Shift to liquid milk amid milk powder shortage to benefit local dairy producers

• Nation Lanka Equities says milk powder importers continue to incur losses on price controls amid rising costs

The current milk powder shortage in the market will bode well on the domestic dairy producers such as Lanka Milk Foods PLC (LMF) as others have suspended imports due to the increase in controlled price by the government, according to Nation Lanka Equities (Pvt) Limited, a stock brokerage.

Further, the ongoing shift towards liquid milk due to its perceived health benefits and the ongoing milk powder shortage would also lift the prospects of local dairy producers, specially when they are planning for capacity expansion.   

Sri Lanka is facing an acute milk powder shortage as people are forced to daily stand in queues to buy rationed milk powder as price controls prevent importers from breaking even, “let alone make a profit”, even after the government agreeing to raise price by Rs.200 a kilogram, the research arm at Nation Lanka Equities said. 

Milk powder importers in Sri Lanka are in limbo due to increase in imported milk powder prices caused by the higher global commodities bubble and higher freight rates, with weakening rupee adding further into their woes as they cannot set prices to reflect cost due to controlled prices, creating a shortage.  According to Nation Lanka Equities, only the companies with milk powder as their sole business engage in importing, and that also happens at a loss.

Milk powder importers and producers for months lobbied the government seeking a price increase of Rs.350 for a kilogram, but the government agreed to increase the price by only Rs.200 and provided a tax relief of Rs.35 which was made out of 5 percent of PAL and 15 percent excise duty. 

According to an equity research carried out by the company into LMF which owns dairy brands such as Lakspray and Ambewela, the ongoing capacity expansion by the company is expected to increase daily milk production by 60 percent by the end of the year priming the company to become a beneficiary of these developments. 

According to the LMF management cited by Nation Lanka Equities, by the time the company’s Rs.3.7 billion dairy farm is completed by the end of 2021, the company would be able to increase its capacity from the current 35,000 litres to 55,000 litres.  Nation Lanka Equities forecasts this expansion coupled with the shift seen toward liquid milk would increase LMF’s revenue contribution from the latter to 65 percent by FY22 from the current 58 percent. Powdered milk makes up the balance 32 percent of revenues at present. 

During the three months ended in June 2021, LMF reported earnings of Rs.13.83 a share or Rs.553.3 million compared to Rs.2.23 a share or Rs.89.2 million in the corresponding period in 2020.  The revenue rose by a robust 21 percent to Rs.2.32 billion from a year ago. While the sales of powdered milk has declined by 17 percent to Rs.607.5 million in the June quarter as the company halted milk powder imports during the last six months, sales from liquid milk rose by a robust 23 percent to Rs.1.71 billion. 

Imports account for 60 percent of the annual milk demand in Sri Lanka and the domestic milk production has increased by 6 percent every year during the last five years, although imported milk remained stable during that period.  

“Therefore, we expect consumers to shift to liquid milk due to the likely milk powder shortage although it is not the most cost-effective option for consumers,” Nation Lanka Equities said. LMF has also raised prices of their liquid milk and yogurt to fend off pressure on their margins stemming from the rising costs, and Nation Lanka Equities didn’t rule out further price increases during 2H’22. Harry Jayawardena controlled Milford Exports (Ceylon) Private Limited held 33.57 percent in LMF by June 30, 2021 being its largest shareholder.