Bega Cheese warns of tough times in milk supply

Bega Cheese has warned that increased pressure on dairy farmers as a result of drought and the rising cost of grain to feed their cattle will create intense competition for milk among processors.

Executive chairman Barry Irvin foreshadowed that Bega would have to pay more for milk supplies as a result of the dry conditions.

Bega was able to increase its milk supply by almost 100million litres to 750million litres in 2017-18 and said its fiscal 2019 procurement was up by another 115million litres.

Mr Irvin said Bega had been successful in shoring up additional supply for the newly-acquired Koroit dairy processing plant in western Victoria over and above the 300million litres a year locked in until mid-2020 under the terms of the $250million Saputo divestment of the plant.

Canadian dairy giant Saputo and Fonterra have both made it clear they are on the hunt for more milk along with Bega, which now expects to process up to 450million litres at Koroit in 2018-19.

Barry Irvin of Bega Cheese. Photo by Peter Braig.

Barry Irvin of Bega Cheese. Photo by Peter Braig.

Mr Irvin said it had been a tumultuous past year for the diary industry and for milk procurement.

"While we have seen some growth in the total milk supply for Australia ... it still remains highly competitive in terms of acquisition of milk," he said.

"Commodity volatility does remain, meaning there is price volatility for farmers.

“It is fair to say that while we were pleased that we did improve price for our suppliers in the year just past, they too have been suffering from costs and they are beginning to feel the genuine challenge of drought.

"In terms of milk supply, as the year unfolds we will obviously see that farmers will be affected by drought and the cost of inputs."

Mr Irvin said Bega was pleased to have delivered normalised earnings before interest, tax, depreciation and amortisation (EBITDA) of $109.6million for 2017-18, which was within guidance of $105million to $115million, despite increasing its farm gate milk payments late in the year.

Bega's announced normalised net profit of $44million, up from $30.3million the previous year, and it declared a full-year dividend of 11cents a share.

It is understood Bega will resist the temptation to launch a rival bid for Capilano Honey despite frequently expressing an interest in diversifying into honey.

​Bega did not comment on Capilano.