Price Determination in the Australian Food Industry A Report

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4. The performance of Australian food companies THE PERFORMANCE OF AUSTRALIAN DAIRY COMPANIES Company performance analysis We have set out a comparison of the recent historical performance of dairy companies in the Australian industry that are engaged in the cheddar cheese manufacturing and marketing business. There are a number of dairy companies engaged in processing and manufacturing in the Australian industry. The majority of these enterprises, with the exception of National Foods, are cooperatives. The summary indicators give a limited appreciation of the relative performance of these companies in the cheese category for the following reasons: • the majority of companies that are involved in the dairy sector are cooperatives; • cooperatives typically structure their affairs such that milk payments to suppliers are a balancing item after withholding an appropriate amount for capital improvements, working capital and unforeseen fluctuations in returns; • whilst the resulting value of milk is closely related to movements in international prices, as noted earlier in this report, the net value from world market returns effectively sets prices for suppliers to the domestic market; • dairy companies operate either: – across the spectrum of dairy commodities (Bonlac, Murray Goulburn) – with a focus on consumer branded products (National Foods); or – with exposure to both (Dairy Farmers); and • the company with the greatest degree of specialisation in cheese production is Bega Cheese, which owns a small cheese plant and a major cut-and-wrap facility. Price Determination in the Australian Food Industry A Report 106 Figure 114. Returns of Australian dairy companies, three-year average WCBF NF Bega DF Bon MG -10 -5 0 5 10 15 20 25 30% Source: Whitehall Associates’ analysis of financial statements Abbreviations WCBF NF DF Bon MG ROE ROA EBIT SHF ROA EBIT/sales Warrnambool Cheese and Butter Factory Ltd (in Victoria) National Foods Dairy Farmers Bonlac Murray Goulburn return on equity capital employed return on assets earnings before interest and tax shareholders’ funds ROE
• There is a strong contrast in the return profile between cooperatives and public companies (National Foods and the unlisted WCBF). National provides the best returns on assets and on invested equity capital of those selected and has limited commodity manufacturing. • Bonlac Foods lost money in 2002 and 2000 when it hit difficulties in exposure to currency movements and had poor overhead recoveries from declining milk volumes. The effects of an attempt to a dual strategy of commodity manufacturing and brand management left the business with shortages of capital and an inability to compete for milk supplies with other Victorian manufacturers. Financial position of dairy companies We have set out a comparison of the recent historical financial position of dairy companies in the Australian industry, in terms of: • the turnover of inventory (latest reported in 2002), expressed as months of stock on hand; • the ratio of shareholders’ funds to total assets; and • gearing (the ratio of debt:equity). A variety of situations can be explained by the different strategic positions taken by the Australian companies and/or the way in which they have responded to changes in the industry. • Dairy Farmers and Murray Goulburn have followed the traditional cooperative model in funding their businesses, operating at or above a debt:equity ratio of 1.0. • Cooperatives such as Murray Goulburn, Dairy Farmers and Bonlac raise capital through deductions from the gross milk returns paid to their members, though members are allowed to increase share investments at any time. • Bega operates as a traditional cooperative but has restructured in 2001 using the proceeds of a sale of its brand licences to reduce its overall debt levels and reduce the exposure of its business to cheese manufacturing. • Bonlac Foods has, since 2000, operated a hybrid corporate structure to accommodate the investment in the Bonlac business by Fonterra. It retains high debt levels in this comparison – since reduced through the further acquisition of shares by Fonterra. Bonlac’s financial position worsened in the late 1990s due to currency exposure and heavy investments in branded consumer goods businesses. Figure 115. Financial position of Australian dairy companies WCBF NF Bega DF Bon MG 0 0.5 1 1.5 2 2.5 3% Source: Whitehall Associates’ analysis of financial statements months stock SHF: assets debt: equity • National Foods has operated with low levels of debt, given its good cash flows and recent focus on being the lowest cost milk processor in the domestic industry. • Different companies have adjusted very differently to deregulation of the industry. Price Determination in the Australian Food Industry A Report 107
