Bega Cheese books $229.9 million loss after tax as global commodity markets fall

The company pointed to the growing "disconnect" between high Australian farmgate milk prices and plummeting internationally traded commodity markets as a key factor in the loss.

It said the decline in milk production in Australia and excess milk manufacturing capacity was expected to continue for some time.

This had resulted in a $230 million non-cash after tax impairment - primarily related to the bulk dairy commodity factories.

The company has flagged changes at its big processing sites at Koroit and Tatura in Victoria as it tries to manage the impact of falling production on its business.

Bega's 2022-23 normalised profits after tax fell 38 per cent to $28.5 million and earnings 11pc to $160.2 million on the back of higher interest rates and lift in farmgate milk costs.

Revenue rose 12pc to $3.4 billion.

The $230 million impairment impacted statutory earnings, which resulted in a statutory loss after tax of $229.9 million.

The planned changes to operations at Koroit and Tatura aim to cut costs in bulk commodity production.

But chairman Barry Irvin and chief executive officer Pete Findlay said the plants played a key role in underpinning the company's booming branded domestic business and there were no plans to close either of them.

And they pointed to the success of the company's branded strategy in driving growth for the company.

Mr Irvin said the domestic branded products had grown in volume and value after Bega pushed price increases into the consumer market.

Mr Findlay said the branded part of the business now accounted for about 85 per cent of revenue, up from just 45pc in 2016.

Bega had also retained its number one share in the market in its three biggest revenue-earning categories - yoghurt, milk-based beverages and spreads.

Mr Irvin said the disconnect between Australian farmgate milk prices and global commodity prices was the largest he had ever seen.

This reflected falling Australian milk production and processing overcapacity, which had led to heightened competition for milk.

But Mr Irvin said he expected to see rationalisation in the Australian processing sector, as the market adjusted to the new level of national production.

Mr Findlay said there had been only relatively minor rationalisation in industry manufacturing capacity in the past 20 years, despite milk production declining.

"In fact in some instances we've seen new capacity brought on," he said.

The subsequent highly competitive environment for milk had led to record farmgate prices, despite falling global commodity prices.

Mr Findlay said that had impacted the commodity business, which would continue to struggle in 2023-24.

Bega would work on that business in the coming year, including reassessing existing toll processing and volume arrangements.

"What we want to do is make a business that is far more agile, that has parts that can be rested and has costs that can be pulled out that will make us far more able to pivot with farmgate milk price fluctuations," Mr Findlay said.

"We will look to restructure our commodity assets, particularly Koroit and Tatura.

"We will look to see how we can strip those back to fit the current circumstances."

But Mr Findlay said those commodity sites would still play a huge part in Bega's future.

"As we model the growth of our domestic business out over the next five years, we will need Koroit and Tatura in our network just to cope with the huge seasonality in milk," he said.

"We see Tatura, Koroit and Lagoon (Bega) as still being incredibly important to our branded future.

"We think we can change our commodity sites to fit what we need them to do in the future and to be able to cope with that disconnect between farmgate pricing, commodity pricing and also a reduction in volumes."

The commodity business would also continue to focus on higher value commodities - such as lactoferrin - and nutritional products.

Mr Irvin said there appeared to be no easy fix to growing Australian milk production.

Production had fallen in recent years despite record milk prices and good seasonal conditions, he said.

This was due to factors such as labour shortages, lack of succession, farmers adjusting the scale of their businesses and some farmers looking to the sustainability of their businesses.

But it was not all doom and gloom.

There was a large group young people in the industry who were investing and growing their businesses.

But there were other farmers who had taken the opportunity to retire from the industry - possibly earlier than they had planned - on the back of booming property prices and increasing value for their animals.

Mr Irvin said the challenge was to develop models to bring young people into the industry when the value of land and of dairy business was increasing.

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