Is the Australian dairy industry about to head down the same path of weak revenues and earnings that the huge Kiwi industry is already travelling?
Judging by the hype still surrounding sales of infant formula and other dairy products to China for companies like Bellamy’s (BAL), Bega (BGA) and A2 (A2M), there is a surprise looming after Murray Goulburn (MGC), the country’s largest milk processor, signalling a profit downgrade could emerge later this morning.
Murray Goulburn went into a trading halt on Friday to allow it time to work out how much damage falling dairy prices have done its forecasts.
The halt was a surprise given the recent upbeat comments from the company and its CEO Gary Helou.
The cooperative requested the halt of trading in its listed unit trusts to asses the “impact of market conditions on its FY16 outlook”.
The units had fallen 0.5% to close Thursday trading at $2.14.
The units have been listed for about 10 months and started trading around $2.24 on July 3. They fell to a low of $1.76 in August and then rose through the rest of the year to hit their all time high of $2.70 on December 29. Since then it has been all downhill.
MGC vs A2M vs BGA vs BAL – Downgrade looms for Murray Goulburn
According to the Global Dairy Trade platform run by NZ giant Fonterra, world prices for dairy products are down a net 18.6% since last November, despite consecutive rises reported for April (the auctions are held fortnightly, with the next to be held on May 3).
Global prices have been falling since 2014. Fonterra last month said that its 2015-16 milk price forecast (for the year to the end of May) will be $NZ3.90 per kilogram of milk solids, down from its previous forecast of $NZ4.15 and well below the $NZ5.25 at the start of the season. It was $NZ8.50 a kilogram back in mid 2014.
Driving the price weakness is a global glut of dairy products caused by weaker demand, overproduction and sanctions against Russia, which have seen Russia impose bans on dairy imports in retaliation.
At the same time there is growing uncertainty in China about the level of imports, especially of infant formula, which have weakened confidence in that market. That hit share prices earlier this month during several days of confused commentary.
At the same time the sluggish economic growth in China has weakened demand, while the Russian bans and overproduction elsewhere have seen surplus stocks pushed into global markets, further cutting prices.
Murray Goulburn released its half year results in February and said in commentary that this continuing oversupply was delaying the expected recovery in global prices.
Those low prices hit Murray Goulburn’s profit and they were down by a third to $10 million for the six months to December.
CEO Gary Helou said in the February profit statement, “The first half has seen the continuation of the decline in Chinese imports of commodity dairy ingredients and the ongoing Russian embargo on dairy imports. This has been compounded by increased European milk supply, resulting in a period of significant oversupply in global dairy commodity markets, driving commodity prices towards record lows.”
Nothing seems to have changed since then, judging by the cuts to its forecasts by Fonterra.
Rival Bega Cheese reported a 160% jump in net profit to $14.499 million for the December half year, on a 1.6% rise in revenue to $561.37 million. That was due to a rise in infant and nutritional formula sales and in the value of its canned goods.
But it was also from a very weak first half in 2014-15 when earnings plunged 68%. Investors will be looking for Bega to update the market in the wake of Murray Goulburn’s news.
