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Why the Bellamy’s Australia Ltd and a2 Milk Company Ltd (Australia) share prices are falling today

Although the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has continued to rise today, the shares of two of the market’s top-performing shares from 2015 have extended their recent declines.

The share prices of infant formula producers a2 Milk Company Ltd (Australia) (ASX: A2M) and Bellamy’s Australia Ltd (ASX: BAL) have fallen 6% and 7.4% respectively today, with the latter’s share price falling below $10 for the first time since 23 November, 2015.

The a2 Milk Company and Bellamy’s Australia were two of the country’s best-performing shares throughout 2015, rising roughly 202% and 715% respectively (although a2 Milk only floated its shares on March 31 2015, with most of its gains coming in November and December 2015).

The pair were at the centre of a boom in demand for infant formula, both in Australia and abroad, whereby supermarkets and pharmacies around the country were having a tough time keeping their shelves stocked. As a result, their sales were soaring with both companies generating far stronger gains than were initially expected.

Most recently, the a2 Milk Company, reported an 86% increase in revenue compared to the prior corresponding period (with revenue from its infant formula product rising 340%), while group earnings before interest, tax, depreciation and amortisation (EBITDA) soared 472%. Meanwhile, Bellamy’s grew revenue by 83% with net profit rising an incredible 325%.

What’s happened?

One factor that could be acting as a drag on the a2 Milk Company’s share price today is the fact that FONTERRA ORD UNIT (ASX: FSF), or “Fonterra”, cut its milk price forecast to a nine-year low due to an oversupply in the market, according to The Australian Financial Review.

The a2 Milk Company still generates a considerable portion of its revenue from selling its milk products, so a lower price isn’t great news for the business.

However, there is another factor that could be acting as a drag on the share prices of both businesses today, as well as that of Blackmores Limited (ASX: BKL), which only recently entered the infant formula space.

Although both companies reported strong growth in China during the latest half, it is anticipated that a large portion of their Australian sales are also made to customers which then sell the tins to Chinese residents via ‘grey markets’ on the internet. It’s been great for both companies and boosted demand strongly, but it’s also a problem that is being watched by Chinese regulators, which could crackdown on such activity.

On the one hand, that could allow the businesses to sell more products direct to Chinese consumers, allowing them to enjoy higher margins, but it could also impact the level of demand for those products – particularly in the short term. It is unclear of the likelihood of this occurring, but it is worth keeping in mind, particularly given the heights at which the shares are trading.

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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.