Milk industry navigates a ‘perfect storm’ but sees blue skies ahead
Australia’s dairy industry finds itself in a ‘perfect storm’. So companies are innovating – which may mean more cream for investors going forward.
Australia’s dairy industry finds itself in a “perfect storm” – fuelled by floods, bushfires, staff shortages, NZ rivals and a rigid pricing structure.
So, under financial pressure, companies are innovating – which may mean more cream for investors going forward.
The current crisis
The Australian dairy industry is facing unprecedented challenges, marked by severe financial pressures, labour shortages, and intense international competition.
Over the past 18 months, the industry has been significantly impacted by a series of natural disasters, including those floods and bushfires, which have reduced national milk production to its lowest point in 30 years.
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These climatic events have not only affected pasture growth, but also increased operational costs for dairy farmers, so even in a high-price environment they are finding profits hard to find.
Meanwhile, processors already struggling with the highest milk prices in the industry’s history.
Fabrizio Jorge, the CEO of South Australian-based dairy processor Beston Global Food (ASX:BFC), offered Stockhead an overview of the events leading up to the current situation.
“If you think about what has happened around 18 months ago, you will come across some very large natural events taking place,” Jorge explained.
“There were floods, for example, affecting the southern part of New South Wales, and also floods impacting the northern part of Victoria. These culminated in the flooding of the Murray River in South Australia.
“The series of natural events have no doubt impacted national milk production over the course of the period. And because of the reduced production, it has created effectively a shortage of dairy products domestically.”
The industry is further strained by the competitive global dairy market, particularly from New Zealand, the largest dairy exporter in the world.
Unlike Australia, where milk prices are regulated and fixed annually, New Zealand adjusts its milk prices based on supply and demand, creating a more flexible and responsive market.
This disparity has led to increased imports of cheaper dairy products from NZ into Australia, exacerbating the financial stress on local processors.
“Obviously this is very problematic for us because in Australia, processors like Beston are bound to something called the Dairy Code of Conduct,” said Jorge.
“One crucial aspect of the code is the requirement for dairy processors to announce the milk price for the upcoming season by June 1 each year.
“This price announcement sets the tone for the entire season, which typically runs from July 1 to June 30 the following year,” said Jorge.
Establishing a fixed milk price once a year may pose challenges, said Jorge, as it doesn’t factor in fluctuations in weather conditions, or potential inaccuracies in weather forecasts provided by the Bureau of Meteorology.
That mis-prediction turned out to be precisely what happened last year.
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Dairy farmers leaving in droves
The gradual reduction in the number of dairy farmers is also playing a part in driving up milk prices.
Amid high milk prices, many dairy farmers in Australia are leaving the industry.
One significant reason for this is labour shortages.
Dairy farming is a labour-intensive job that requires continuous attention, with milking needing to be done at least twice a day.
This demanding schedule makes it difficult for farmers to find and keep workers, especially in rural areas where there is already a general labour shortage.
Jorge said another challenge was the ageing workforce.
The average age of Australian dairy farmers is over 60, which means many are retiring, and there are not enough young people entering the industry to replace them.
Additionally, high land prices and profitable opportunities in the beef market are tempting some dairy farmers to switch their farms to beef production instead.
Lastly, housing availability in rural areas is limited, making attracting and retaining workers, who would need to live close to the farms, more difficult.
“And when (wholesale) milk prices were higher, a lot of dairy farmers looked to take advantage of that and reduced the number of animals milking (to avoid oversupply, which could drive down prices), so there are multiple reasons impacting the cost of dairy products in the country right now,” Jorge added.
The path to survival
To overcome these challenges, Jorge says dairy processors need to focus on innovative strategies, particularly around adding value to its products, as well as cutting costs.
Beston was innovating to remain sustainable.
The company is now refocusing on value addition by producing high-value products such as lactoferrin, which is highly sought after in both domestic and international markets.
Lactoferrin is a protein found in milk, and is often used as an ingredient in dietary supplements, infant formula, and skincare products.
“We are literally sold out in lactoferrin, and we are expecting that lactoferrin will eventually reach anywhere around 15 to 20 per cent of our total sales,” said Jorge.
The company is also diversifying its product lines by developing and expanding categories such as shredded mozzarella, cream cheese, and other milk fat products.
This diversification should help Beston tap into niche markets and reduce its reliance on the fluctuating prices of commodity milk, said Jorge.
He said Beston was also implementing cost-saving initiatives and optimising its production processes.
These measures were essential to make its operations more efficient and mitigate the high cost of milk.
Last, but not least, the company was now focusing on exports, which should reduce its dependence on the domestic market.
“We’re now supplying some of China’s largest infant formula companies, so that part of our portfolio remains very healthy, profitable, and sustainable,” said Jorge.
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Patient investors could still be rewarded
Fortunately, there is hope around the corner: Next year, milk prices in Australia are expected to adjust and become more in line with global market rates.
Jorge is optimistic that a more normalised milk price environment would alleviate some of the current challenges and pave the way for a more sustainable industry.
“We are getting ready for next year, to be completely honest.
“We are seeing a surplus of milk in Australia already now.
“And that’s going to be important for the reset of the milk price.
“Around 80 to 85 per cent of Beston’s cost structure is the milk price. So if we get our milk price wrong, it will be a very painful process for the whole year.
“We’re looking forward to the first of June, which is just around the corner now, and try to come up with a much more sustainable milk price,” said Jorge.
For potential investors, this scenario presents both risks and opportunities.
Although the industry is undergoing a tough phase now, the shift towards value addition and cost optimisation could position companies such Beston for long-term profitability once the milk price, and hence the market, stabilises.
Good signs for some
Despite challenges, there’s still hope for the sector, with some milk companies listed on the ASX even thriving right now.
A2 MILK (ASX:A2M)
A2M has jumped by 38 per cent in 12 months on the back of its strong infant milk formula (IMF) sales in China.
For the first half of FY24, A2M delivered a positive result with 3.7 per cent revenue growth to $812 million, and 5 per cent EBITDA growth to $113 million.
EBITDA margin even came in higher, at 13.9 per cent.
The company has achieved a top-5 China IMF position supported by record levels of marketing, and has now improved its guidance for FY24.
For FY24, A2M is expecting revenue growth of low-to-mid single-digit per cent compared to FY23, with EBITDA margin to be broadly in line.
FONTERRA (ASX:FSF)
Fonterra provided its Q3 business update on Wednesday, announcing profit after tax from continuing operations of $NZ1.013 billion ($A937 million), up $NZ20 million ($18.5 million) on pcp or equivalent to 61c per share.
CEO Miles Hurrell said the Foodservice and Consumer channels in particular had enjoyed a strong third quarter with a lift in earnings compared to the same time last year.
FSF said that for the upcoming 2024/25 season, the balance between milk supply and demand was delicate, and China’s import volumes hadn’t fully rebounded to previous levels yet.
Due to these uncertainties and the potential for market fluctuations, FSF said it was taking a cautious stance as the season begins.
“Our opening forecast range is $7.25-$8.75 per kgMS with a midpoint of $8 per kgMS,” said Hurrell.
This content first appeared on stockhead.com.au
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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