Dairy is important to the NZ economy. NZ is the biggest dairy exporter in the world making up 35% of the worlds dairy trade. NZ exports almost all production. 

What is dairy? It is more than milk, and unsurprisingly there are more than a few players. Since I spent time trying to understand this and A2, you get to read it too. 

Producers in NZ there some 11,000 farms across 1.7M hectares or around 6% of the landmass taking up a quarter of the pastural land to keep upwards of 5M cows fat and happy. These ladies produce 21B litres of milk annually which ultimately results in NZ$19B of export revenue which equates to about 20% of the national export revenue and getting close to half the agricultural export revenue.

China plays a huge part of this export consumption at around 40% although their consumptions is predominately powdered milk. High volume, low margin. It appears Ms Ardern hasn’t upset the Chinese like Morrison. The fact the Chinese government has told the population dairy is good for the immunity helped. 

While China is big, dairy exports go to more than 130 other countries with Australia, Indonesia key large markets. 

Processing – this is the world of Fonterra with 80% of the market and about 10 others making up the rest. Fonterra are focused on developing high margin products in medical, sport science and nutrition research such as fermented products.  

Distributors and Marketers – this is predominately the space a2 plays in although, like Fonterra they are across the whole supply chain. A place where quality, consistency and ESG are playing an increasingly importantly role. 

A2 Milk chair David Hearn recently said “While the issues that arose in FY21 were undoubtedly a challenge, the business remains at its heart a very robust, differentiated branded business with exceptionally strong financials.”

Understatement much?

The share price looks like a graph of flights through Auckland airport – ok possibly not that bad, but it is down 70% from ATH. That, and supply chain issues set off a chain of multiple profit downgrades.

Add in new leadership team and a Slater and Gordon class action distraction, shareholders went looking elsewhere. 

The strong Chinese market and a government attempt to stimulate the infant population again could help a2 although not immediately. The strong ESG and view that all things NZ are fresh and clean can contribute, although the Chinese government is pushing to increase local consumption. a2 remain embedded in the Chinese market and you need to put faith in this continuing.

While the company remains profitable, with net profit in FY20 NZ$385M on gross margins of 56%, falling to NZ$81M in FY21 on an also lower gross margin of 42%, it is not completely broken. Still, I would want to see the numbers climbing again and happily miss some upside to ensure there is not further downside.