One of the best-performing stocks of 2015 is Bellamy's Australia Ltd (ASX: BAL). The infant formula company's share price has rocketed 650% this year. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has returned negative 8%.
Obviously, such market outperformance has attracted significant attention from investors, big and small; farmers, consumers, the media, and regulators. We've seen shell companies become the vehicles of shrewd investors seeking to capitalise on the irrational investor demand for infant formula producers and dairy companies more generally.
Bellamy's isn't the only reputable dairy producer to see the potential, however, with A2 MILK FPO NZ (ASX: A2M), FONTERRA ORD UNIT (ASX: FSF) and Bega Cheese Ltd (ASX: BGA) recognising the potential for Australian dairy exports to Asia.
Here are 10 facts every Bellamy's and A2 Milk shareholder should know about the Australian dairy industry:
- Australian milk production was 9.73 billion litres last year, according to Dairy Australia. Of that, 38% of milk production is exported, says the Department of Agriculture and Water Resources.
- From farming to exports, Australia's dairy industry is worth $13 billion. It's Australia's third-largest rural industry, according to Dairy Australia
- Australia produces just 2% of the world's milk production, but Australia's dairy exports account for 6% of world dairy trade (worth roughly $2.2 billion) – making it the fourth-largest producer behind Europe (32%), New Zealand (38%) and USA (14%).
- Australia's top five export markets by value last year were Japan, Greater China, Indonesia, Singapore and Malaysia; however, the fastest growing market over five years is Greater China.
- Milk utilisation looks like this:
- Here's the typical factory paid prices in Australia:
- According to Dairy Australia's December outlook:
- Global dairy prices have recovered from their extreme lows, but production from some regions has slowed as a result of tighter margins
- El Niño appears near its peak; and
- Water remains relatively expensive
- Here's how the value of dairy products fluctuated in the three months to October 2015, year-over-year, according to ABS data:
Source: Dairy Australia Note: Milk includes buttermilk; Whole Milk Powder (WMP) includes infant powders; **Processed Cheddar is now included with Cheddar, and other processed cheeses in "other cheese".
- For infant formula producers, between 15% and 20% of Australia's milk powder production is sold domestically
- According to a recent study by CSIRO and Rural Industries Research and Development Corporation (RIRDC), the world's population will rise between 60% and 70% between now and 2050, with 1 billion rising from poverty. Specifically, dairy consumption is expected to rise 100%.
Is it time to buy dairy producers?
It's well and good to focus on the potential of an investment opportunity for a given sector, industry or company. However, investing in agriculture is bound with risk.
Indeed, what has made Bellamy's such an impressive investment is its ability to offer a 'lightweight' business model (it does not produce its infant formula – it contracts production), the fact it has no exposure to commodity prices, offers organic products, and has the ability to tap a growing global marketplace.
Meanwhile, investing in producers carries an added level of risk. They are capital intensive businesses, which usually means low-profit margins. They also sell a commoditised product, since milk from one cow is very much the same as another. A2 Milk has sought to counter the commodity risk by focusing its attention on cows that produce an 'A2' protein only, which helps with tummy discomfort.
Buy, Hold or Sell?
As a Bellamy's shareholder, I've enjoyed the run-up in share price. However, I probably wouldn't buy more shares at today's prices unless I was investing for the ultra-long term. Further, I'd need to conduct more research on A2 Milk before buying in – although on face value it does appear an interesting prospect.
