In the Muster, we round up our current views on key agri and FMCG themes and stocks, this month asking whether we are at the bottom of milk powder pricing (a key driver of the dairy sector), we also discuss our increased target price for Synlait, and look at several other notable recent observations from the agri and FMCG sectors.

Spotlight on Dairy

Are we at the bottom of SMP pricing: Skim milk powder (SMP) is the principle commodity exposure of our dairy ingredient coverage universe. SMP prices weakened over much of 2HCY17, but have begun to demonstrate early signs of recovering (+13% Dec’17-Feb’18). This month we take a look at some of the factors impacting SMP prices and the green shoots we believe are emerging that suggest we may be approaching an inflection point. These signs include: (1) strong growth in China imports of milk powder products (SMP, WMP and Whey Powder), at a time when domestic production growth appears to have slowed; (2) slowing growth in SMP stock levels in Europe and the US (down 2% YOY in Nov’17 the fourth consecutive YOY negative movement); (3) declining profitability of US dairy farmers and the potential for this to curtail supply expansion in CY18; and (4) changes to EU SMP buy-in policies which may see milk diverted to alternative product streams.

Bell Potter research of note

Synlait Milk Ltd (SM1.AX): SM1 recently announced the next major leg of its growth strategy, committing NZ$125m to develop a 110mL liquid dairy packaging facility at its Dunsandel site. The plant is to be base-loaded by a 10 year contract with Foodstuffs NZ for fresh milk and cream products which would initially utilise one third of the capacity, though there would likely be opportunities for the plant to potentially process milk for other branded products as well as enable SM1 to expand its product suite to RTD (Ready-To-Drink) IMF and adult nutrition products. We raised our NPAT forecasts 1-3% over FY18-20e and our target price to A$7.90ps while retaining our Buy rating.

Catching our eye

Strengthening cotton prices: We note the 14% surge in US cotton prices over 4Q17 with offers for the domestic 2018 crop at ~A$510-520/Bale. An outbreak of pink bollworm in India, which is driving negative crop revisions, has been the driver. Rising cotton prices should be beneficial for WBA, which has planted ~17,000Ha of cotton this season (vs. 10,500Ha in FY17).

Chinese infant formula (IMF) continues at a record pace: Demand for imported IMF rose a further +21% YOY in Dec’17 and on a R3M basis is now running at an annualised run rate of ~385,000t (vs. the total ~254,000t imported in FY17).

Marine harvest 4Q17 trading update: We have previously noted a weaker than expected surge in 4Q salmon prices but also note the recent trading update by Marine Harvests for a 32% YOY decline in operating EBIT despite a 13% YOY volume uplift.

EU changes to SMP buy-in: The European Council has introduced a temporary change to the operation of the intervention mechanism for SMP in an effort to curb the build-up of a growing stockpile in the region. The changes have seen the limit for buying-in SMP at a fixed price set at zero for 2018.

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