Bega Group is budgeting to absorb significant inflationary costs of $30 million to $35m every month because of stiff competition for farmgate milk supplies and the rising price of packaging, resin, vegetable oil, sugar, coffee and other manufacturing expenses.
Flooding in northern Victoria has also recently caused power blackouts over multiple days at its Tatura plant and forced the dairy company to outsource milk processing to its rivals, Saputo Australia and Fonterra.
The past year has been one of the most volatile periods in recent business history, according to executive chairman, Barry Irvin.
Yet, he also believed the diverse dairy, sauces, spreads and juice processor was well positioned to take on "any" headwinds, risks, market challenges or geopolitical surprises on the horizon.
Despite the latest cost hurdles, Bega still expected to reap enough gains from improved export earnings, efficiency savings and increased domestic retail prices in its grocery lines to meet earlier forecasts of $160m to $190m in full year earnings before interest, tax, depreciation and amortisation.
RELATED READING
Eighteen months after paying $535m for Lion Dairy and Drinks national operation and five years after its landmark $460m acquisition of the Vegemite brand and other lines from Mondelez Australia, Mr Irvin said Bega had a balance that allowed it to take full advantage of global commodity markets when appropriate.
It also had "the comfort of the greater stability that our branded business will bring us".
Big branded cheese
Bega Cheese, now called Bega Group, is now one of Australia's biggest branded food businesses with sales topping $3 billion last financial year - almost $1b more than the previous year, and up from a relatively modest $100m back in 2002.
The one-time third party contract cheese packing and export dairy commodity company had rapidly evolved into a multi-channel branded business where today only 18pc of sales were derived from bulk products.
"For the first time in the company's history there are no significant gaps in our capacities or capabilities," he told this week' annual general meeting, held in the company's NSW Far South Coast home town.
Despite a likely overall net increase in running costs of $350m-plus this financial year because of a 30pc rise in its benchmark Victorian farmgate milk payments - almost double what was initially tipped - and other manufacturing outlays, Bega should partly offset its expenses with bigger returns from strong global dairy commodity demand, assisted by a lower, export-friendly Australian dollar.
Efficiency options
Soon to retire chief executive officer, Paul van Heerwaarden, said Bega was also speeding up some of its cost out and efficiency programs.
Also, while northern Victorian flooding challenges had been many and varied, he did not expect the impact to have a material financial impact on business performance in 2022-23.
Mr van Heerwaarden was pleased to tell the AGM COVID-19 related supply chain challenges and costs, which totalled more than $40m in 2022-22 and included $8m in plant shutdowns and $3m in rapid antigen tests, were "largely behind us".
Although material spikes in input costs had provided challenges and had a short term impact, he said they did not lessen the opportunity for further growth.
Bega was enjoying strong growth in most of its sales categories and maintained market leading positions, notably holding the top spot and 50pc market share in flavoured milk drinks; 32pc and top spot in the spreads market, and 25pc share in the highly competitive yoghurt segment where Bega is also the leading player with brands such as Farmers Union and Yoplait.
"Our milk-based brands, led by Dare, continue to grow, as has Vegemite and our peanut butter range, thanks to innovations such as the new Squeezy Simply Nuts," he said.
Launches of new lactose free Pura whole milk and Farmers Union Iced Coffee had also performed well.
To help keep ahead of costs he said Bega's manufacturing network had more opportunities for rationalisation and optimisation, as did the entire dairy industry.
Dollar milk now $1.55
At the same time, the rise in the retail price of supermarket house brand milk - up 40pc in 18 months, meant contentious "dollar milk" was now worth $1.55 a litre, better reflecting the real cost of white milk production to farmers and providing more realistic competition to proprietary brands.
"This is a really important development and positions us well as inevitable changes in global commodity price cycles occur," Mr van Heerwaarden said.
The CEO, who has been in the top job almost six years, will depart early next year after 13 years in a number of executive jobs which included key achievements with the Kraft brands acquisition from Mondelez, the big Koroit factory purchase in 2018 and the Lion Dairy and Drinks deal.
Transitioning into the top job in coming months will be Pete Findlay who joined Bega as chief financial officer in 2019, then became chief operating officer early this year.
Mr Findlay has previously worked in the retail, manufacturing, distribution and information technology sectors.
Start the day with all the big news in agriculture! Sign up below to receive our daily Farmonline newsletter.
Andrew Marshall
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
