The Chinese Milk Man

The front page of the weekend Australian Financial Review looks like a montage of Markets and Moneys past. Banks, recessions and milk all featured.

Milk? Yes, Australian maverick Edgar Collins is on a mission to live out every businessman’s dream: selling something to China.  He’s building up a holding of 100,000 dairy cows with his company AustAsia.

Dairy is a fairly new thing to China. While milk in Australia recently sold for $1 a litre, it sells for $7 in China. And you have to pay the cows a lot less. Few Chinese drink milk, except as some sort of luxury health product. If that changes and a billion people decide they want lattes, Milo and Dare Iced Coffee, either the cows will be in for a shock or there will be a boom in the dairy industry.

Turns out it’s investors getting the shock so far. The bidding war for Victorian company Warrnambool Cheese and Butter Factory, which The Money for Life Letter subscribers made a tidy profit from, gives you an idea. It was all over the news for weeks.

But how can a small 120 year old rural dairy company suddenly become the centre of action in financial markets? Four companies from three different continents have joined the bidding war so far. The stock was up close to 250% from the MFLL entry price, although we took profits before the share price reached those lofty heights. 

Warrnambool had plans to fly fresh milk from Avalon Airport to China. It sounds completely ridiculous, but with tainted milk scandals tearing apart every major dairy company selling into China, the story was especially compelling. We’re not sure whether the plan will ever get off the ground now that a takeover is in the works.

The strangest thing about the milk industry is how it’s changed. It used to be about delivering a local product from the farm gate to your doorstep. Today, Edgar Collins spends his time flying around Singapore, Indonesia, and Shanghai. Since when does a Queensland milk man decide to move to Shanghai and then plan to list a $1 billion dollar company?

It’s good to know that the adage of going east has paid off for some. All those westerners who bothered to learn Chinese and felt like loners in Asian universities are probably raking it in right now. But where does that leave us still here in Australia?

If people like Edgar Collins can produce what China wants in China, without a tainted milk scandal, Australia will be back where it started; without prospects for growth

It also reduces trade and economic connections between countries. Historically, people don’t go to war during prosperous times, because trade and prosperity go together. You don’t pick a fight with your customer. And no resident of Melbourne will ever endorse a war against a coffee producing nation. It’s when the economy is struggling that political tensions rise. And that’s one theme of our upcoming conference.

This also brings us to the next story on the front page of the Weekend AFR. Treasurer Joe Hockey practically threatened Australia with a recession if workers don’t get their act together. If productivity growth doesn’t improve, living standards could fall, he said.

Markets and Money promptly did its bit to improve productivity and hired a second German for the office. But we doubt that’s what Joe Hockey had in mind. Threatening people with falling living standards seems odd, so what is he getting at?

Well, one thing that does improve productivity is a recession. The less productive workers lose their jobs and the economy adjusts to find more productive uses for freed up capital and labour. It’s a good outcome in the long run, but it sucks in the short run.

In the meantime, the biggest impediments to productivity are of course not the unions that Ford and Qantas face. Both companies are in the news over cutting jobs in Geelong. Instead, it’s politicians that are standing in the way. If Hockey got rid of bizarre government compliance requirements, that would improve productivity and create jobs too. Shifting the marginal cost curve is something government can do, because politicians caused it to rise in the first place.

Last but not least when it comes to the front page of the AFR, apparently the Commonwealth Bank of Australia is now worth more than tech giant Intel. CBA shares went from $5.40 in 1991 to almost $80 today. CEO Ian Narev commented that some retail shareholders find the high price off-putting.

What an odd thing to say. A high share price is bad? The same does not apply to house prices, of course.

Actually, it does says the Sydney Morning Herald. Keen to get in on the housing boom somehow, psychologists have come up with another fictional medical condition. It’s called Grief Over Missing Out, or GOMO. Apparently, the depression over being outbid on your property of choice is the same as being jilted at the altar.

Only in Australia is marriage as emotional as buying a house. More on that tomorrow. 

It’s Remembrance Day today. Usually these deep and meaningful days fall to war history enthusiast Greg Canavan to write about. He’s about as Aussie as they come, apart from the lack of a property fetish. And there’s always lots of positive feedbacks for his thoughtful comments.

Unfortunately, it’s our turn today. We’ve got German, British and Australian citizenship and went to school with American military children in Europe. So unless you’re willing to read a different view on things, please stop reading now.

The extent of our military experience consists of meeting an Australian torturer freshly returned from Afghanistan. Apparently, pulling fingernails off Afghani fingers is the reality of military life, sex scandals aside.

We’ve never understood why signing away your life to do a politician’s dirty work is honourable. And we can’t imagine why our German grandparents would have wanted to kill our English ones.

So this year, our Australian side has got the better of us and we’d like you to remember something more useful than war – sport. On Christmas day 1914, the cannon fodder on both sides of the western front displayed the kind of defiance that makes Edward Snowden look boring. Men from the 1st Battalion of the Royal Welch Fusiliers played a soccer game against the German Battalion 371 in no-man’s land. (The Germans won 2-1.)

There are a lot of theories about whether the game really took place. Some say many such games were played all along the front, some with up to 50 players per team. But that’s not the point.

The point is that buying into political fervour can get you killed by someone who really just wants to have a kick-about with you. So this Remembrance Day, remember the day a game of soccer interrupted a World War, and ponder whether the same shouldn’t be said of every other military conflict around the world.

If we bombed the Taliban with footys and drones were for showing replays, the world would be a much better place. Who knows, perhaps the next generation in the Middle East would play for Collingwood instead of Al Qaeda.   

Then again it’s probably not a surprise that a born German wants you to think about something other than war.


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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