Potential dip in milk prices to impact the dairy industry: Lens on FCG, SML

  • May 07, 2020 NZST
  • Team Kalkine
Potential dip in milk prices to impact the dairy industry: Lens on FCG, SML

The impact of COVID-19 on economies, industries and businesses around the world is palpable. Barring a few exceptions, almost all the sector has been affected by the pandemic, and the extent of the impact varies with the degree of correlation of each sector with the infectious disease.

The dairy industry, which produces the essential milk and milk-based products, had been relatively stable in the initial months of the year. However, the production, export, and price of dairy products have plummeted in recent times owing to the global recession caused by the coronavirus outbreak. With a negligible or low supply of dairy products to restaurants, cafes, hotels, and airlines, among others due to COVID-19 related business closures, the estimated price of dairy products has declined.

New Zealand is one of the largest dairy producers in the world with nearly 3 per cent of the total milk in the world produced in the country, according to the Dairy Companies Association of New Zealand. The country exports ~95 per cent of the milk produced yearly. NZ is thus affected by the events that occur around the globe.

ANZ lowers dairy price forecast by 70 cents as demand dips further

Recently, New Zealand's rural lender, ANZ Bank altered its forecast for milk price by 70 cents per kg for next season. It has significantly deteriorated the price of milk solids from NZ$6.45 per kg to NZ$5.75 per kg.

Due to the drought conditions in many parts of New Zealand which led to dry-off herds before the usual time, the impact on the country’s milk production was as follows:

  • For March 2020, production in New Zealand increased by 0.1 per cent on a milk solids basis, compared to March 2019. However, the production decreased by 1.9 per cent on litres basis. (Further details included in the table below)
  • For the 12 months to March 2020, production in the country decreased by 1.1 per cent as compared to last year.

 

Also, because of the reduced demand for butter and fluid milk products from Iran and China, respectively, the total dairy exports dipped by 18,713 MT, or 5.9 per cent, in February 2020 as compared to the same period in 2019.

 

NZ milk production

 

With this backdrop, let us have a look at two dairy stocks: FCG and SML, and how are they performing in these difficult times.

Fonterra Co-operative Group Limited (NZX:FCG)

Fonterra is an Auckland, NZ-headquartered multinational dairy nutrition Company. FCG is the largest dairy exporter around the globe and has operations in over 140 countries. The Company’s portfolio includes brands such as Anlene, NZMP, Farm Source, Annum, and Anchor.

FCG has been releasing the global dairy update for each month, which provides the statistics of dairy items for Fonterra as well as milk production scenario on the worldwide front.

Drought conditions prevailing in the North Island of New Zealand in March had substantially impacted the milk production for FCG. Whereas in South Island, farm conditions including cow and pasture cover are in good shape. Key highlights of FCG’s performance for March update are as follows:

  • Milk solids collection for New Zealand in March 2020 declined by 1.2 per cent as compared to March 2019, from 129.6 million kgMS to 128 million kgMS. Bifurcation of this milk collection in the same time frame is mentioned below.
    • The milk collection in South Island increased by 4.7 per cent, to 64.5 million kgMS.
    • However, In North Island, the milk collection declined by 6.6 per cent, to 63.5 million kgMS.

 

  • Viewing the season-to-date (1 June to 31 March 2020), the milk collection decreased by 0.3 per cent at the same time last season, to 1,340.9 million kgMS. Bifurcation within the same time frame is as follows:
    • Milk collection in North Island dipped by 1.5 per cent and increased by 1.4 per cent in South Island.
    • Milk collection for North Island changed from 805.5 million kgMS to 793.5 million kgMS. For South Island, the milk collection increased from 539.7 million kgMS to 547.4 million kgMS.

 

  • At last trading event (21 April 2020),
    • FCG’s product quantity sold on Global Dairy Trade (GDT) was 19,739 MT, an increase of 26.8 per cent over the same period last year.
    • FCG’s weighted average product price decreased by 17.4 per cent over the same period last year, to USD 2,896 / MT.

Strategic Partnership: The Company has partnered with YFood, a Germany-based start-up. As per the collaboration, FCG will offer its expertise in research and product development. According to Thijs Bosch, Fonterra GM Europe, the partnership will strengthen FCG’s position in Europe.

Stock performance:  On 07 May 2020, FCG shares were trading at NZ$3.620 at the end of the session, a decline of 1.09 per cent as compared to the previous close.

Synlait Milk Limited (NZX:SML)

Synlait is a Canterbury, New Zealand-headquartered dairy processing company. SML manufactures a variety of nutritional milk products by combining the art of processing with expert farming. The Company has a presence in Auckland, Canterbury, Christchurch, Dunsandel, Palmerston North, Pokeno and Temuka.

COVID-19 Update: On 7 April 2020, the Company notified the market about the measures undertaken by SML during the difficult time wrought by COVID-19. While facing challenges to serve the essential items to society, SML adopted the following steps to reduce the risk:

  • In supply chains, production processes, break out sections, Synlait established two-meter social distancing measure.
  • At the infant formula manufacturing site, SML placed advanced protection equipment controls.
  • Enhanced the practices for sanitation and hygienic cleaning.
  • Only the teams which are essential to run and maintain the Company’s operations are given access to the sites.
  • SML established daily declarations as a practice for everyone visiting their sites. This comprises of their travelling position, health confirmation and practising social distancing always.

Financial performance and challenges faced:

On 19 March 2020, the Company released its half-year FY 2020 results for the period ended 31 January 2020. SML mentioned that the Company slightly dropped from its guidance range due to the shipment challenges faced in the month-end.

SML mentioned that it is connected and committed to China. The Company plays a significant role in supplying infant nutrition to customers in China and has robust customer partnerships in the country.

The snippet of the result and per cent change (on pcp basis) is mentioned below:

  • Total milk processed grew by 8.5 per cent, and total revenue of the Company rose by 18.8 per cent to NZ$559 million.
  • While EBITDA was in line with FY 2019 at NZ$67.6 million.
  • Net profit after tax was down by 29.8 per cent, to NZ$26.2 million.
  • Net tangible assets per Quoted Equity Security was NZ$2.66 as compared to NZ$2.54 in the prior comparable period.

Stock performance:  On 07 May 2020, SML shares were trading at NZ$7.000 at the end of the session, a decline of 0.29 per cent as compared to the previous close.

 

 


Disclaimer
The website has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. The above article is NOT a solicitation or recommendation to buy, sell or hold the stock of the company (or companies) under discussion. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site.

 

   
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