Sweden’s Oatly Group is facing headwinds of oats futures near a 7-1/2 hear high. Drought slashed supplies from top global supplier Canada at a time of robust demand for the grain. $OTLY is expanding beyond milk to ice cream, yogurt, cooking creams, spreads and on-the-go drinks
Swedish-based Oatley is the world’s original and largest oat milk company with offerings of milk to ice cream, yogurt, cooking creams, spreads, and on-the-go drinks. The company has run into headwinds with food supply prices affecting it’s margins and pricing. Inflation has been striking commodities across the spectrum and oats are no different.
Record High Oats Futures Prices
The United Nations index shows that global food prices recently hit a decade high, oat futures hit an all-time high of $6.36 a bushel recently. The catalyst was drought hitting Canada, who is the world’s largest exporter of oats, for which demand has increased as oat milk gains in popularity, which is a huge positive for Oatley. The COVID-19 pandemic has driven consumers toward healthier foods and grains argues Randy Strychar, president of Ag Commodity Research and Oatinformation.com.
Last week JP Morgan upgraded OTLY from to Overweight from Neutral with a $21 price target which hasn’t filtered through to investors. There were two bullish initiations last month with a Buy from Citi at Buy with a $21 target and Cowen at Outperform with a $26 tgt. Oatly had it’s debut as an in May 2021 and fallen since. The IPO priced at $17 with lots of fan fare but with a relatively heavy float at 84.4 mln ADSs. The stock opened at $22.12, ran to $29 by mid-June, but it has been cut roughly in half since then. This Swedish-based company is the world’s original and largest oatmilk company. Its offerings also expand beyond milk to ice cream, yogurt, cooking creams, spreads, and on-the-go drinks.
Short Selling Adding to OTLY Sell off
A July 14 report from short seller Spruce Point said Oatly overstated its revenue, its margins, and its growth story in China, and it questioned just how proprietary Oatly’s production process. Also weighing on the stock is a frothy valuation at 13x 2021 sales, even after factoring in the pullback in the stock. That’s a high multiple for an unprofitable food company. Analysts are looking for revenues to nearly double next year from $695 mln in 2021 to $1.29 bln in 2022 and to $2.02 bln in 2023. Clearly there are two alternate takes on the stock. make your own risk analyses on this name as always.
Oatley Products Reach
Oatley products are sold through a variety of channels with strong networks such as Starbucks (SBUX) and Target (TGT) and premium natural grocers and corner stores and online including China’s Alibaba’s (BABA) Tmall. In the US, the UK, Germany, and Sweden, Oatly is the highest selling brand in the oat category.
Oatley sees a significant opportunity to satisfy unmet demand and believes it’s only at the beginning of the transformation of the overall global dairy market. Oatly anticipates a societal shift toward plant-based diets. Oatly has successfully converted many traditional dairy milk drinkers to Oatly and attracting new drinkers to the category altogether. In its home market of Sweden, it has a 53% market share of the alternative dairy products non-milk based category.
The U.S. is one of the world’s top consumers of oats and will have one of the smallest harvests ever. The drought filtered through for US and Canadian farmers that many harvested the weather damaged plants to be sold as feed for animals. This further hit supplies for consumers Think of oats and you think of oatmeal, granola bars and the No. 1 cold cereal in the U.S, Cheerios, the No. 1 cold cereal in the U.S.
The United Nations index shows that global food prices recently hit a decade high, oat futures hit an all-time high of $6.36 a bushel recently. Oats have been a staple for a long time and recently has been touted as a key crop for reducing carbon emissions in agriculture. It has shaken up the market for alternative dairy products, with U.S. oat milk sales rising nearly 70 times since 2017. It now accounts for 16% of non-dairy milk sales, more than soy, rice and coconut milk combined and second only to almond milk, NielsenIQ data show.
Oatley Reserves
Oatly Group AB has contracts in the Baltics and other countries in addition to Canada which is critical with the drought hitting the Canadian farmers. This has enabled OTLY to increase production and sales over the next year as planned, which helps offset the higher oat prices.
Oat costs account for less than 10% of global retail sales, the company said in a statement. In August, Oatly projected revenue will surge 64% in 2021.
Cheerios-Oats
Cheerios is celebrating its 80th anniversary this year by using its original name, CheeriOats. Producer General Mills $GIS was able to secure enough North American oats to maintain volume of America favorite cereal. Jon Nudi, president of North American retail at the company said “thanks to its scale and “longstanding relationships,” “Oats are a really important ingredient for us, Cheerios is our biggest brand in the cereal category,”
General Mills has raised prices across categories but Nudi didn’t commit to raising prices on Cheerios in particular, saying that oat costs are just one piece of overall inflation.
Joe Ennen, chief executive officer of SunOpta, a major supplier of oat milk, in a statement likened the “challenging” supply environment to the shortage of computer chips that’s been throwing the electronics and automobile industries into turmoil. Food companies are scrambling for supplies, and Canadian exports will be down sharply this year, said Chuck Penner, president of LeftField Commodity Research in Winnipeg, Manitoba. – Bloomberg
Back to food inflation, the drought has hurt many other crops including Canola, flax, lentils, durum wheat and mustard. All are also pricing sharply higher and could eat into new plantings of oats next year in Canada. Interesting times for Oats and therefore Oatley
From The TradersCommunity Research Desk