It’s wait and see for production requirements and pricing trends as Saputo quits some of its sites
The big news in dairy is Saputo’s sale to Coles of two milk processing facilities in Laverton Victoria and Erskine Park New South Wales.
According to analysts such as the Rural Bank this retreat of larger processors results from Australia’s long-term declining milk production.
Large processors have looked closely at their allocation supplies for end products such as skim milk powder, whole milk powder, cheese or butter and the initial result has been for Saputo to cut and run.
With the allocation for value-added products based on contractual arrangements and profitability in the export market, the low supply is what has driven up local farmgate milk prices, while global dairy prices where there is still plenty of supply continue to decline. In this scenario, the profitability of processing various end products, particularly for export, is becoming more difficult, and no longer worth the trouble for Saputo.
On the other side of the slate, for new owner Coles’ the use of the plants will be predominantly for milk for the domestic market. This means export pricing and competition won’t have as much of an impact on their profitability.
Coles is understood to have offered long-term (three to five-year) contracts at as much as $12-$12.50/kg MS. This is an effort to secure supply in order to stabilise retail prices. However, it does raise the question of how much control of a vertically integrated supply chain is too much for one company, will they continue to increase prices and compete with themselves.
Local milk production continues to decline with a 20% fall from January, followed by the February production level down by 5.3% on last year. This puts season-to-date production 6.5% below last season, and 8.5% below average.
While the worst of flood-affected production is behind us, local milk production is still on track to be around 8 billion litres a year. This is compared to an average of around 8.8 billion litres. But for those with long memories, it was only eight years ago when local milk production was pushing 10 billion litres a year.
Global dairy prices continue to freefall, declining seven per cent in the latest two Global Dairy Trade events. This puts the Global Dairy Index at its lowest since November 2020.
Current prices are down 39% year-on-year and 12.3% below average. Cheddar was the only category to gain value in the most recent trade event lifting two per cent. However, this comes after three consecutive sessions of losses to be down 16.5% from last month.
With new season farmgate milk prices will be announced in the coming months, it may be bad timing to see Saputo exit.
Processors will put up a case where they are facing the competing forces of low domestic supply versus declining global prices.
However, several analysts are still anticipating new season farmgate milk prices to be well above average as buyers must compete to secure supply. But easing global prices and increased export competition will limit the upside. It is therefore seen as unlikely that opening prices will remain at current high levels.
