There’s been a huge drop in the share price of Bellamy’s Australia Ltd [ASX:BAL] today. The stock saw a decrease of 5.9% this morning.
Bellamy’s is a Tasmanian-founded dairy company. It’s the parent of Bellamy’s Organic, a producer of baby food and formula. It’s push for natural and organic products gives it an appealing edge in today’s health-conscious market.
Obviously, when sales are low in these countries Bellamy’s share value is bound to drop.
China’s demand has slowed in the last couple of months. However, this is expected to change in the second half of 2018. And the global dairy demand in general is also expected to rise.
So why the drop in share price, despite high demand?
It was only yesterday that Bellamy’s announced their new arrangements for increasing Australia’s organic milk supply.
Through an agreement with Fonterra Australia Pty Ltd, Bellamy’s aims to help convert all Aussie dairy farms to organic farms. Bellamy’s mission is:
‘…to support sustainable farming in Australia, improve farmer economics and promote safe premium Australian made organic products.’
The announcement went on to say:
‘This long-term agreement accounts for the cost of conversion to organic and, if successful, will provide Bellamy’s with an additional secure, organic, fresh milk supply from Tasmania.’
That doesn’t sound like a negative move at all. So why does the market think so?
Well, despite the benefits of this Fonterra agreement to the dairy industry, it does come at a cost. And quite a large cost, at that.
The initial $5.5 million investment — going towards assets needed for organic milk production — could be what’s scaring away investors.
But, as reported in The Weekly Times, managing director of Fonterra René Dedoncker insists the switch to organic is essential:
‘The development of an organic milk pool is also a positive for Tasmanian farmers, who will have the opportunity to tap into the premium and stability that organic milk attracts.
‘Organic dairy products such as nutritional powders command a premium, creating a high-value return, and we want to work with Tasmanian farmers interested in organic dairying to grow that organic milk pool over time.’
What does organic mean for the future of Bellamy’s?
While it may be the cause of this recent downward slope, this ‘organic-all-the-way’ path for the dairy industry points towards a positive future.
Bellamy’s CEO, Andrew Cohen, believes this new arrangement is an ‘exciting step’ for the industry.
And looks like a positive not only in terms of the quality of products, but also in terms of the quality of investment. For, as well as helping farmers, Cohen says Bellamy’s new move will also help them:
‘…take greater control of our supply-chain and cost structure.
‘We believe the rising demand for our brand and high quality, premium organic infant formula in Australia, China and emerging Asia can become an important and value-added platform for Australian farmers.’
If Bellamy’s bet on organic pays off, then all looks good for the road ahead.
For Money Morning
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