Milk Production

According to Fonterra, milk production in Australia in October is 10% lower than last Oct.
12-month to Oct is down 7%, compared to the same period last year (NZ down 1%, EU and US up 2%).

Meanwhile, milk import 12-month to Oct is up 13% in Latin America, 5% in Asia and 26% in China
(down 6% for Africa/Middle East)


As supply and demand re-balances with stable production rate and steadily-increasing demand, dairy price should remain stable. MGC milk intake for 2017 should be about 20% lower (equally-affected by both milk loss to other supplier and weather-affected lower production)


With the Mead Johnson deal (260-300 millions capex) off the table for now, release of $100 million from working capital(inventory reduction) and cost-saving of $10 millions in 2017 (stepping up to $55 millions in 2018), MG should be in strong financial shape. Net Debt stands at $480 millions in 2016. Inventory of $568 millions at cost.

In terms of underlying business performance, Over 60% of milk intake goes to ingredient business. Taking into the account of 20% lower total milk intake and 30-40% price improvement in dairy commodity market, ingredient business is likely to receive 30% less milk intake but its operating profit should become positive, compared to a loss of $81 millions in FY 2016.

Most shorters and short-term traders treat event-based information such as MSSP and milk-loss as the whole picture of the firm, because they only care about how to profit from price fluctuation.

From a long-term business owner perspective, I am actually happy to see that MG is likely to call off $260 millions capex, likely to receive 20% less milk and going through management changes, because (1) Less milk intake should help MG release more capital and reduce its inventory amid volatility in dairy sales, as seen in Bellamy, (2) call-off capex turns out to be right, $480 millions Net Debt is not ideal, I would like to see it go down $200 millions, (3)new management and focus on operating efficiency is beneficial for a company with huge revenue at very low margin, (4)less milk volume to sell in higher market price reduces the risk of over-expansion and over-stocking.

Happy New Year. Good luck to holders that continue to hold through volatility with a long-term investing goal. I have seen companies manipulated by traders but eventually, market will recognize its intrinsic value.

"Thinning" is what I would decribe MG now = getting rid of incompetent management, cutting back on capex, selling down inventory, cutting cost and focus on farmers.
As a business owner, this sounds good.
I also believe next year will be brighter for Murray Goulburn.