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Dairy Australia - Market News

04 November 2013

Dairy Australia - Fortnightly Update 1 November 2013Dairy Australia - Fortnightly Update 1 November 2013

EU and Canada arrive at an accord to enter into landmark trade agreement after nearly four and a half years of negotiations and NZ processor Westland Milk Products releases its annual report, noting an increase in its supply footprint.
Dairy Australia - Market News

Global Developments

The European Union and Canada have arrived at an accord to enter into what is being hailed as a landmark trade agreement after nearly four and a half years of negotiations. The pact will see Canada increase its import quota for EU cheese by 18,500 tonnes to around 32,000 tonnes in exchange for EU concessions for Canadian beef and pig products. Phase-in periods of up to seven years are built into the agreement, which must first be ratified by each EU-28 member state as well as the Canadian state legislatures.

New Zealand processor Westland Milk Products has released its annual report, noting an increase in its supply footprint – particularly in the Canterbury region, where up to 20 extra farms joined the cooperative. CEO Rod Quin credited the supply from irrigated Canterbury farms as bolstering returns for all shareholders as the early 2013 drought saw supplies dry up elsewhere as commodity prices peaked. Westland’s next step is likely to be an expansion in production facilities, with shareholder consultations flagged in coming weeks.

The Australian Front

Warrnambool Cheese & Butter (WCB) takeover contest—from checkers to shogi. With offers from three competing bidders for WCB already on the table, Lion (local subsidiary of Tokyo-listed Kirin) earlier in the week paid $9.25 per share for a 9.9% holding in WCB—after the latter’s Board recommended that shareholders accept the revised offer of $8.00 per share from Toronto-listed Saputo (SAP). Lion states that it has acted to safeguard the certainty of cheese supply it enjoys under existing contractual arrangements with an independent WCB. Lion leases a cheese cut-and-wrap facility adjacent to WCB’s manufacturing plant at Allansford; and WCB supplies the bulk of Lion’s block chilled cheese [FY13 supermarket retail value: $250 million (MAT 30/06/13, AZTEC)].

Later in the week, the Australian Competition and Consumer Commission (ACCC) announced that it did not oppose BGA’s proposed acquisition of WCB. SAP’s bid is still to be reviewed by Australia’s Foreign Investment Review Board (FIRB); Murray Goulburn’s application through the Australian Competition Tribunal is expected to take up to 3 months. But with BGA the first bidder to have overcome its regulatory hurdle, and the BGA board scheduled to review its bid (1.2 BGA shares + $2 cash) next week, events have prompted Fonterra to act.

Fonterra last night moved to protect its longer term business in Australia—paying $4.95 per share to acquire a 6% holding in BGA (per Bloomberg this morning). BGA cuts and wraps Fonterra’s cheese marketed under the Bega brand in an arrangement that Fonterra describes as a ‘mutually beneficial partnership...centered license agreements.’ BGA and Fonterra earlier this year renewed their cutting and packaging contract for a term of 10 years [Fonterra’s chilled cheese FY13 supermarket retail value: $459 million (MAT 30/06/13, AZTEC)].

Coming on top of the contest for 10% of Australia’s milk and globally relevant scale, these latest developments reflect industry players jostling to protect their strategic positions. BGA, MG and Lion now collectively own 45.13% of WCB; revised bids and alliances as seen in previous takeover contests in the sector are not unexpected.

In farmgate price news: MG announced a second step-up, $0.09 kg/fat, $0.19 kg/protein, taking its ‘weighted-average, available price’ to $6.00 kg/MS and its full-season forecast range to $6.10-$6.30 kg/MS. The previous day, WCB announced a step-up: $0.16 kg/fat, $0.40 kg/protein, for a weighted-average price of $6.05 kg/MS and a full-season ‘indicative’ forecast range of $6.15-$6.30 kg/MS.

More farmer labels hitting supermarket shelves: In two separate initiatives, groups of dairy farmers in South Australia and Victoria are marketing farmer labels on Coles shelves: the South Australian Dairyfarmers’ Association with ‘SADA Fresh’; and a group of farmers engaged in ‘biological farming’ from near Cobden with ‘Greener Pastures’ milks (processed by WCB). More examples of how dairy farmers are looking to control their returns from milk.

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