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A2 Milk Company share price lower on Fonterra update

In afternoon trade the A2 Milk Company Ltd (ASX: A2M) share price is on course to finish the week on a sour note.

At the time of writing the infant formula and dairy company’s shares are down 2% to $13.45.

Why is the a2 Milk Company share price sinking lower?

With no news out of the company, today’s decline may relate to an update out of one of its suppliers, Fonterra Shareholders’ Fund (ASX: FSF), this morning.

According to the update, Fonterra Co-operative Group has reduced its forecast milk collection to 1,510 million kgMS for the 2018/19 season.

This downgrade is due to the impact of ongoing dry weather in New Zealand, particularly in the North Island, which is impacting production in the second half of the season.

However, this forecast is slightly above last season’s collections of 1,505 million kgMS, which was also impacted by poor on-farm conditions.

Fonterra Co-operative Group also advised that it has made reductions to its offer quantities for its product range on Global Dairy Trade over the next four months. Though, there is no change to its forecast offer quantities on Global Dairy Trade over the 12-month period for all products.

Last month a2 Milk Company advised that it had agreed with Fonterra to build a milk pool in New Zealand that will enable direct ingredient supply from second half calendar 2019.

While this may put a spot of pressure on supply, I think it’s a little soon to panic and feel this share price weakness could arguably be a buying opportunity.

What’s next?

Another of a2 Milk Company’s suppliers will be making an announcement next week. Synlait Milk Ltd (ASX: SM1) is due to release its half year results on Wednesday morning.

As a2 Milk Company is Synlait’s biggest customer, its results will give investors an indication of how demand for its infant formula has fared since the start of the second half. I would suggest investors keep an eye out for those.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of A2 Milk. 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 Scott Phillips.

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