The infant formula sector is an intriguing industry. But it’s easy to forget many aspiring companies are milk companies first.

Australia’s dairy industry is still recovering from a hangover bought on by excessive production levels. The catalyst? Predictions earlier this decade that the world would run out of dairy products by 2020.

Australia still produces 9 billion litres of milk annually and excess production has forced prices to levels leaving farmers hurting. This even led to the closure of the Camperdown Dairy and its owner Aussie Farmers Direct going out of business.

Pic: Brisbane Lions

But the Brisbane Lions had to find a new sponsor and the plant needed a new buyer which initially was Bellamy’s. But they too sold it and Australian Dairy Nutritionals (ASX: AHF) now owns it.

Stockhead was a guest at a broker lunch held in Sydney yesterday following a general shareholders meeting. The company is not yet Bellamy’s but it owns five farms with a carrying value of $22 million and has over 2,000 milk-producing cows.

The farms lie in the so-called ‘Golden Triangle of Dairy’ in south-west Victoria and the company expects it will be organically certified in the next couple of years – the first in November.

Unlike other regions, it has escaped drought unscathed.

So what if you’re organic?

One of the company’s selling points is that it is organic. CEO Peter Skene admitted to one analyst he previously resisted organic milk, thinking it was an inner city fad. But organic milk lacks the chemicals that non-organic milk picks up during the supply chain and it comes at a premium – specifically 42 per cent.

As Skene notes milk can be 20 different things – yogurt, cream and infant formula; and the latter is “top of the tree in terms of return per litre”.

The company noted between 2007 and 2016 the value of organic baby formula substantially grew. It was US$200 million pre-GFC to over US$800 million globally 10 years later. In Australia and New Zealand it is over $200 million now but will reach $400 million by 2023.

“We have a market that’s increasing by 15 per cent per year and we want to give the market what it wants,” said Skene.

He also said sticking with “non-differentiated milk” would leave the company trapped in a price cycle no different to that of mineral commodities such as gold.

What now?

Two months ago, it raised $12 million from investors and Skene declared “we’re ready to capitalise”. Among its planned future products are organic creams, skim milk powders, paediatric formula and kefir.

However it will continue with its Camperdown products. All 16 of them are in at least 700 Woolworths stores and others are in over 900.

Pic: Australian Dairy Nutritionals

One mistake he promised not to make is blowing millions on marketing.

“Our game is we’re adding value to our farms and we’re not speculators by spending $10-$20 million in launching a brand,” he said.

He hinted food tourism could be an opportunity in the future, noting other dairies such as the Maleny Dairy in Queensland did so. And his region, home to the Twelve Apostles, received 2.3 million visitors per year. But he admitted this was not a short term priority.

Remember China

Many shareholders would anticipate eventually entering the Chinese infant formula market. In April, ADN purchased an infant formula plant overseas to be essentially taken down and reassembled in Camperdown.

It aims to be complete by March next year and have a capacity of 2,000-2,800kg per day.

But its plan is to start in Australia not withstanding. Skene said: “We’d like the daigou market to take notice.”

He said a second plant (to be built within the next couple of years) should be enough to export and the company plans to get an export license.

One analyst that attended was Blue Ocean Equities’ Philip Pepe who said there was no shortage of options, one being a joint venture, but the company was not rushing.

“Stage 1 is get it up and running into Victoria and NSW and if it works then Stage 2,” he said. “It [Stage 2] might be [with] a Chinese partner, someone offshore who needs the formula.”