Tuesday, November 24, 2015

Post Number 8

There is a major change in the way developed market consumers are eating. The era of low and no fat diets are over. It turns out that diet has surprisingly little to do with cholesterol levels; most of it is genetic. It also turns out that eating appetite satiating protein foods takes off more weight than a carb-heavy diet. This change is most evident at breakfast, where eggs and meat are replacing grains. I believe there are great investment opportunities in this space. In this post I'll talk about the commodity background for milk. In the next post I'll go into specific investments and move to eggs.

US consumption of milk has changed rapidly over the years. Consumption of fluid milk is down; consumption of cheese, ice cream and yogurt are up. Here's a graph of total US consumption of milk on a milk-fat basis:

The next graph zeros in on the milk products that have been growing quickly. This chart includes exports, which have been growing until recently.

However, consumption of beverage milk has been declining:
Some of this decline has to do with long run factors such as smaller families, plant based alternatives and the increase of the lactose sensitive population. However, a lot has to do with price, as you can see in the graph.

So how to play this. Yogurt is the obvious play, but most of the players are private. Danone is an exception. However, Danone is strongly circumscribed by the French government. A while back it received a takeover offer, but the gov did not allow it. So I would stay away.

The same holds true for specialty cheeses (in the US that means non-American and non-cheddar). I simply can't find an investment vehicle.

I am going to recommend that one play for a rebound in fluid milk. Why go to the declining part of the market? Because I think the decline is over, and a rebound is near.
- Lactose free milk has been introduced and is strongly gaining share. This requires very little processing above what is already done at dairies.
- Milk has taken off among health-conscious athletes. This is particularly true for flavored milk. This group often leads the general consumer.
- The price of raw milk (the input to the dairy) has fallen both in the US and the world market. This is good for both consumption and processing margins. It has to do with the slowdown in China. Here's a graph of New Zealand milk export prices along with the stock price of Dean Foods, the largest US dairy.
Next Post: Dean Foods

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