Shore Capital equity analyst Clive Black has applauded Dairy Crest for its “tremendous commercial statesmanship” in pushing back its scheduled 1 August 2012 price reduction by two months to 1 October 2012.
Dairy Crest was the first of several UK milk processors to delay its price reduction, issuing a statement on its intentions last Thursday. Arla followed suit later that day and Theo Müller-owned Robert Wiseman Dairies took similar steps on Friday afternoon.
The announcements followed a week of talks between the National Farmers Union (NFU) and processors and protests by Farmers for Action (FFA).
FFA held demonstrations outside Arla, Dairy Crest and Robert Wiseman processing plants, retailer distribution centres and supermarkets, demanding a larger share of milk supply chain margins.
“In genuinely difficult times for the dairy farming and milk processing sectors in Britain, Dairy Crest Group has, in our view, shown tremendous commercial statesmanship in deferring the time for which an announced 1.65p/litre price cut is due to be implemented by two months,” said Black.
Black believes, however, that Dairy Crest would not have taken the decision to delay its planned price cut if it was not already under such “financial duress.”
The year ending 31 March 2012 was tough for the firm’s Dairies division. The segment, which markets fresh milk and Frijj milkshakes, recorded revenue of £1.069bn for 2011/12 – a 2% decrease on the previous year.
Shore Capital is expecting similar results in H1 2012/2013, Black revealed.
“This move by Dairy Crest may take some ‘public’ pressure off its executives, pressure being potentially applied by a justifiably concerned farming community and politicians,” he said.
“However, let us be equally candid, if ‘category’ (that is liquid milk) returns are not sorted out for better for the medium-to-long term, it will be merely a short-term transfer of cash from a player over-invested in dairy processing to those over invested in dairy production.”
Shore Capital has not changed its year forecast for Dairy Crest following the deferment, although it admits that the firm’s decision does “little to help Dairy Crest’s profitability.”
“So, as equity analysts we say that we understand Dairy Crest and the other dairies’ expediency in deferring a cut in prices to its farmer suppliers; and we can understand and hope for real appreciation from genuinely distressed farmers in this respect,” said Black.
“However, from a Dairy Crest shareholder’s perspective, the deferment is just that, without a change in the fundamental economics of the chain.”