Milk Prices to Spike in Year of the Dragon?
Justin Rohrlich March 13,
2012 1:50 PM
China, only 100% foreign-owned formula brands are fully
Shawn Hackett, a Boynton Beach, Florida-based money
manager with a special focus on agricultural commodities,
is bullish on milk. And the year of the dragon is why.
he points out in a letter to investors:
are bracing for a dragon baby boom not only in
China and Taiwan, but in other Asian countries
and territories that observe the New Year festival,
including Japan, South Korea, Vietnam, Hong Kong
and Macau….All these babies are going to need
a lot baby formula in their first year of life.
This should offer a significant spike in demand
coming out of Asia for WMP (Whole Milk Powder)
and Dry Whey powder.
to the website of Kunming, China, “As all the recent
baby booms, which happened in the last Year of the Dragon
in 2000, the auspicious year of the "Golden Pig"
in 2007 and in 2008 -- the year China hosted the Olympics,
were followed by shortages in resources ranging from
available delivery room beds to openings at kindergartens
and primary schools.”
Chen Hsin-Fu, president of the Taiwanese Society for
Reproductive Medicine in Taipei and a doctor at National
Taiwan University Hospital -- which specializes in fertility
treatments -- told the Wall Street Journal that he and
his colleagues have seen a “30% to 50% increase since
May from patients all over Asia,” only seems to confirm
the certainty of a coming “dragon boom.”
doesn't matter if you have an easy time or a hard time
[getting pregnant], when it comes the dragon year they
all want to have one," explained Dr. Lin Tseng-kai,
head of the Artificial Reproductive Technology Center
at Hsinchu Cathay General Hospital in Hsinchu, Taiwan.
milk prices go up, you may not eat as much cheese as
before, but you’re not going to stop feeding your kid,”
Hackett tells me. January 23 started the year of the
dragon and it continues until February of 2013. And
he expects milk demand to increase by 609,000 metric
the majority of this type of milk product (WMP
and Dry Whey for baby formula) is available and
bought from the US and New Zealand only. If we
look at the expected combined increases in milk
production for both countries in 2012 the total
comes to 1.6 million metric tons. This is a front
end loaded production cycle so the back half of
2012 will produce a much smaller percentage of
total milk production increases then the first
half. The increase in baby formula demand will
soak up close to 40% of this increased production
that will become increasingly unavailable as we
move into 2013.
way I see it, the world will work through the
milk glut in the first half of 2012 and then US
production starts to decelerate and eventually
go flat by year end. This will be happening as
demand from China begins to soar from the year
of the dragon baby effect and you have a perfect
storm for a massive bull market in milk starting
in the back half of 2012 and really taking off
in 2013. Of course should New Zealand experience
weather problems in the back half of 2012 and
they see also see reduced production then “Katie
bar the door” to the upside.
not only do the US and New Zealand produce the majority
of the WMP and Dry Whey out there, domestic food safety
scandals have also put many Chinese consumers off local
Chinese will buy from names they trust,” says Hackett.
And those names, notes China’s state-run Global Times,
are those familiar to US investors -- especially the
ones germane to Hackett’s thesis.
wit (emphasis mine):
China, only 100 percent foreign-owned formula
brands are fully trusted.
consumer mentality, as reflected by the online
complaints, is not a product of Chinese groveling
before everything foreign, as some critics claim,
but one of deep, knee-jerk mistrust of homegrown
dairy brands, which have yet to recover from a
string of past abuses, the most infamous being
the melamine scandal in 2008 that killed six infants
and sickened tens of thousands of others.
things stand, the Chinese public will continue
to favor foreign dairy brands over indigenous
ones for a long time to come. Therefore, imported
formula brands whether "authentic" or
not, will win an increasing market share as long
as they are more reliable and can establish their
reputation through word-of-mouth marketing in
an age of online shopping.
statistics back this. The domestic market share
of imported formula has been consistently growing
for several years, and it reached more than 50
percent last year.
consumers have quipped that although it pains
them to pay more for foreign-made formula, the
pain at least won't come back to haunt them in
the future, whereas the opposite is true of homegrown
fact, China Market Research Group and CNBC contributor
founder Shaun Rein, noted similar emotions surrounding
even the most pedestrian of consumer foodstuffs, this
was interviewing Emily, a 24-year-old Shanghai
girl about her dining habits. As we talked, she
kept messaging her friends on her Apple (AAPL)
iPhone 4 when she said, "I love Kentucky
Fried Chicken. I go there all the time because
the food there is healthy." Her response
initially took me by surprise: since when is food
from Kentucky Fried Chicken considered healthy?
I pressed Emily more, she responded, "I know
fried food is not healthy in general, but I trust
that KFC will use real cooking oil. They won't
recycle oil that they salvage from sewers as too
many food street vendors do, they won't put cardboard
in their batter as some dumpling restaurants do,
and they won't use expired or tainted ingredients."
firm interviewed thousands more Chinese consumers
in eight cities about their dining habits, we
found that Emily's response was not unusual. Many
Chinese consumers consider Western fast food brands
like Yum Brands (YUM), McDonald's (MCD), and even
Dunkin' Donuts (DNKN), healthy. They all know
a healthy food diet should not have too much oil
and sugar, but they also trust foreign brands
won't cut corners in the production process. They
fear tainted ingredients more than fat.
rising milk prices should be a boon to producers, Hackett
warns that “when milk prices go up, processors get squeezed.
Dean Foods (DF), Kraft (KFT), they’re usually not able
to pass on those expenses one-for-one on the sell side—especially
now, given the overleveraged state of the US economy.”
how to play it?
says the “two top baby formula sellers to China are
Mead Johnson (MJN), with 11.7% share and Danone (DANOY.PK)
at 9.8% share.”
commodities traders, Hackett writes:
markets in milk almost always start in the deferred
contracts and work their way back as the scarcity
trade builds. This was exactly what happened in
late 2010. My preferred Milk contract to buy on
any weakness heading into late spring would be
the October 2012 contract. Once the bull market
starts in the deferred contracts there will be
a fantastic opportunity to bull futures spread
early summer 2012 milk against late fall 2012
milk when the spreads reach typical maximum elasticity.
line: Milk should be one of the top agricultural
commodities to buy in the latter part of the spring
2012. Longer term oriented commodity investors
can buy the October 2012 contract now and average
in additional contracts on any weakness through
June 2012. Shorter term investors can wait for
more technical price confirmation as well as a
money flow commercial buy signal. My forecast
is that milk could easily make new all time record
highs this time around and could easily hit $30/hwt
if New Zealand were to have weather problems.
course, if counterfeit dairy products are really what
you’re after, they’re still readily available. In January,
fake eggs -- made from industrial chemicals and food
additives -- were discovered in Shandong province.
State Council Information Office’s China.org.cn reported
that a “worker can make 300 fake eggs per hour in a
small room, and each kilogram sells for 1.2 yuan (19
US cents),” and quoted experts who said “long-term consumption
of fake eggs can lead to memory loss or dementia.”
be a trade to consider when babies start eating omelets?