Bega Cheese profits dry up as drought fuels fierce fight for milk

Although the southern NSW based dairy, spreads and sauces business achieved increased revenue to a record 1.06 billion litre milk intake, lifted revenue 13pc to $1.42b and generated a record $115.4m in normalised earnings before interest tax, depreciation and amortisation, the statutory profit figure slipped to $89.5m.

The result reflected costs associated with buying the $250m Koroit milk factory in south western Victoria and closing its Coburg plant in Melbourne.

Higher finance and depreciation costs also contributed to the statutory profit slump from $28.8m in 2017-18.

"The one in 100-year drought, extremely high grain, hay and water prices and continually suppressed retail selling prices for our quality dairy products have really tested the strength and resilience of our dairy suppliers, their families and the communities in which they operate," said Bega chairman, Max Roberts.

He said the past financial year would be remembered as one of the most difficult dairy farming years ever experienced.

"Drought conditions subsequently also created intense competition for the diminishing available milk pool which put pressure on our underlying profit," he said.

"Our investment in advancing over $38m to suppliers via our Bega supplier premium and related supply agreements should buffer some of the intense competition for milk into 2019-20."

Although pleased to report record revenue, a record milk intake and record production, all achieved largely because of Bega's new Koroit supplier base, Mr Roberts said the board and management acknowledged profit fell "below the expectations we set ourselves at the beginning of the year".

"This was primarily as a result of milk competition in a declining milk market," he said.

Chief executive officer, Paul van Heerwaarden, said Bega fully understood the challenging circumstances its suppliers and the wider Australian dairy industry had to tackle in the past year.

RELATED READING:

The company had also worked tirelessly to balance delivering the strategic objectives of the business in an unprecedented competitive environment for milk.

"We accelerated investment in infrastructure, played a key role in rationalisation of the dairy industry, expanded our product portfolio and invested in our brands and milk supply relationships," he said.

However, while competition for milk within Australia had never been stronger, Mr van Heerwaarden said milk supply expectations in Europe, the US and New Zealand may result in pricing changes during the second half of FY20.

The company would monitor the market carefully.

Having lifted revenue by 13pc to $1.42b last financial year he said Bega Cheese was well positioned to continue to respond to the challenges.

The increased revenue was supported by an expanded dairy portfolio, including becoming a major supplier of retail and food service butter from the Koroit plant.

Bega's youth and adult milk formula powders and other specialist milk powder blends were also big business.

The Vegemite brand had extended its reach with the launch of a gluten free line.

"We also launched the Bega Simply Nuts peanut butter range which provides a premium natural product, using only Australian peanuts sourced from growers who supply fresh to our Kingaroy and Tolga facilities in Queensland," Mr van Heerwaarden said.

"It is imperative we continue to further accelerate growth initiatives across the business, particularly for our branded consumer products portfolio.

"We will prioritise investments in reducing costs across the supply chain and overheads.

"While we deal with the challenging trading conditions in dairy, we remain committed to our strategy and transformation to become the great Australian food company."