March 2016

Quarterly Newsletter of DMP Asset Management Ltd March 2016
Issue 21

DMP Asset Management Ltd
ABN 77 145 590 316
Australian Financial Services Licence Number 383580
Level 30, 80 Collins Street, Melbourne VIC 3000 T (03) 9981 3300 F (03) 9981 3399
W www.dmpam.com.au

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"Australia is a lucky country run mainly by
second rate people who share its luck. It
lives on other people's ideas, and, although
its ordinary people are adaptable, most of its
leaders (in all fields) so lack curiosity about
the events that surround them that they are
often taken by surprise."
Donald Horne 1964
Donald Horne’s famous phrase “The Lucky Country” has
been used to describe Australia in many lights since it was
first coined in 1964. Originally intended to poke insults at
Australia’s lack of self-ingenuity, modern interpretations
refer to Australia as the lucky country in the true sense of
the word due to being blessed with weather, lifestyle and
land mass. When asked for comment regarding this
misinterpretation, Donald said he “has had to sit through
the most appalling rubbish as successive generations
misapplied this phrase.”
While his work hasn’t been interpreted as intended, it does
highlight Australia’s fortunate position. Perfectly situated
directly south of the biggest of the four Asian tigers,
Australia has prospered as a major bulk commodity
trading partner to China and has benefited greatly from
the relationship. In calendar year 2016, Australia is on
course to achieve an uninterrupted 25 years of economic
growth in Australia; the second longest continuous period
of any advanced economy in the world behind
Netherlands who holds the record with 27 years between
1982 and 2008.
In 2011 DMP communicated (via a lunch series titled
Hopium) to clients that the Australian Resource sector
was “overdosing on China” and that underlying prices of
bulk commodities would come under pressure. Fast
forward to today and we now see the effects of oversupply
on our major bulk commodity producers with BHP
Billiton and Rio Tinto dropping 60% and 50%
respectively over the last 5 years.
DMP’s bearish outlook on any near-term recovery for the
Resources sector has our Australian equity portfolios
positioned to be underweight the sector. While much has
been written on how Australia has helped build China
over the last 25 years through the supply of raw materials,
the emerging story that has become the “flavour of the
month” is that Australia has to now help feed China, a
country with 1.36 billion hungry citizens.

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This emerging thematic has been of great interest to you
judging by the many queries received on the topic. It too
has been of interest to DMP for some time now, and a lot
of work has gone into understanding the specific factors
that are in play. We have spoken to many stakeholders in
the agricultural sector; industry experts, management
teams of agricultural companies, government authorities.
DMP’s research also led me to Tasmania where I spent a
few days speaking to farmers on the ground, those best
placed to tell the real behind-the-scenes story.
It is therefore appropriate that we use this bulletin to share
our findings and provide you with insights into whether
Australia can indeed be the food-bowl of Asia and benefit
on a similar scale to the bulk commodities boom of
previous decade.
The need to feed the rising Chinese middle-class
Back in 2014 the Communist Party of China (CPC) - the
country's cabinet - published its "National New-type
Urbanization Plan" expressing a desire to increase their
ratio of permanent urban residents to total population from
53.7% to 60% by 2020. That meant the migration of 100
million rural residents - four times Australia's population -
into pre-built cities across China to allow for citizens to
enjoy the modern comforts of life. The Plan was driven by
the belief that the future of China laid in domestic
consumption rather than from being an export-driven
economy. Recent reports from the Chinese National
Bureau of Statistics have shown that the Plan is working
as domestic consumption (Tertiary) has surpassed
manufacturing (Secondary) in recent years.
A rapidly urbanizing population also means a rising
middle-class, a cohort that earns between USD$5,000 to
USD$25,000 p.a. according to Credit Suisse. They say
that China now leads the world in middle-class citizens at
109 million, a full 17 million ahead of the nearest country,
the U.S.
An interesting study into the Chinese wealth allocation
habits provides us with insight into the spending habits of
a typical Chinese middle class family. “Eating better"
ranks as number #2 on the list of 7 consumption desires
which suggests that a larger share of the wallet almost
always goes into food first as opposed to other creature
comforts. My own anecdotal observations growing up in a
typical Chinese family verifies this as I was fed “only the
best” by my family elders where possible.
Australia’s illusion of “feeding China”
Back to the question of whether Australia can be China’s
food bowl, we think this is a difficult proposition. For
starters, the Australian Fair Work Act stipulates a
minimum wage of AUD$21 per hour for all casual

