The profitability of Murray Goulburn’s spanking new bottling plants in Melbourne and Sydney, and their cheap supermarket milk supply contracts, is under close scrutiny from proposed new owner, Saputo.
In fact, the chief executive of the Canadian family business offering $1.3 billion for the Victorian-based farmer co-operative’s assets, believes Australia’s dairy sector could generally be “more disciplined” about the prices it takes for dairy products sold on domestic and export markets.
Lino Saputo said his company expected long-term sustainable value from its markets, dealing only with customers “who give you good value for the production effort employed”.
He has raised hopes within the dairy industry about a possible end to Australia’s contentious $1 a litre supermarket brand milk price if Saputo’s takeover gets the nod from Murray Goulburn (MG) shareholders and regulatory authorities by next April.
While Mr Saputo has promised to honour all MG supply contracts with its customers, he said North American dairy giant avoided discounting its products at all costs.
He has also been reported expressing unease about about milk selling in Australia at just $1/litre when bottled water and carbonated drinks retail for at least $3/litre.
Whatever we do it has to make sense financially - there has to be some profit at the end of the deal.
Peak state dairy group United Dairyfarmers of Victoria and the NSW-based Dairy Connect have been quick to applaud Mr Saputo’s comments, saying the future was looking better for farmers in the year ahead if they could be paid a fair deal from the sale of dairy products.
UDV described the current domestic market for milk and cheese as “race-to-the-bottom tactics” as retailers offered consumers below-market prices which devalued the whole industry.
Coles was the first supermarket to slash private label milk pricing to the contentious $2/two litres territory, prompting an outcry from farmers which has continued for six years.
MG’s Coles commitment
MG spent about $150m building new milk processing plants at Laverton North in Melbourne and Sydney’s Erskine Park in 2013-14, primarily to support a newly-signed 10-year contract to supply $1 house brand milk to Coles and get its own Devondale fresh milk and cheese products on the retailer’s shelves.
As part of its deals with the powerful retailer, MG also outlayed $90m to upgrade cheese packing operations at its Cobram plant in Victoria so it could supply house-branded cheese to Coles.
“We will have to renegotiate contracts in due course, when they expire,” said Mr Saputo while visiting farmers in NSW last week.
“We will honour the Coles contract in the fluid milk market in NSW and Victoria, but we think there are ways to run those plants more efficiently and effectively, and maybe different ways to increase volumes and returns.
“But whatever we do it has to make sense financially – there has to be some profit at the end of the deal.
“Every one of our platforms needs to stand on its own feet.
“We are not going to exchange four quarters just to get a dollar.”
Milking our dairy reputation
He noted Australian processors, particularly MG, had established “an incredible following with consumers overseas”.
“But I think we need to have more discipline in the export sector in Australia, including from MG’s production assets,” he said.
“The branding and understanding of MG’s product value is well known and we are looking forward to having that footprint in places like China, Japan and the Pacific, but we have to be careful not to be dealing commodity-focused buyers.”
You have to be disciplined in connecting with customers who give you value.
The Saputo company had already worked hard add more value to returns it achieved from Warrnambool Cheese and Butter (WCB) products since buying the big processor in 2014.
“We don’t do discounts. We’ve had long term markets overseas and customers who appreciate we want fair value and pay the right price,” he said.
“We don’t look at the world market as a stock market, but as a long-term, sustainable investment and you have to be disciplined in connecting with customers who give you value.
“I think that is where we need to have more discipline in Australia.”
Saputo’s determination to maximise full value from MG’s assets includes taking a careful look at the economics of the co-op’s infant formula facility in China, which it will inherit as part of the sale deal.
“It’s not running at capacity, but it is a good plant,” he said.
“We want to be a value-added business so we have to evaluate what’s going to be profitable for us.”
Saputo already exports dairy formula to buyers from North America and Argentina, but currently does not market its own branded lines.
Looking to buy more
Meanwhile, with more than $2 billion in loan facilities still at its disposal, Saputo continues to look to other investment opportunities in Australia, Brazil, New Zealand and maybe Europe.
“We are still looking at other platforms in Australia, although I think we’ll concentrate on bedding down the MG acquisition first – assuming there are no issues stopping us,” Mr Saputo said.
“NZ is unusual because Fonterra controls so much of that market, but if something came along it could make sense for us once we have a bigger platform in Australia.”
He said NZ, Australia and Latin America were important global dairy export hubs, and Saputo had already looked at several expansion options in Brazil to complement its position in Argentina
“We don’t have any position in Europe yet. That may be our next option for growth.
“But we’re very disciplined about what we buy and we take an aggressive approach to paying down debt.
“Anything we buy must make good economic sense.”
The story Saputo’s MG plans target more value from Aussie milk first appeared on Farm Online.