With Fonterra’s share price at a 5 year low, will management’s new focus on NZ milk hit the sweet spot?

Back in October 2016 Fonterra’s shares traded at NZ$5.9. However, shoot forward 5 years and the stock has gone backwards to NZ$3.35 leaving management with more questions than answers.

Fonterra is a dairy cooperative, owned largely by New Zealand based dairy farmers that supply the business.

In Asia-Pacific, Fonterra is a well known brand. China is one of its largest export markets.

However the company’s history is checkered. At one time international was high on the agenda. In 2008 it spent $202m to buy the remaining stake in Chilean dairy company Soprole. As late as last year it acquired Dairy County, an Australian cheese business.

Yet milk is a commodity and farm gate prices vary dramatically impacting margins.

Fonterra’s gross margin is just 16%. Arla, a somewhat similar business, although focused on Europe and the Middle East makes 22%. Nestlé by comparison makes nearly 50% gross margin.

Last week Fonterra’s management revealed plans to dial back on international looking at divesting or IPO-ing its Australian and Chilean businesses.

Debt is one big headache. Fonterra also needs to shore up its capital base and wants to change the link between the number of shares a dairy farmer owns and the quantity of milk they supply.

Photo: Nick Savari

Discussion and rumours of this change, which has yet to be finalised, is driving down the share price.

Management is fighting increased competition and dis-satisfied stake holders. Whilst NZ milk enjoys a very positive image, especially in Asia-Pacific, the company’s future growth path lacks clarity.

The (legal) marijuana business: a future hidden in clouds of smoke, hype and red tape?

Barclays Investment bank held its annual jamboree for the great and the good in the consumer products industry last week.

On the roster were many familiar names: P&G, J&J, Kraft Heinz, Nestlé, Coca Cola and more. All the usual suspects.

However one name intrigued me, Canopy Growth. I hadn’t heard of it.

Founded in 2013, Canopy Growth markets medical and recreational marijuana in the Canadian market. Besides Canada it’s also focused on the US, where its betting there’ll be legislative reform in favour of marketing marijuana, and Germany.

Photo: Richard T Yovh, Unplash

It’s listed on both the Toronto and NYSE exchanges and has annual revenue C$607m and over 3,200 employees.

The company’s website boasts an array of marijuana brands including Tweed, 7 Acres, Blissco, Hiway; Dog Treats; flavoured waters; a sleep solution branded ‘Dream Gummies’ and if that wasn’t enough they also do vapes.

What surprised me was how little money the company makes. In fact it’s heavily in the red, and losses have increased despite a rise in revenue.

The issue starts with their gross margin which averages just 15%. Compare that to Philip Morris who make 68% or BAT who make 83%

Canopy Growth’s stock price once traded at over C$60 but in recent days it’s down at C$19. 

At the Barclay’s conference the CEO talked about the importance of consumer insights but perhaps the issue is a lack of focus, too many brands. There were apparently over 100 innovation projects on the go, but it seems many have been shelved as cash burn accelerated. 

Perhaps the market isn’t as big as they imagined? Penetration of legal marijuana in Canada is rising but it’s still below 10% of the population.

Investors who hang on will be betting legislators in America and Germany vote in their favour.

I’ll end with a few disclaimers: I’m not an investor in Canopy Growth, nor am I doing any work the company. Oh, and I don’t smoke either.

Malaysian palm oil exports soar; still early days for biotech alternatives

Malaysia’s palm oil industry is on a roll. It’s the country’s third biggest export worth $9.8b in 2020, up 18% year on year. Significantly ‘processed’ palm oil, which is more valuable than ‘crude’ accounts for over 70% of exports.

palm oil plantation SE Asia

India is Malaysia’s largest export market, followed by China. 

Palm oil is widely used in the cosmetic and food industry for example cooking oil and spreads. Palm oil has several USPs, it’s resistant to oxidisation extending shelf life; it’s also stable at high temperatures giving fried products a crispy texture. And its odourless and colourless.

It’s no surprise that the industry attracts close Government supervision. The Malaysian Palm Oil Board oversees research, regulation and promotion. The MPOB also sets an export tax levy – currently 8% – on crude palm oil.

However, the palm oil industry is not free of controversy. The biggest issue is deforestation and climate change.

In neighbouring Indonesia at least 81% of forested land cleared to produce palm oil is said to be illegal, according to Watchdog Forest trends. Surveys have shown that deforestation has increased across SE Asia during the pandemic.

palm oil deforestation impact

Global stocks of palm oil are tight currently, and a shortage of migrant workers in Malaysia’s plantations linked to Covid-19, has pushed up global prices.

Given concerns, at least in the West, about sustainability, not to mention the scale of palm oil industry – $61b – one would expect to see more alternatives to palm oil emerging. 

There are a few but none close to commercialisation.

C16Bio sciences is one startup researching single cell alternatives based around algae or yeast. However, the company is at early stage funding (series A, $24m) with just 20 employees. Lanzatech is another. 

Perhaps if MPOB is wise, it will take a close interest in such biotechs?

In the meantime palm oil futures are up nearly 100% on the same period last year.

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