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Bega Cheese profits are down by 74 per cent in the half-year financial results as the company struggled to absorb a rapid increase in the farmgate milk price.
Key points:
- Bega Cheese's half-year profits are down by 74 per cent
- A rapid rise in the farmgate milk price is to blame, the company says
- The company's share price drops by 8 per cent in response
High farmgate milk prices have put pressure on profit margins for the processor, which it says were "beyond what could be realised in the domestic market".
Bega Cheese profits were $7.3 million in the half-year financial results.
Revenue is up 11 per cent to $1.67 billion but earnings are down by 26 per cent compared to the first half of last year.
Executive chairman Barry Irvin said the steep change in milk prices caught them off guard.
"I was watching the market very carefully thinking farmgate milk prices will move about 20 per cent," he said.
"We weren't prepared for that 30 per cent movement, which is the fastest movement I've ever seen.
"And it occurred over a six-week to two-month period, which I have never experienced."
Bega CEO Peter Findlay said the company implemented a staged increase in the prices on the supermarket shelf, which helped to offset the increase in raw materials.
"There were unprecedented price changes in the Australian domestic market," Mr Findlay said.
"We've put through an annualised price increase of $260 million across more than 1,000 product lines.
"And I'm pleased to say we were able to do this while increasing the volume of sales."
The company announced earlier this week it will close its Canberra manufacturing facility, formerly known as Capitol Chilled Foods, which will see 19 workers made redundant or redeployed.
Mr Irvin said he expected more facilities to close across the industry.
"I would say there is further need for rationalisation of capacities within the Australian industry," he said.
"There is no question that there is still too much stainless steel in this country for the level of supply that we have.
"Whether it be us or our competitors, the industry is making decisions that will, I think, make for a healthier processing sector in the medium term."
Are record farmgate milk prices here to stay?
Dairy farmers will be closely watching the opening farmgate milk price, which processors are required to announce by June 1.
The global dairy market has softened considerably in the past six months and milk production has increased in the northern hemisphere.
However, there is still a lot of competition between processors looking to secure a slice of the shrinking milk pool in Australia, which again dropped by 7 per cent in the past six months.
"The farmgate milk price would probably, at the very least, be stable on balance. We would probably say that there is a little bit of downward pressure in some regions," Mr Irvin said.
"But because of scarcity, it may be a little more stable than might have otherwise been the case."