Bega warns on food prices as COVID, flood, Ukraine costs bite

Direct costs related to the coronavirus pandemic will alone total more than $40 million in 2021-22, according to Bega - up from the $20m in COVID-related disruption costs it reported in February.

Floods, fast rising freight and logistics costs, strong global demand for dairy exports and the shut down of port operations in Shanghai are among a mishmash of factors currently squeezing Bega's dairy and spreads balance sheet.

Russia's invasion of Ukraine and other freight bottlenecks caused by COVID-19 in China and elsewhere are also disrupting the export trade, although overseas commodity prices are particularly rewarding at the moment.

In fact, Bega has told its shareholders despite the supply chain frustrations, global markets are now providing stronger returns than the company's domestic sales.

Last week shrinking milk supplies within Australia, particularly after many east coast farms and supply chains were inundated with rain and flooding, pushed management to offer record farm gate milk prices for 2022-23 to encourage more volume from producers in Victoria, South Australia and NSW.

Its Bega Valley farmers will get $9 a kilogram of milk solids, or about $1.40 more than last year's offer, while Riverina, Victorian and SA farmers will receive about $8.40/kg.

More farmgate price details for other east coast suppliers are due by the end of April.

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Executive chairman, Barry Irvin, said declining Australian milk production in the past six months and stronger international markets had stiffened competition for milk, meaning most dairy companies, including Bega, were offering higher price incentives to farmers.

Those higher farmgate prices and overseas market influences and disruptions meant consumer prices were also set to rise at home, although the extent to which the pressures were reflected at the supermarket prices would vary between products.

Bega's grocery and dairy lines include the Vegemite brand, peanut butter, honey, Zoosh salad dressings, the Bega cheese range, and a host of fresh and flavoured milks, yoghurt, dairy dessert, juices and plant-based beverages sold under the Dairy Farmers, Pura, Dare, Farmers Union and Vitasoy brands.

Mr Irvin said this year's NSW and Queensland floods had not only impacted customer deliveries in eastern Australia, but rail and road flooding in central Australia in February also impacted movements to customers in Australia and overseas.

Although the floods and COVID-related frustrations were now generally easing and likely to be contained within the current financial year, strict lockdowns in Shanghai had created increased concerns about the certainty of exports destined to Chinese buyers.

Fortunately, the diversity and capabilities of the Bega Cheese business had been particularly helpful.

In 2020 Bega's domestic dairy market grew into a national concern with the purchase of the Lion Dairy and Drinks operations for $560m.

"The company has managed a number of external challenges while responding to opportunities, particularly in global commodity markets," Mr Irvin said.

"Bega Cheese's balance sheet remains strong and the company continues to execute its capital program focused on site and supply chain efficiencies, capacity increases and product innovation in high growth categories."

Bega Cheese has tipped normalised earnings before interest tax and amortisation of between $175m and $190m for the current financial year.

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