Bega’s outlook curdles
A NEW milk war has erupted across Australia’s key dairy regions, delivering farmers record prices but fuelling more pain at the checkout and affecting Bega Cheese profit.
Competition for a shrinking national milk pool – including the rise of milk brokers – has pushed farm gate prices up 30 per cent, prompting a profit warning from Bega Cheese.
The company has been diversifying from dairy to cushion itself against commodity price volatility but milk remains the company’s biggest input cost, with about 10 litres needed to make a kilogram of its namesake cheese.
Bega warned in April that pandemic costs, floods, Ukraine conflict and China’s lockdowns would wipe more than $40m off full year earnings before interest, tax and amortisation.
In a statement to the ASX late on Wednesday, Bega executive chairman Barry Irvin said the company had passed on these costs via higher wholesale and retail prices.
But Mr Irvin said “strong competition” in sourcing milk and subsequent record farm gate prices would deliver flat or lower earnings growth in the next 12 months and had already led to supermarkets and restaurants paying more for dairy products.
For the 2022 financial year, Bega is forecasting earnings before interest, tax, depreciation and amortisation to be $175m to $190m on a normalised basis. In the following year, it’s expecting EBITDA to be $160m to $190m.
“The farm gate price increases will benefit farmer suppliers, impact all Australian dairy companies, and is already being reflected in higher product prices in the retail and food service markets,” Mr Irvin said.
“Bega Cheese expects that the company’s FY2023 performance will be impacted by the delay in timing of some of these higher product prices and the finalisation of secured milk volumes during July.”
Bega announced in June a record average opening farm gate price of $8.40 a kilogram milk solids for the 2022-23 season. Mr Irvin said the farm gate price had surged an extra 30 per cent in the past month.
“Initial milk price announcements by Bega Cheese and other dairy companies on June 1 reflected this level of expected milk price increases.
“However, after the release of those initial prices there has been particularly strong competition amongst milk processors during June and July and farm gate prices in Victoria for FY2023 have further increased to a level of approximately 30 per cent higher than FY2022 price.”
Australia’s milk pool has been decreasing steadily in the past decade, with farmers leaving the industry in the aftermath of the $1 a litre supermarket milk wars, drought and other difficulties on the land.
While the supermarkets have abandoned the discounting strategy, the milk pool has yet to rebound with farmers facing higher input costs from Russia’s invasion of Ukraine.
Barrenjoey’s Josh Kannourakis lowered his price target for Bega from $5.25 to $4.40 a share but upgraded its rating to overweight from neutral.