Thinking of having some butter with your toast for breakfast? Go on, then. It’s good for you. Or at least, it’s not as bad as previous warnings claimed.
The world seems to have fallen in love with butter again after decades of relegation to the “bad foods” list following medical advice to avoid saturated fats. Recently, though, various studies have suggested that there is no link between eating butter and cardiovascular disease, with one study even suggesting it could cut the risk of diabetes.
Perhaps as a result of these studies, the price of butter has surged to a record high on international markets. A combination of bad weather and falling milk output in key countries has not helped. So perhaps it is time to give dairy farms, which for so long have been out of fashion, a fresh look.
However, this is no easy process. Many dairy farms and famous butter producers are private, and so it is difficult for investors to get exposure. Of course, there are the usual suspects — large companies such as France’s Danone, or U.S.-based Dean Foods Co. (DF) But what else is out there?
One way for investors to start their research is to look at farms or dairy products makers that are listed and see how efficient they are at turning over their inventory — in other words, how fast they manage to sell their products. Generally, the lower the number of days that inventories are held — i.e., the higher the number of times inventories are turned over in a year — the more efficient the company.
One word of caution: A low number of inventory turnover days equally can indicate that the company does not keep enough inventories, so investors should do a lot more research before deciding whether to invest in its shares.
Still, judging by inventory turnover days, the most efficient publicly listed company in the dairy farm sector is China Modern Agricultural Information Inc. (CMCI) . FactSet shows this company, which is headquartered in the north-eastern Chinese city of Harbin, taking only six days to turn over its inventory.
China, already a huge market for dairy, is growing fast, so this company has plenty of potential. One caveat, however, is that the company takes a long time to collect payment after the sale has been made, judging by its days of sales outstanding (DSO) ratio, which is 68.8. This could indicate that it sells too much on credit and/or the quality of that credit is not all that great.
Next is a company that is listed only in Australia. Australian Dairy Farms Ltd., listed under the symbol AHF, turns over its inventory in 9.9 days. The company sells not only raw milk, but also value-added products including butter and yogurt both in Australia and abroad. This company has a lower DSO ratio than China Modern Agricultural Information, but at 49.5 it is still relatively high.
Another company on the list is headquartered in India and listed only there. Virat Crane Industries Ltd., listed in Mumbai under the symbol VIRATCRA, turns over its inventory in 27 days, and its DSO ratio is a good 14.9. However, part of its output is focused on local specialty products, so investing in this company takes a lot of local knowledge.
Europe is traditionally a big consumer of butter, cheese and other dairy products. One European manufacturer and supplier of dairy products is Greek Evrofarma SA, listed in Athens under the symbol EVROF. The company, which was founded in 1991, produces milk, cheese, yogurt and organic cheese and turns over its inventory nearly seven times a year.
However, at 131, its days of sales outstanding (DSO) ratio shows how difficult it is to obtain payment for sales in Greece, a country that has been living in a deep economic depression since the global financial crisis.
Another European dairy producer that is listed and has relatively efficient inventory turnover is a Lithuanian firm, Rokiskio suris, listed on the stock exchange in Lithuania’s capital Vilnius. Besides milk collection, the company also makes butter, sour cream, yogurt, curd cheese, hard cheese and other products. It turns over its inventory a little more than four times a year and has a DSO ratio of about 18.
It looks like investors need to travel far and wide to butter up their portfolios. For those loath to do the research and looking for just a bit of general exposure to the agricultural sector, ETFs such as iPath Bloomberg Livestock Subindex Total Return ETN (COW) or iPath Pure Beta Livestock ETN (LSTK) are a better option.