Australian dairy processors are adapting to rapidly evolving markets, but warn global commodity markets face increased uncertainty due to the COVID-19 pandemic.
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TRADE VITAL: Bega Cheese says it is vital for trade that borders remain open to trade.

Bega Cheese executive general manager – ingredients Mark McDonald said global commodity prices were softening.

“Global incomes are an issue now,” he said.

One of the key drivers of global incomes was oil prices, which at US$30 a barrel were now well below the cost of production, which was having a huge impact on oil-producing countries, including in the Middle East and Russia.

Global milk production was growing at 1-1.5 per cent, which in a normal world would be a contraction of supply relative to demand, but in the current environment, demand was difficult to forecast.

“It will be an unsettled period for the next 6-12 months,” Mr McDonald said.

Saputo president and chief operating officer Kai Bockmann told a briefing last week downward pressure on global commodities was having an impact on its Australian business, while lower oil prices were affecting demand from the Middle East.

But both companies are seeing improved signs from the Chinese market.

Mr McDonald said there had been some delays due to tight capacity in Chinese ports but these were sorting themselves out.

Mr Bockmann said there had been some softness in China and South-East Asia due to lockdowns in countries there.

“But the good news is that we are starting to see the Chinese ports and transport in that country slowly getting back to normal,” he said.

“So we anticipate that those markets like China will pick up steam as we start to enter the second and third quarter of our fiscal year.”

Mr McDonald said it was paramount that borders remained open to allow trade to continue.

“Because while Australia has a very strong domestic industry, which is wonderful, it also relies on exports, and to a degree imports, to support the consumer and the farmers themselves,” he said.

Both companies are reporting changes in product mix.

Saputo, in its global briefing, reported an increase in demand for retail products but a decline in food service and industrial markets across its operations worldwide.

Mr Bockmann said in Australia there had been a surge in demand for longer shelf-life products such as UHT, powder, everyday cheese and chilled milk.

Food service is a smaller part of Saputo’s business in Australia, but demand in that sector was soft.

Mr McDonald said food service was slower but Bega was fundamentally a retail food business in the domestic market and was seeing strong demand for one-kilogram block and sliced cheeses, while cream cheese sales and infant formula into Asia were still going well.

Bega was focused on business continuity – both in terms of planning how to manage potential interruptions and in keeping in touch with existing customers, he said.

It was also committed to picking up milk from its suppliers and had plans in place should it have to close a plant.

“We have enough capacity to manage our milk across a number of multiple plants – we are in a very fortunate position,” Mr McDonald said.

Saputo is ramping up production in its plants producing retail goods and switching some of its other factories to making longer shelf-life products, but is keeping a close eye on the evolving situation.

But its chief executive officer Lino Saputo said the company could be left with inventory, if it could not repurpose some of its food service items that were getting close to the end of their shelf life.

The company would attempt to get this stock to foodbanks.

Mr Saputo said the company was also committed to collecting 100 per cent milk from its contracted suppliers.

But in some places, it was no longer taking milk from other sources.

Mr Saputo said the company’s strong balance sheet meant it was well placed to weather the COVID-19 outfall.

There might be opportunities for further mergers or acquisitions for the company as a result.

Although noting there might be opportunities in Oceania, Mr Saputo ruled out the likelihood of those being in Australia.

Any further acquisitions in Australia would be reviewed by the Australian Competition and Consumer Commission, and might not be viewed favourably, he said.

A recent report released by the International Dairy Federation says that total dairy consumption globally will increase by 24 per cent by 2031, or an increase of 1.7 per cent per year.

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