Milk sector on the boil

Last year a ferocious takeover battle saw Canada’s Saputo eventually emerge triumphant in a $500m takeover battle with Murray Goulburn and Bega Cheese for Warrnambool Butter & Cheese.

Now, another takeover appears to be looming with A2 beta-casein protein milk producer the A2 Milk Company revealing that it has fielded a conditional and incomplete bid “from two associated trade parties”.

Newspapers The Australian and the AFR fingered the Perich family’s Freedom Foods, already a near-19% owner of A2 Milk, as a likely bid participant.

US milk giant Dean Foods is believed to be the other trade party involved in the bid.

A2 has already introduced its products to the US, via the state of California, earlier this year, to a warm reception and is believed to have been sounding out financiers on an equity raising to hasten the process.

A successful bid by Dean Foods and Freedom could accelerate the international roll-out of A2’s products.

The A2 Milk Company’s main milk product is A1 protein free, meaning it is easier to digest and opening up the company’s premium and branded products to a wider audience than normal milk products, which contain both A1 and A2 proteins.

The AFR has reported that Gerry Harvey is to invest up to $80m in the Coomboona Holsteins operation in Victoria.

The paper said that Harvey’s investment in the 2000-hectare property north west of Shepparton was likely to involve “the construction of three huge sheds milking 6,000 cows with the modern feeding method known as total mixed ration.”

Harvey’s investment follows Gina Rinehart’s investments in Australian dairies over the last year.

Mrs Rinehart’s Hope Dairies has bought as much as 5,000 hectares of dairy farms in the Mary Valley in Queensland’s south east.

The company will spend $500m, in partnership with Chinese interests, on a milk processing plant that will process 150m litres of milk a year, to produce export infant milk formula for China.

China’s New Hope Dairy is believed to be another company keen to extend its Australian dairy interests. It has previously committed to spend $500m over three years on Australian agriculture projects.

New Hope is already part of a consortium, including Freedom, the Perich family, and Moxey Farms, that is expanding the latter’s already sizeable dairy operation.

Meanwhile, Rabobank sees global milk oversupply, but a far brighter market scenario in Australia.

The company’s latest research said that:

“A recovery in global dairy prices is still on the horizon, however burgeoning stocks have pushed out any sustained upturn in the market until the first-half of 2016.

“The global outlook….reaffirms the bank’s position that a recovery phase is imminent, however it has pushed out the timeframe by at least three months.

“Rabobank senior dairy analyst Michael Harvey says the market correction has been largely delayed by the removal of EU quotas which has bolstered exportable supplies.

“We are currently operating in an environment where global milk production is rising faster than demand growth, and there is simply too much milk in the market,” he said.

“This has left exporters looking for additional offshore sales at a time when China and Russia have been largely absent.

“While global milk production is set to continue to increase, the rate of growth is expected to slow particularly out of New Zealand and the US, while an improvement in demand should see some rebalancing in the market by early next year.

“However, the rate of initial price recovery will be dampened as the market works through accumulated excess stocks. And as such, we are unlikely to see the stronger upward momentum in prices until the second quarter of 2016.”

Rabobank’s Harvey was more positive on the local outlook.

“Australian farmers have been largely buffered from the weakness in international dairy markets, with the farmgate price for southern export producers maintained at AUD6.00kg/milksolids for the 2014/15 season.”

Mr Harvey said next season’s milk price is expected to remain in the same vicinity, which will certainly encourage ongoing investment in the sector.

“Southern producers have generally had a profitable year, which has been bolstered by manageable feed and fertiliser costs and low interest rates,” he said.

“Milk production has also been strong — particularly in northern and eastern Victoria and Tasmania — with year-to-date national milk production up by around 2.9 per cent.

“While most dairy regions have experienced normal autumn rainfall, we are acutely aware of the emerging El Nino weather pattern which could impact pasture growth and feed costs.

“And this is certainly a downside production risk to the outlook for Australian farmers.”

Mr Harvey said the local consumer market is also facing some headwinds, with slightly higher unemployment and weak consumer sentiment which is seeing milk production growth outpace local market growth in the foreseeable future.