2015 was the year of the Aussie Food Boom on the Australian stock market.
Driven by demand from China, food companies were star performers last year. From January to December, Capilano Honey (ASX: CZZ) shares were up over 200%, vitamin brand Blackmores (ASX: BKL) was up over 550%, and Bellamy's Organic (ASX: BAL) and A2 Milk (ASX: A2M) were up over 700% and over 200% respectively.
But it has been a different story in 2016. Since January, A2 Milk is up modestly, Bellamy's and Capilano are down somewhat, and Blackmores is down over 40%. Why?
Well, each company is different, but there are a few common factors.
The market was in a lather of excitement about each of those companies, last year. And it certainly makes sense that the growing middle class in China would be interested in our consumer goods.
That story is easy to understand, and it sent the share prices of our so-called soft commodity companies soaring. It's only natural that the market might overprice those stocks, in such a situation, because amongst all that excitement, investors turned a blind eye to the risks.
You see, strong sales growth for those companies was driven by daigou, or a personal "buying agent", who buys items in Australian supermarkets, on behalf of clients in mainland China. Marketing agency Think China suggested last year that there were "over 4,670 buying agents in Australia".
If Chinese consumers think that Capilano can be trusted to provide 100% Australian honey, or Bellamy's has the best infant formula, or Blackmores has reliable primrose oil, then they will buy those brands. But an added element of trust, in China, comes from knowing that the product you are consuming comes off an Australian supermarket shelf.
To this day, for example, independent pages on Taobao (China's eBay) show daigou posing with Australian products in Australian supermarkets — proof that they have access to, and can provide, the genuine item.
Regulation rocks the boat
According to Australian National University post-doctoral fellow Ryan Manuel, "goods that are bought and sold online through the free-trade areas will be subject to new duties. Some food and drug suppliers, such as milk powder providers, will also need to have their products licensed or re-licensed by China's food and drug regulators."
This move has reportedly caused some daigou to slow down their sales of Australian products. Blackmores has said that it expects sales in the first quarter of its new financial year to be down on the prior corresponding period. It noted that the Australian market "has softened in recent weeks, impacted by retailers destocking, and some exporters changing the channels through which they acquire products."
A buying opportunity
It certainly looks like Chinese policy might have impacted the market for vitamins, at least. The coincidence between the regulatory changes and slower vitamin sales in Australia is hard to ignore. Either way, these concerns are certainly weighing on the share price of our soft commodity companies.
But looking deeper, there is no evidence to suggest the underlying demand for our honey, vitamins or infant formula has softened. In fact, a visit to Taobao demonstrates that these items are still easy to come by, at close to the Australian retail price. And when you think about it, if a parent has gone to the trouble of acquiring Bellamy's formula during March, will they really give it up in April, because it costs them a bit more?
Foolish takeaway
No-one knows whether slower sales for Blackmores is a momentary disruption, or a permanent plateau. But it seems unlikely that, having cleared our supermarket shelves of some items in 2015, the Chinese shopper is finished with our trusted Australian brands in 2016. There's little doubt shares of these soft commodity companies have performed well to date, and perhaps the future isn't as bright as the past. But a basket of these stocks should perform well in the coming decade, providing opportunity for active investors who look beyond the banks and miners.
