Australian dairy firm eyes China's baby milk sector

Bega Cheese Ltd plans to generate as much as half its revenue from overseas by 2020 as the Australian dairy company expands a range of products with vitamins maker Blackmores Ltd.

The 117-year-old cheese-maker started selling infant formula this year through a joint venture with Blackmores as demand for the dried-milk powder surged in China.

In an interview in Sydney last week, Bega Chairman Barry Irvin said the two companies aim to follow up with nutritional powders for the elderly as well as diabetes sufferers, and then push into developing markets across Asia.

Irvin, a fifth-generation dairy farmer, wants to break a history of meager returns at Australia's leading cheese-maker. Tumbling commodity prices have made it difficult to make money manufacturing simple food ingredients like skimmed milk powder.

Blackmores stock has more than quadrupled since the start of 2015, driven by demand from China. Bega, which takes its name from the southern New South Wales town where it's based, needs the tie-up with Sydney-based Blackmores to deliver higher-profile goods that can command a price premium, Irvin said.

"It's a long-term branding exercise," he said.

"There are great opportunities in the health space. There's a different paradigm about the sorts of margins that can be extracted in that area."

Falling commodity prices drove Australian dairy group Murray Goulburn Co-operative Ltd to slash its profit target as much as 50 percent on Wednesday.

Murray Goulburn also announced the departure of Managing Director Gary Helou and said it would bring forward efforts to make higher-margin, ready-to-eat foods.

Even with annual sales of A$1.1 billion ($837 million) in the year ended June 30, Bega made a profit of just A$12.4 million. In the most recent fiscal first half, its profit margin was 2.6 percent.

Based on Bega's average profit margin over the past five years, the company would have made more money putting its revenue in a local bank account.

"It's a tough business," said Irvin. "Food's a single-digit game. Our objective is to get it into double digits."

Expansion into Asian markets, where products from Australia and New Zealand are trusted and claim a higher price, is part of Irvin's plan.