Milk War Looming as Dairy Demand Grows

Milk War Looming as Dairy Demand Grows

March 15, 2014

PICTURE: Lino Saputo Jr, right, speaks to local farmers at a meeting at Warrnambool Cheese & Butter in Mount Gambier.
SOURCE: The Australian

SAPUTO boss Lino Saputo Jr slipped quietly in and out of the country this week for the first time since the dairy giant's takeover of Warrnambool Cheese & Butter, as a milk war threatens to break out in the region.

The Canadian group's $500 million-plus vote of confidence in the local industry, combined with the recent favourable conditions in the global dairy market, is pointing towards an impending surge in investment in Victoria's southwest, one of the country's most productive dairy regions.

Warrnambool meat processor Midfield Group last week unveiled an ambitious plan to build its own milk powder plant to tap into booming demand for dairy commodities throughout Asia.

Meanwhile, the Colac-based Bulla Dairy Foods has sparked speculation that it intends to start sourcing its own milk directly from farmers, following its announcement of a new milk processing and separation facility in the town.

The recent developments, coupled with Saputo's intention to expand manufacturing capacity at Warrnambool, have led to suggestions that local demand for milk is set to outstrip supply significantly.

Mark Topy, an industrial analyst with Canaccord Genuity, said that signs were pointing towards a potential battle for milk between the Saputo-backed Warrnambool and Murray Goulburn, the two biggest buyers of raw milk in the southwest.

But with supply across the industry down over recent months, Mr Topy warned that increased demand could cause a spike in farmgate prices, potentially threatening the profitability of the major processors.

"There's expansion talk in the wind, for sure, but it needs to be matched by an increased milk supply," he said. "And I think that's going to severely limit some of these growth plans."

Australian dairy farmers are already benefiting from an improvement in global diary market conditions, which has led to rising farmgate prices, and the major dairy processors are strongly urging them to invest in boosting their milk production.

Both Murray Goulburn and Bega Cheese, which are keen to expand their respective export businesses, have indicated that they plan to aggressively compete for milk supply in the region.

Saputo, however, has maintained a relatively low profile since it seized control of Warrnambool in mid-February, and is yet to announce any plans for the business, of which it owns just under 90 per cent.

It is understood that Mr Saputo, the chief executive of the Toronto Stock Exchange-listed company, and members of his executive team flew into the country this week. They travelled to Warrnambool on Wednesday and Thursday and spoke with the company's directors, management and other staff.

Mr Saputo could not be contacted before he left on Thursday evening. It is not known whether he also met representatives of Lion Co, the Japanese-backed beverage and dairy company that retained just over 10 per cent of Warrnambool, having declined to accept Saputo's $9.40-a-share takeover offer.

Lion has previously made it clear that it is keen to chat to Saputo about the cheese supply contract it has with Warrnambool.

Consolidation of the diary industry is tipped to continue in coming years, with Australia now viewed as an important strategic base for food companies keen to take advantage of soaring demand for dairy products, including milk powder, cheese and infant formula, in Asia.

In China alone, demand for dairy products is set to double by 2020.

According to local investment bankers, there is no shortage of Asian investors kicking the tyres on potential transactions, evidenced by the recent purchase of United Dairy Power by a Hong Kong-based investor for $70m and China's Bright Foods' acquisition of yoghurt producer Mundella Foods in January.

It is understood that Midfield's aspirations have also attracted potential interest from a prominent Asian investor.

Industry sources suggested that building a basic milk powder plant would probably cost about $100m, but could boost demand in the Warrnambool region by up to 800 million litres a year.

Midfield boss Colin McKenna, who told local press that he hoped the plant would be operational in 18 months, did not return calls yesterday.

Midfield booked sales revenue of more than $350m last financial year, according to IBISWorld.