ATM - A2 Milk Corporation Limited

[NT001]

The frontpage headline and lead story occupying most of page 1 above the fold in yesterday's NBR plus a two-page spread inside the paper raises the suggestion that Fonterra, which has reportedly spurned opportunities in the past to take over the a2 Milk Company, might now face the prospect of A2 being taken over by a foreign dairy giant and turned into a major local competititive threat to the national co-op.

But before everyone rushes out to buy a copy, let me say the story is hardly gripping. Although the NBR reporter has apparently interviewed CEO Geoff Babidge, her story comes nowhere near giving the suggestion any substance. It adds nothing to what has been published elsewhere about a2MC and the recent takeover talk, and doesn't even begin to discuss the issues and problems, let alone the perceived benefits, of a global giant trying to turn a2MC into a competitor to Fonterra. It just notes Babidge's admission that some of the company's patents start running out in a couple of years, leaving a "window of opportunity now to develp the brand", but doesn't say for what purpose.

Of course, a front-page headline in NBR and a big spread inside the paper speculating that A2 is some kind of threat to Fonterra can't do the company's reputation and its SP any harm. It's good to be noticed, at least.

Meanwhile A2 is generating useful publicity for itself in Britain. The London Daily Mirror, which is read by more than a dozen or two folk, has run a story in its financial section on the best promotional deals being offered by British supermarkets, and picks A2 Milk as the best.

"Our favourite deal this week is a free bottle of A2 milk with your grocery shop - it's a 2 litre (2 pints) bottle and the offer is open to anyone shopping online at [Sainsburys]". It then goes on to explain what A2 is all about.

[Harrie]

Are you able to post a copy of both the relevant articles NT?

[NT001]

Are you able to post a copy of both the relevant articles NT?

Sorry, Harrie, the NBR story is paywalled and I had to drive into town to buy a print copy, thinking it might have some stuff we didn't know. I just wanted to save others the trouble and expense of doing the same on a weekend.

The London Daily Mirror item is at
http://www.mirror.co.uk/money/sainsb...-codes-6212479

[nextbigthing]

http://www.bbc.com/news/uk-england-s...shire-33840815

[Harrie]

http://www.bbc.com/news/uk-england-s...shire-33840815

This would have to be a good thing for ATM wouldn't it?
If farmers want more at the farmgate then why not convert to a2 and pick up a premium.
Lower farmgate prices mean lower milk prices in general over time so doesn't that then make a2 milk more affordable to the consumer whilst maintaining healthy profit margins for ATM?

[NT001]

This would have to be a good thing for ATM wouldn't it?
If farmers want more at the farmgate then why not convert to a2 and pick up a premium.
Lower farmgate prices mean lower milk prices in general over time so doesn't that then make a2 milk more affordable to the consumer whilst maintaining healthy profit margins for ATM?

A number of factors would come into play here Harrie, as I'm sure you know. First, it takes some years to convert your herd to a2 and it costs money to do so. Farmers would have to figure whether the conversion cost is worth it for the farmgate price premium in several years' time. Besides the actual costs involved, such as the cost of DNA-testing each cow and culling the non-a2 cows, there's the problem that on-farm production goes down during the process. It's really only a practical proposition for farmers whose herds are already largely a2 and who can absorb some extra costs.

I haven't seen details of a2MC's farmer recruitment and farmgate pricing policy in Britain, but I do know that the company's entire supply comes at present from about 20 herds in a small region in Cheshire, Shropshire and North Wales.

Obviously it makes economic sense to buy from farmers within a limited region close to the specialised processing packing plant required to ensure the a2 milk is kept completely separate from standard milk containing a1.

The protesting farmers mentioned in the BBC report came from not too far away in Staffordshire, Derbyshire and Warwickshire, but I don't know if the company needs more suppliers at present, and whether there's a queue of farmers already waiting to sign up.

The average dairy herd in the UK has about 135 cows producing milk, so we're talking about 2,700 cows supplying a2MC's needs at present. That's not a lot, although it's about nine times the number supplying a2 milk in NZ and presumably more suppliers will be needed if demand takes off.

The premium farmers are paid for a2 milk is not great, and wouldn't be enough to make a lot convert to a2 in the present global price downturn in the UK or here in NZ.

The above points are worth remembering also when we are speculating about the possibility of a big dairy company or consortium taking over a2MC. It's not as though anyone could move in and suddenly turn a2 into a global money-making giant. It would take years to convert herds en masse and build up supplies, and at the same time to educate the consumer public as to why they should pay a premium for the product. That's one major reason why it's smart strategically for a2MC to position itself as a "niche" player seeking a high retail margin on relatively small volumes.

[nextbigthing]

This would have to be a good thing for ATM wouldn't it?

I hope so. I was hoping the long term effect would be
1) Farmers get paid more
2) Price of milk goes up across the board to cover it, however A2 already pay a premium therefore they don't have to pay farmers proportionally as much of an increase if any
3) A2 therefore becomes relatively cheaper, enticing people to pay that little bit extra to purchase it
4) Increased sales, high shareprice, party time.

[nextbigthing]

Someone mentioned IP the other day. Is anybody convened about ATM's IP expiring?

[NT001]

Someone mentioned IP the other day. Is anybody concerned about ATM's IP expiring?

The NBR story last Friday quoted CEO Geoff Babidge as describing a2MC's patent portfolio as "extremely complex" with some patents running out in a couple of years, although the report didn't say which ones.

But the story also said "key patents which prevent other companies from promoting the benefits of A1-free milk" run out in October 2023, in other words they still have eight years to run, and they are the ones that seem to be causing observers the most concern. Babidge also said the company has a number of new patent applications under way which have a potential life of 20 years.

Elsewhere Babidge has recently stressed that a2MC's security against IP challenge relies not only on its "robust" suite of patents, none of which is vital in itself, but also on its practical know-how and established market position based on consumer perception.

In one statement he said the strength of the company’s comprehensive and inter-locking IP portfolio means "no one else can have complete freedom to operate in the manufacturing, selling and advertising of an A1 beta-casein free proposition in its entirety like we can.”

That wording does suggest a potential competitor might be able to wriggle through cracks here and there in a2MC's IP, but it would continue to run into legal constraints on IP issues overall.

[nextbigthing]

Thanks NT001. Eight years should be plenty.