One of Australia’s hottest-selling products, infant formula, has been caught up in the market woes about the health of China’s economy.
Shares in some of Australia’s most-popular infant formula brands have plummeted in the past month amid increasing concerns from analysts that the world’s second-largest economy will cool further this year.
On Tuesday, Beijing said fourth-quarter growth growth was less than expected while China’s economy expanded 6.9 per cent in 2015, the slowest pace in 25 years.
Trans-Tasman producer, a2 Milk, has fallen 26.7 per cent to $1.58 in the past four weeks, while Bellamy’s Organic has eased 14.6 per cent to $13.22. This compares with the S&P ASX 200 Index shedding 8.3 per cent in the same period.
The sell-off comes as demand in China for Australian formula sent the shares of popular infant nutrition brands soaring late year.
But infant formula makers, which have struggled to keep their products on Australian supermarket shelves, are still reporting strong sales.
One dairy executive said despite the China slowdown, disposable incomes and sales in China were still robust.
“There is a disconnect in the market,” the executive said.
NAB agribusiness economist Phin Ziebell said demand for infant formula in China should continue to remain strong, particularly as the country moves from a manufacturing to a consumption led economy.
He said infant formula was different to other dairy exports because it was a premium, branded product.
“The thing about China and dairy is it’s really going in two directions,” Mr Ziebell said.
“There was the melamine scandal in 2008 and understandably people were terrified about that because food safety is a serious problem. That means for your infant formula there is going to big demand for product that isn’t adulterated with poison.
“And certainly the Chinese leadership has an emphasis on a more consumption based economy. If they can do that, that’s good for Australian agricultural exports because we can sell into that premium end of the market and have an FTA [free trade agreement] which gives us the ability to really effectively do that.”
The outlook for bulk dairy commodities isn’t as rosy. China has stepped out of the global dairy market in the past 18 months while it ran down inventories of milk powder, triggering a halving of prices for key dairy commodities. It has also ramped up its own supply, Mr Ziebell said.
“The medium-term story is for commodity-end milk powder, that’s not baby formula and not at the premium-end of the market… there is a move to source that domestically,” he said.
“That’s quite separate from any of the financial market ructions that we’ve seen since the start of the year.”
Mr Ziebell said this was likely to put a stopper on global dairy prices reaching the highs of the 2013 and 2014 seasons.
“We think they [China] will get back into the market a bit but I don’t see the upside of that 2014 binge on global markets.
“So we won’t see massive upside in price forecasts, but likewise we don’t see calamity ahead either.”
NAB is forecasting a “slow recovery” of global dairy prices this year, which will be bolstered by a lower Australian dollar that it expects will hit 66 US cents by June.
“Australian prices are also likely to be supported by the ongoing international interest in our products,” said NAB regional agribusiness manager Dave Davies.
“Free trade agreements such as the China Free Trade Agreement will only help this trade, especially if we can operate on a more level playing field with the New Zealand industry.”