Why the foundation of milk stock superstars like Bellamy's Australia Ltd is at risk

What is one thing milk stocks have in common? Dairy farmers.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors have been rallying behind baby formula and milk product superstar stocks such as Bellamy's Australia Ltd (ASX: BAL) and A2 Milk Company Ltd (ASX: A2M) in the last year or so, while other dairy stocks such as Fonterra Shareholders' Fund (ASX: FSF), Bega Cheese Ltd (ASX: BGA) and Bubs Australia Ltd (ASX: BUB) have been on close watch.

But what is one thing all of these stocks have in common that could make or break their operations?

Dairy farmers.

The farming community across Australia has long struggled with drought issues and financial uncertainty, but if there's a group that gets the raw end of the deal, it's dairy farmers.

High feed costs, water issues and low milk prices combine to make turning a profit near impossible for many dairy farmers, and according to the ABC, a recent national confidence survey of dairy farmers showed less than half see any future for the industry.

While the share price of players like Bellamy's rocketed up 169% from just $8.20 in August 2017 to its all-time high of $22.08 in March this year, dairy farmers have been fighting suppliers for a fair price for the raw product each of these companies relies on.

The big reason for Bellamy's and A2's success in recent times has been their foray into the Asian market, with both striking lucrative long-term supply agreements with Chinese-based buyers.

Australian baby formula products, in particular, are seen as "safe" throughout Asia due to the rigorous checks and balances the raw products go through to make sure they are uncontaminated.

And who is at the coal face of those procedures?

You've got it, dairy farmers.

If they don't succeed, how can anyone else?

With the baby formula sector likely to continue to boom, you can assume the demand will continue to be there for the base milk product from our dairy farmers, but if the farmers themselves continue to be hamstrung by paltry prices for their product, how are they supposed to weather the actual storms, or lack thereof, that threaten their cows?

Fonterra today announced its farmgate milk price for 2017/2018 alongside its earnings guidance.

Fonterra's share price has struggled in the last 12 months, down from $5.80 at this time last year to open today at $4.62.

The announcement today revealed Fonterra is reducing last season's forecast farmgate milk price from $6.75 to $6.70 per kgMS.

Fonterra's chair John Monaghan said reducing the price was "the right thing to do" for the long-term interest of shareholders and said the company "wanted to be upfront with farmers" but needed to "keep our balance sheet strong".

Shares in cheese maker Bega have been on the incline recently – hitting a 52-week high to close off July 18 at $8.01 when Bega announced it would acquire the Koroit Facility in Victoria for $250 million.

Bellamy's and A2 have seen share price slides of late, with Citi downgrading A2 last week to a sell and reducing its price target from $10.90 to $9.50.

Citi still has a buy on Bellamy's.

While investors can rest assured companies in the dairy space will make decisions on the basis of protecting profit, the plight of dairy farmers cannot be ignored, and the long-term health of the sector will be related to their success.

Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A golfer celebrates a good shot at the tee, indicating success.
Share Market News

Here are the top 10 ASX 200 shares today

ASX investors finally enjoyed a win this Thursday...

Read more »

a man sits back from his laptop computer with both hands behind his head feeling happy to see the Brambles share price moving significantly higher today
Industrials Shares

Up 39% in a year, is there more growth to come for this ASX 200 share?

IML Equity Analyst Josh Freiman shares his views on a major ASX 200 industrial stock.

Read more »

Man looking at his grocery receipt, symbolising inflation.
Share Market News

What the latest US inflation print means for ASX 200 investors

The ASX 200 is likely to benefit if the US Fed cuts interest rates again in December. But will it?

Read more »

guy helping girl invest in shares and dividends
Opinions

5 ways for investors buying ASX shares to stay focused during economic uncertainty

AMP Chief Economist, Dr Shane Oliver, offers advice on how to handle the Trump factor.

Read more »

A worried man holds his head and look at his computer.
Share Fallers

Why Graincorp, Light & Wonder, Orica, and Wildcat shares are falling today

These shares are having a tough time on Thursday. But why?

Read more »

A young women pumps her fists in excitement after seeing some good news on her laptop.
Share Gainers

Why Catapult, Flight Centre, Nufarm, and Xero shares are storming higher today

These shares are having a strong session on Thursday. But why? Let's find out.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Opinions

1 ASX growth stock down 30% I'd buy right now

This international business is growing core earnings at a strong rate.

Read more »

Concept image of a man in a suit with his chest on fire.
Record Highs

How long can the CBA share price keep this up?

Australia's biggest bank is running hot. Does it make any sense?

Read more »