• Mark Monfort

The BEGA they are....

In the AFR yesterday they highlighted that Aussie company Bega Cheese warned of tougher times ahead due to milk supply issues (see ‘Bega warns of tough times in milk supply as drought hits farmers’). The key causes are droughts around Australia and the rising cost of grain (as if farmers aren’t doing it tough enough). Basically, this pressure in what they call the upstream supply chain (i.e. suppliers to Bega) means that they’ll likely have to pay more for milk which, as most of us know, is a key ingredient in cheese (their main product). The issue is all too familiar for me as I was in London whilst a similar supply chain issue gave us good reason to be cautious on a large UK cheesemaker.

In the European version of this problem the story goes back to 2014 when Dairy Crest, a UK cheese and butter producer sold off their dairy production business. The selling off of this business unit was made to improve efficiencies but left them exposed to supplier prices as milk production was now outside of their control. Fast forward to 2016 and Europe was undergoing the beginnings of their own milk supply issue which led to rising prices that we were able to see in our macroeconomic dataset called INSIGHT. Thanks to this dataset (derived from trusted national statistics and a model driven by the business intelligence product Qlikview) we were able to see that milk prices had positive a historical correlation with the costs of butter and cheese production which were now the 2 main lines of business for Dairy Crest. In late 2016, the company warned of rising milk prices potentially curtailing their profitability and it saw its share price fall. The market shrugged this off and saw those losses erased into mid-2017 as investor confidence rose again. What was also rising, per our INSIGHT datasets were the milk prices (which had continued their upward trend) and with this we warned investors to be continually cautious. As we can see below, those that took heed of this warning would have benefited as the company’s shares have traded negatively since then.

Back to Australia and Bega Cheese is looking more positive but the warning about its supply issues certainly appear worth looking into especially if the pains of its UK peer are anything to go by. There may well be various ways that this Aussie company can handle these rising prices better than the example we highlighted but if not, then it's going to be well worth an investors time to take a look. In the case of Dairy Crest, it was well worth ours.

Caveat emptor.

#earnings #investmentbanking #sharemarkets #Australia #UnitedKingdom #DairyCrest #DCG #BegaCheese #BGA #BusinessIntelligence #Qlikview

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