Why was Golden Koala Infant Formula opportunity missed by AHF?, page-33

Today’s announcement by WHA is interesting for it’s reference to ODFA which has also come up in frequent market releases issued by AHF.

For example, this, from AHF:

Strategy Presentation (AHF: Feb16)
CDC has contract raw milk sourcing arrangements (with ODFC, via a JV arrangement existing since 2013):

• A cooperative of 16 dairy farmers based in Victoria
• Produces 70% of Australia’s organic milk
• CDC processes organic milk on behalf of ODFA that goes into the production of organic butter via the JV arrangement between the two companies

Strategy Overview Presentation (AHF: 11/7/17)
The largest Australian cooperative group of Organic Dairy Farmers are Victorian based Organic Dairy Farmers Australia (ODFA) which accounts for around 50% of Australian organic milk production and is a JV partner with CDC in the production of organic butter at CDC’s Camperdown Factory.

Annual Report, 2017 (AHF: Aug17)
FUTURE DEVELOPMENTS, PROSPECTS AND BUSINESS STRATEGIES
* To invest in high value categories and foster cooperative relationships with initial producers and end sellers including in organic milk production, manufacture and sales


And, now this, from WHA:

Non-Binding Heads of Agreement (WHA: 16/7/17)

• Wattle Health Australia has entered into a non-binding heads of agreement with Organic Dairy Farmers of Australia Pty Ltd, Mason Ventures Ltd (an indirect wholly-owned subsidiary of Mason Group Holdings Limited) and Niche Dairy Pty Ltd (wholly-owned by Mr. Andrew Grant, the founder of Blend & Pack) to undertake a commercial due diligence for the establishment of a joint venture for the production of organic powdered milk.
• Where the parties determine to proceed after that commercial due diligence and agree on binding legal agreements, Wattle Health Australia will acquire a 2.5% of the proposed joint venture, with Organic Dairy Farmers holding 50% and the remaining interests to be held by Mason Ventures Limited and interests associated with Andrew Grant.
• Organic Dairy Farmers presently source and produce in excess of 75% of all fresh organic milk production in Australia.
• It is proposed the joint venture would construct a milk spray drying plant to process Australian Certified Organic Milk to produce dried Organic Infant Formula and base powders for Supply to the consortium partners (including Wattle Health Australia) on a take or pay basis.
• Where the joint venture proceeds, it will provide for Wattle Health Australia as a consortium partner to have exclusive supply from the proposed joint venture of 100% dried Australian Organic and Nutritional Dairy products.

Heads of Agreement formalised – now to be a binding JV è Market Announcement (WHA: 6/4/18)
A suspension in the trading of the Company's securities has been requested, pending the finalisation of the joint venture arrangements with Organic Dairy Farmers of Australia Pty Ltd (as previously announced) and a potential capital raise

It therefore seems to be that:

1. AHF is about to lose another of its long term customers, this time in the highly exclusive organic space;
2. Instead of preferring to partner with AHF, ODFC is going to go and do its own JV, including ORGANIC INFANT FORMULA;
3. The proposed JV arrangements in reference to WHA and ODFC are far more advanced than what AHF seem to be:
   1. relationship wise;
   2. documentary wise;
   3. source and supply wise;
   4. CR wise; and
   5. plant planning and development wise.

In addition to this, it would seem that ODFC will continue to process its organic milk requirements via CDC only until such time as the WHA JV milk spray drying plant is up and running. If so, then not only would this lock CDC into having to remain functional and operational for ODFC’s purposes, but also provides for a near on seamless transfer of supply, functionality, product and output from CDC to the new WHA manufacturing plant which entirely benefits ODFC, but crimps CDC (and through it, AHF).

Leaving that aside, it would also seem to be that AHF is going to try and go head to head in the organic IF segment against its current (soon to be, former JV partner) in circumstances where
(*) supply access wise;
(*) timing wise;
(*) capital wise;
(*) time to production (etc),
ODFC will be streaks ahead of AHF in competitive, production and market reach terms.

Today’s WHA announcement all but confirms then that things are not quite going right at CDC and that AHF’s own IF shift is as if in reaction to ODFC’s pending parting of the ways under a 2013 dated, 5+ year JV that, to date, had withstood the test of time. So, what near and future term impact will this have on AHF, the continued viability of CDC, and the continued maintenance of the non-impaired values of CDC?

In order to function viably, you need throughput, supply, customers and /or contracted /in place commercial arrangements. These have so far been lost with Aussie Farmers Direct, about to be lost (so it would seem) with ODFC, and appear to have been downgraded or lower provisioned for, from a supply and display perspective in respect of Woolworths.

As for Lencia, or Lian He, nothing more has been heard of either of these since they were first announced and then repeated several times over before then dropping away, altogether. So, what next?