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workers, a cohort that forms the majority of a farm’s
workforce. Asian farmers on the other hand can employ
workers for as low as AUD$2. The huge spread means
that Australian farmers will never be able to compete on
price when compared to their Asian counterparts given
labor is a significant part of total operational costs. This is
even more so when transport costs are factored in.
Interestingly, when in Tasmania I learned that fresh
vegetables produce made available for international export
have been hovering around 10% to 15% of total sales and
has been unchanged for the past 10 or so years and is not
expected to change going forward. In fact, the Australian
produce market is in oversupply because “anyone with
land can grow vegetables”, as the famers tell me.
It is without a doubt that Australia is a big country with a
land mass of 769 million hectares (mHa). Despite the size,
only 47mHa is arable land. In contrast, Asia has 233mHa
of arable land according to latest statistics released by the
Food and Agriculture Organization of the United Nations
(FAO), and a population of 4.427 billion to work the land.
Source: Food and Agriculture Organisation of the United Nations (FAO)
The farmers ended my visit by quipping “Agriculture is a
bloody hard industry to operate in. Australia won’t be able
to feed China (or Asia for that matter). Asia will feed
itself.” From what I saw and learned, I tend to agree.
We see agriculture as just another commodity
There is also the issue of supply versus demand, and the
underlying cyclical commodity price that drives an
agricultural company’s value. Take Almond producer
Select Harvest (ASX:SHV) for example; a quality
company with experienced board and management,
industry’s best practices on crop management and rising
market share. Despite the company positives, the share
price has almost halved on a Year-On-Year (YoY) basis
to $4.13 on 31st
March 2015 driven by the fall in almond
spot prices. In other words, what the company does
internally is not as important as the macro factors that
drive commodity prices which in turn drives company
value.
The agricultural sector is inherently cyclical in nature and
is exposed to material risks outside of one’s control. Some
of the examples given by farmers; 1) outbreak of foot-
and-mouth disease which occurred within UK in 2001
resulting in the culling of 10 million sheep and cattle, 2)
the 2010-2011 Queensland floods which displaced over
200,000 residents and destroyed significant amounts of
crops, 3) the worst drought event in Australia between
1995 and 2006 that severely hampered the agricultural
sector. These are all recent examples that highlight the
major risks faced by agricultural sector.
A positive to come out of my Tasmania visit
Brand Australia is still very well
known internationally, and there
will always be demand for
Australian produce labeled with
“Australian Made”. When
international consumers were asked
what comes to mind when they
come across Brand Australia produce, they refer to
premium product grown in areas with fresh air, sun,
rolling hills and green grass.

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I guess we are “The Lucky Country” after all.
We are not entirely convinced
While there are growth factors that are certainly in favour
of Australia’s agricultural sector, we are not entirely
convinced that investing into the sector will return the
long term growth we seek for our clients. While DMP will
always opportunistically take advantage of investable
companies that do crop up in the sector, we see agriculture
as just another commodity and therefore would rather rent
it than own it.
Specialty fresh fruits and vegetables producer Costa
Group is one agriculture company that DMP is “renting”.
It stands out from the crowd due to its market dominance
in mushrooms, berries, tomatoes and citrus. Mushrooms
and berries in particular are notoriously hard to
successfully grow in commercial quantities; Costa’s
intellectual property around plant genetics and world-class
growing methods provides a high barrier to entry for
others trying to enter into its space. The defensive
qualities, as well as good earnings growth coming from
international markets are the reasons why it has been
included into our Australian Small Caps portfolio.
Revisiting a familiar thematic
Back in the October 2015 luncheon series, DMP
introduced the concept of “House Of Bricks”; companies
that operate from a dominant market position, has a good
track record of top-line growth, has strategic assets that
are unique in its product offering and provide goods or
services that we “need” rather than “want”. We maintain
the view that the best opportunities for long term
sustainable growth remain within companies that exhibit
these characteristics. A few of our favourites (and why)
are:
 Challenger Financial Services (CGF) – Dominant
annuity provider for ageing population
 CSL Ltd (CSL) – Major player in the blood plasma
fractionation industry
 Folkestone Education Trust (FET) - REIT within the
child care industry
 Ramsay Health Care (RHC) – An ageing population
with increasing care needs
 Sydney Airport (SYD) – Strong growth in number of
Chinese tourist visits
 Transurban Group (TCL) – Long dated toll road
owner and operator
Our earnings outlook for large capitalized companies is
expected to be modest at best with big household names -
Origin, BHP, Santos, ANZ, NAB, Woolworths –
experiencing double digit share price declines in the year
to 31st
March 2016. DMP’s focal point for returns for the
rest of 2016 will be in the middle/small end of the market
as we believe this space is where the highest returns can
be generated for our clients. We look forward to working
for you to carefully select opportunities in this space to
achieve the best outcome.
Jason Wong
Fund Manager