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Price Determination in the Australi
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© Commonwealth of Australia 2004 T
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FOOD AND AGRICULTURE BUSINESS GROUP
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FIGURES Price Determination in the
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• The current focus of retail cha
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• assertions as to market power i
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Overview - main drivers of prices i
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Food lines The analysis of food pro
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Figure 1. Overview of the approach
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Figure 2. Corporate profitability I
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Figure 4. Major drivers of prices a
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5.3 The greater influence of prevai
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DAIRY - PACKAGED MILK Overview of t
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Figure 10. Whole milk, 2 litre, sup
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Prices through the chain Our analys
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Figure 16. Natural cheddar cheese:
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Farmgate prices Farmgate prices are
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DAIRY - ANALYSIS OF PRICING OF DAIR
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Figure 25. Dairy butter and blend s
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‘Step-ups’ are paid by several
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THE MEAT SECTOR Analysis of the det
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The approach taken The pricing anal
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The changing value chains - various
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The approach taken Assumptions used
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Figure 39. Lamb market sales, ’00
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Figure 41. Lamb: Major drivers of p
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Observations The price comparison s
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Figure 46. Pork products, supply ch
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Figure 48. Value and cost-adding fr
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Supply chain management Wholesale m
Page 68 and 69: Figure 51. Fresh vegetables: Major
Page 70 and 71: FRESH HORTICULTURE - WHOLESALE MARK
Page 72 and 73: FRESH HORTICULTURE - ANALYSIS OF PR
Page 74 and 75: market access - in the United State
Page 76 and 77: The industry’s product mix The ke
Page 78 and 79: PROCESSED FRUIT AND VEGETABLES Anal
Page 80 and 81: Figure 69. Frozen vegetables, peas,
Page 82 and 83: PROCESSED PINEAPPLES - ANALYSIS OF
Page 84 and 85: Figure 75. Fresh fruit, with juice,
Page 86 and 87: GRAIN AND OILSEED PRODUCTS Analysis
Page 88 and 89: Figure 79. Flour, 1kg, supply chain
Page 90 and 91: Figure 82. Share of retail price of
Page 92 and 93: OILSEEDS - OVERVIEW Background The
Page 94 and 95: Figure 87. Oils and fats, supply ch
Page 96 and 97: The amount represented by the retai
Page 98 and 99: Industry risks The key area of risk
Page 100 and 101: • The major cost faced by egg pro
Page 102 and 103: Figure 96. Consumer price index, fo
Page 104 and 105: • Many such operators have indica
Page 106 and 107: SUGAR PRODUCTS Analysis of the dete
Page 108 and 109: Figure 103. White sugar, 2kg, suppl
Page 110 and 111: Projected export returns for the co
Page 112 and 113: • Export prices are driven by glo
Page 114 and 115: Retail prices • The average retai
Page 116 and 117: Industry risk • The overall retur
Page 120 and 121: THE PERFORMANCE OF AUSTRALIAN VERSU
Page 122 and 123: THE PERFORMANCE OF GLOBAL BRAND MAN
Page 124 and 125: THE PERFORMANCE OF PRIMARY MANUFACT
Page 126 and 127: Our purpose in preparing this secti
Page 128 and 129: GROCERY RETAIL - WHAT DETERMINES PR
Page 130 and 131: The consumer trend towards eating o
Page 132 and 133: GROCERY RETAIL - PERFORMANCE OF GRO
Page 134 and 135: 6. Issues for consideration ISSUES
Page 136 and 137: PRODUCER INTEGRATION Does integrati
Page 138 and 139: Industries have in several cases ta
Page 140 and 141: Examples include: • 1 litre milk
Page 142 and 143: Figure 132. Targeting the stomach H
Page 144 and 145: MAJOR ADJUSTMENT - WHAT’S HAPPENI
Page 146 and 147: THE IMPACT OF DROUGHT The sector Di
Page 148 and 149: Price Determination in the Australi
Page 150 and 151: Oczkowski, E, Murphy, T 1999, Influ
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