Oversupply now an issue for infant formula makers in China and Australia, Bega Cheese concedes

Oversupply now an issue for infant formula makers in China and Australia, Bega Cheese concedes

Australian dairy group Bega Cheese has conceded its joint venture to produce infant and toddler formulas with Australian nutrition supplement maker Blackmores has failed to meet sales targets. 

Speaking at the company's AGM, Bega chairman Barry Irvin said changing market conditions meant that "expected sales" have not materialised at "levels that were originally forecast". 

As a result, Bega has made provision for a potential write-off of inventory to the value of AUD5-7m (US$3.8-5.4m). 

When the venture was initially launched in October last year, the companies said the partnership brought together the experience of each organisation to develop and produce nutritional foods based on an understanding of their consumers in Australia and Asia.

Speaking yesterday (25 October), Irvin insisted that the venture united the complementary capabilities of Bega and Blackmores. "We have great confidence in the value of the skills and capacities of both companies," he stressed. 

However, he said: "There is no doubt that we have seen significant change in the nutritionals market since the partnership launched its first products in January." 

Irvin said in contrast to this time last year when "supermarket shelves were empty", the infant formula markets in China and Australia are now marked by signs of "short-term oversupply". The dairy executive attributed this to factors including regulatory changes in China, increased production and the "evolution of supply channels". 

Bega said the business is "under constant review" adding that it will continue to monitor the market situation as "circumstances become clearer". 

More broadly, Bega said that its dairy business is also facing challenges as part of an industry price crisis that has seen rivals Murray Goulburn and Fonterra slashing prices. "The result of an oversupply of dairy products was continued in downward pressure on dairy commodity prices, with significant competition in all markets," Irvin noted. 

However, he sounded a cautiously optimistic note on the outlook for global dairy commodity prices over the coming year. 

"Analysts around the world are predicting global commodity prices will continue to improve, albeit with a little bit of volatility, and we are seeing that happen now," he said. "The fact production costs are greater than the farm gate milk price being paid in Australia is also true around the world. We are seeing supply rebalancing, we are starting to see that very heavy growth in Europe start to shrink, we are seeing a return of demand in China."

Bega shares fell sharply in the wake of the group's AGM, from an open of AUD6.48 yesterday to close at AUD5.24 today.