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In the December 2015 quarter DMP fielded many
enquiries on infant formula. The infant formula thematic
has been known to us for some time and has been
discussed in detail amongst the funds management team.
Much of the recent interest in infant formula is centred on
two new-age dairy (NAD) companies A2 Milk
(ASX:A2M) and Bellamy’s (ASX:BAL).
It is likely that you will have read about the rush for infant
formula at local supermarkets across Australia leading
into Christmas 2015. Pictures showing shoppers buying
entire pallets of infant formula had Australian mothers
frustrated at the inability to purchase any meaningful
supply for their own children.
Sourced from www.news.com.au
So why is there a sudden explosion in demand for NAD
dairy? And what differentiates these companies from
normal dairy?
Marketing geniuses A2M and BAL
The A2 milk company (A2M), which produces only A2
milk, says that their dairy is good for consumers suffering
from digestive problems; much better than drinking
normal milk which contains both A1 + A2 beta-casein
proteins. The argument is that A1 beta-casein releases the
opinoid BCM-7 which is said to affect the digestive
wellbeing of a person. What makes A2M milk special
then is that it processes milk from only A2 beta-casein
cows resulting in A2 milk. By removing the A1 protein it
removes the threat to one's digestive system. Or so the
company says.
Bellamy’s (BAL) on the other hand has tackled the dairy
market in a different - but equally effective - way. Global
demand for organic foods is growing strongly; in the U.S.,
the world's biggest organics market, demand for organic
produce has been growing at a CAGR of 11% for the past
14 years, with sales reaching approximately $27 billion a
year. Bellamy’s have seized on the changing preference
for healthier food free of unnatural additives like synthetic
herbicides and animal antibiotics by introducing its own
range of organically certified dairy products.
Is the proof in the milk?
When A2 Milk was first discovered in the 1990s and
made commercially available to consumers in 2003, there
were claims that drinking normal milk containing A1
would increase risks of heart diseases, diabetes and
schizophrenia in adults and autism in children. Since then,
numerous independent studies have unsuccessfully been
commissioned to shore up those claims. Both EJCN

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(European Journal of Clinical Nutrition) and EFSA
(European Food Safety Authority) have disproved that A1
beta-casein protein had any adverse effect in humans.
Dairy Australia, the national body for Australian dairy
industry, along with the NZFSA (New Zealand Food
Safety Authority) has also weighed in on the theory by
categorically stating there are no scientifically-proven
health benefits of A2 milk over A1 + A2 milk. These
studies have resulted in A2M reducing its health benefit
claims down to only being merely good for the digestive
system.
In BAL's case, it is worthwhile to first understand what
makes a product organic. Use of the word "organic"
simply refers to the absence of synthetic farming aids like
pesticides, herbicides, antibiotics or fertilizers. Does the
omission of synthetic aids lead to more nutritious
produce? “Probably not”, according to the prestigious U.S
based Mayo Clinic who have concluded that "organically
and conventionally produced foodstuffs are not
significantly different in their nutrient content".
Risks is to the downside
Without hard conclusive evidence, it will always be a
question of "will the customers ever find out the truth?”.
Slowly but surely we see each health benefit initially
touted by the companies being dispelled; in A2 milk one
customer that we spoke to seemed genuinely surprised at
finding out that A2 milk is not actually beneficial for
lactose intolerant consumers. In Bellamy's organic
products, DMP uncovered that
pesticide/herbicide/antibiotics were all used in organic
farming; the only difference being the use of organic
farming aids as opposed to synthetic aids.
The Tasmanian dairy farmers I questioned confirmed as
much; they tell me that A2 and organic milk is no more
than a “fad” due to very good marketing, and that
consumers will soon wise-up to the truth that they are just
paying a premium for homogeneous Australian/New
Zealand milk.
The Chinese middle class who is currently soaking up
much of the demand was also found to be “very fickle and
hard to pin down to a strong brand loyalty", according to a
study published by Bain consulting. This suggests that
consumers are disloyal and will promptly leave for
another brand overnight. The same study measured a -
3.1% decrease in the market share of foreign infant
formula brands in 2013-2014, an indication that Chinese
consumers are starting to shift towards local brands.
There is also the oversupply issue that is currently
unfolding in China where most of the demand is coming
from. Dairy processors have responded by announcing
major CAPEX initiatives to increase supply of their
products. Murray Goulburn has initiated on a $300 million
CAPEX plan to produce an extra 90,000 tonnes of
nutritional powder; a new joint venture between
Blackmores and Bega has created a new range of infant
formula with an initial production run of 120,000 cans;
Synlait (NZ biggest dairy processor) have recently
completed an upgrade to their factories to increase infant
formula production from 90,000 to 140,000 tonnes a year.
This new Australian and New Zealand inventory is in
addition to additional supply from 94 other international
dairy processors currently operating within China. By
understanding the supply side of the equation, we now see
why there are 3,500 individual milk formula SKUs on
shelves across China.
This story feels very similar to the recent (current) oil
oversupply crisis that has been the precursor to weakness
across global equities markets. Thanks to the increased
supply efforts of OPEC and the U.S oil producers over the
past decade, the world is now in an oversupply situation
of approximately 1.2m barrels of oil per annum, with oil
spot prices suffering as a result.

