GDT194 another go

 Ahead of the last auction I was somewhat confidently suggesting a 3% - 5% lift in the WMP futures and a robust result across the board.  The -1.6% result in the GDT auction and a modest +1.3% uptick in WMP was therefore disappointing. In some respects, this was even more so, given that my optimism was partly predicated on an expectation of interest from Chinese buyers which did indeed eventuate – as shown in the GDT / CIP chart below. Chinese buying represented 44% of the auction volume.

Notwithstanding the outcome of GDT#193, and some weakness immediately following the auction, activity over the last week has probably been more in line with the “expected” outcome than the “actual” outcome. Most products are trading 3% - 6% higher in futures markets and it will be interesting to see if this is sustained in this week’s auction, unlike GDT #193.

The milk futures markets have also reflected a robust local view and the 2017/18 contract is trading at $6.85/kgMS this afternoon compared with the Fonterra guidance of $6.75kgMS and a MyFarm model projection (based on futures curves) of $7.00/kgMS. The AgriHQ price has edged up to $6.73/kgMS.

An observation on geopolitics and market volatility:

Global equity markets had a hiccup last week as a result of rising tensions and rhetoric around North Korea. Citi Research made the observation that commodity prices have been very calm given the importance of the north Asian markets and sea routes to the global commodities trade. The chart below doesn’t include agricultural commodities but nevertheless, given the importance of north asian trade routes to global trade, the lack of volatility in commodity prices is somewhat surprising.

And despite the “spike” in short term volatility observed in the US VIX last week the chart puts that in a longer term perspective.

So either the market sees the current “bluster” out of the US Administration as just that, or the market remembers the cold war, or they are simply mispricing the risk and under-estimating the propensity to act of either Donald Trump or Kim Jong Un. Let’s hope that it one of the first two!

Corporate Activity:

A couple of share price moves of note in the last 2 weeks:

  • After I implied it was “flat-lining” in my last note, the Fonterra Shareholder Fund (FSF) price (below) has rallied 3.5% to $6.26! (I’ll keep the criticism up if it has this impact)
  • The share price performance of Synlait remains strong. Synlait results are scheduled for 19 September.  No surprises are expected but with a good deal of good news factored, this result will be closely watched.
  • Bellamy’s share price which rallied post coming out of suspension on the basis that its Braeside canning plant would have its CNCA registration restored, continued its recovery when that did indeed happen last week. It should be noted, however, the restoration of this license doesn’t resolve the plant’s status beyond 1 Januaruy 2018 (see below).
  • Meanwhile, the previous CEO of Bellamy’s (Laura McBain) has been appointed CEO of another microcap listed food company, Primary Option, whose only asset is a 48% holding in the gourmet food products business “Maggie Beer Products”.

  • Finally, on the corporate front, there were reports from both major credit rating agencies, Moody’s and S&P. Moody’s said that the dairy sector still posed a risk to the NZ banking system but acknowledged that the outlook had improved considerably while S&P also acknowledged an improvement in the sector and said it was “more sanguine” about it’s “A-“ credit rating for Fonterra.

CFDA registration:

Meanwhile, the important process of plant registration by the China Food and Drug Administration (required by 1 January 2018) is underway with the first “batch” of registered brands released last week. That list (courtesy of DB) included 30 brands from 12 companies and included 4 international companies: Abbott, FrieslandCampina, Mead Johnson and Nestle. Importantly for Fonterra, and despite its ongoing suspension on the Shenzhen exchange, Beingmate had 4 brands registered.

The CFDA reported that through to 30 July (2017), it had received 665 brand requests, including 531 from domestic companies and 134 requests from international companies.

No NZ or Australian plants were registered in this first “release” but the suggestion is that the authorities are working through applications based on the date received.

Meanwhile, Synlait also announced that registration of its Munchkin’s brand by the US FDA could be “4-12 months away”. This registration was previously expected this calendar year. Synlait said that the delay would not have a material impact on 2018 earnings.

Summary and Conclusions:

Despite the disappointing result in auction #193, both listed equity prices in the sector and commodity futures prices have remained robust.

With some of the immediate concerns surrounding global markets ameliorating overnight, I am expecting a solid result tonight.