Criterion: Improving dairy returns show the sector is in clover

The listed dairy sector is benefiting from dairy’s return to favour as a source of protein
The processors report improved profits whilst boosting farm gate returns to the producers, but retail conditions remain soft
The humble milk pail is giving way to automation in the cow shed

The dairy sector is having a moment – and not before time.

Global demand has increased and the humble cow juice has gained favour as a source of protein and gut health.

The producers aren’t squabbling among themselves for once – and did we mention the farmers are happy?

The recent results from Bega Cheese (ASX:BGA) , Synlait Milk (ASX:SM1) and the NZ-listed Fonterra show that the processors (and marketers) can increase their farm gate price for farmers whilst boosting profits, albeit with self-improvement.

Bega chief Peter Findlay cites the gym-going youth chugging back chocolate milk and smoothies for their protein fix.

“Dairy has come around again,” he says. “Everyone was anti-fat, now they are anti-sugar and they are big on protein and dairy is a great source of protein.”

Bega’s house of brands

Bega has turned from humble milk collector to a brands powerhouse, having acquired the Lion dairy and drinks business – names such as Dairy Farmers, Yoplait, Big M, Masters and Farmers Union – for $560 million in 2020.

In 2017 the company bought the non-dairy Vegemite brand and other assets from Mondelez International (formerly Kraft Foods) for $460 million.

Bega sourced $200 million of its $1.8 billion of half-year revenue from branded products.

Happy little Vegemites

Vegemite has proved a defensive (albeit low-growth) brand when consumers are rushing to home brands.

“The pleasing things is the result was in a really tough trading environment,” Findlay says.

“We don’t think this will change in the next six to 12 months.

“We will combat that by trying to bring innovation to the table and drive efficiencies.”

Bega’s remediation includes rationalizing its cool room warehouses from 110 to 92, with more to come.

The company is also building a $30 million ‘dark’ (fully automated) distribution centre at Laverton that should deliver $10-12 million in savings from 2027.

Synlait is back in black

Kiwi producer Synlait is a redemptive story, on Monday reporting a NZ$4.8 million profit for the year to January, compared with a previous NZ$96 million loss.

Famed for making infant powder for the NZ$6.3 billion marketing juggernaut A2 Milk (ASX:A2M) , Synlait points to strength in nutrition (such as infant formula) and ingredients.

“Given where Synlait was 12 months ago, this is a considerable commercial achievement,” acting CEO Tim Carter opined.

What will Fonterra do?

Helped by favourable weather in NZ, Fonterra reported an 8% bounce in net profit for the year to half year to January 2025, to NZ$729 million.

“Fonterra’s earnings and the forecast farmgate milk price have both benefited from solid demand for our high value ingredients products, and our sales book is well contracted for the season,” CEO Miles Hurrell says.

Fonterra points to recovery demand in China as domestic milk production rebalances, with robust Southeast Asian demand.

Amid the underlying sector recovery, investor attention is focused on Fonterra’s planned divestment of its consumer division.

The business houses the Anchor, Mainland and Western Star brands (as well as Bega cheese, for which it has the marketing rights from Bega).

Bega would love to acquire the business – competition regulator willing – but Fonterra appears to favour an IPO of the business.

Fewer farms, more automation

As for the farmers, Findlay says the only ones with glum faces are the western Victorian producers stricken by drought.

“Most of the farmers are happy,” says Findlay, who strives to visit 100 to 200 of them annually. “I would like to think the industry is looking pretty positive.”

Just as the processors have rationalised, the same is expected to happen with dairy farms in line with US trend of fewer farms with more cows.

It’s estimated that the average herd here is 340 beasts, compared with around 280 ten years ago.

Milking automation – including AI – will enable older farmers to preserve their knees and backs and stay in the game.

Meanwhile, there’s always an outlier to a feel-good yarn.

In February Beston Global Foods Company (ASX:BFC) entered liquidation after administrators failed to find a buyer for the debt-heavy entity.

This story does not constitute financial product advice. You should consider obtaining independent advice before making any financial decision.