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At 25x and above forward looking Price/Earnings (P/E)
multiple as in the case for A2M and BAL, we think the
companies are priced very expensively.
At DMP we think 10x to 12x forward looking P/E provide
fair value for agricultural companies. While it is
undeniable that the current demand for infant formula
products from China is strong, DMP believes that milk,
just like fresh produce, is just another commodity product.
Our deep dive into the space has led us to the conclusion
that the valuation spike experienced in December 2015 is
not a sustainable event and is likely a bubble that has
already begun to deflate.
Jason Wong
Fund Manager
Disclaimer
The information, opinions, estimates, conclusions, material and other data (the “Information”) presented in this document are provided to you for information purposes only and are not to be
used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities. Nothing in this document constitutes legal or tax advice, or a representation that any
investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you.
The Information presented in this document has been obtained or derived from sources believed by DMP Asset Management Ltd (DMPAM) to be reliable, but DMPAM makes no
representation or warranty, express or implied, as to their accuracy or completeness. To the extent permissible by law, DMPAM, its employees, agents and advisers exclude all liability for
any loss or damage arising directly or indirectly as a result of any person acting or relying on the Information presented in this document.
Any projections contained in this document are estimates only and may not be realised in the future. Past performance should not be taken as an indication or guarantee of future
performance, and no representation or warranty, express or implied, is made regarding future performance.
This document was prepared for multiple distribution and contains general securities advice only. It does not take into account the specific investment objectives, financial situation or needs
of individual recipients and may not be appropriate in all circumstances. Persons relying on this Information should do so taking into consideration their specific investment objectives,
financial situations and needs. Before acting on the basis of this document you are advised to contact DMPAM or an independent adviser for individual advice tailored to your personal
circumstances.
Finally, in accordance with the Corporations Act 2001 (Cth) please note that:
(a) DMPAM may receive fees and commissions concerning any or all of the entities which are the subject of this document. Details of those fees and commissions are available on request;
and
(b) DMPAM and/or its employees may hold securities or rights to take up securities or may intend to acquire securities in any or all of the entities which are the subject of this document.
Jason Wong, Fund Manager
Jason joined DMPAM in 2010 as Portfolio Accountant, and moved into the Funds
Management team in 2013, currently occupying the role of Fund Manager. Prior
to joining DMP, Jason held multiple roles within The Link Group, first as a
Trustees Reconciliations officer in Link Market Services and then progressing
onto the position of Fund Accountant within Australian Administration Services.
His responsibilities included superannuation accounting advice, preparation of
financial year accounts for various superannuation fund providers and sector-
specialized client services. Jason graduated from Melbourne University with a
double degree in Bachelor of Commerce and Bachelor of Information Systems,
majoring in Accounting, Finance and Info. Sys. He has also completed a Graduate
Diploma of Chartered Accounting from the Institute of Chartered Accountants
and is a fully qualified Chartered Accountant.

March 2016

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