Administrators have begun probing why the South Australian dairy group, Beston Global Food Company (ASX:BFC), went bust this week.
The administrators will want to determine why the company failed when it appeared to be on track to remain operational.
The company blamed what it described in Monday's statement as "a perfect storm of adverse events" for its collapse. However, the administrators will investigate the reasons for the failure and whether there is any chance the company can be resurrected in a new form.
Given the weak outlook for the local industry, with high costs and low returns, a trade sale may prove difficult.
The company employs 160 people in its factories, which produce cheese, butter, and milk, including brands such as Edwards Crossing Cheese Company and Mables. Additionally, around 22 dairy farmers who supplied milk to the company could also be impacted if the company is shut down.
Beston stated that prior to the pandemic, it had relatively little debt, but afterwards, it "came out the other side with a debt burden that has weighed heavily as interest rates have increased."
While the business recorded record sales of $170 million for the 2023 financial year, the following 12 months turned out to be a nightmare.
"Over the last 12 months, Beston has experienced exceptionally high operating costs, particularly due to onerous energy prices, at a time when Australian farmgate milk prices have been uncompetitive in world markets," it said.
"The business absorbed some $28 million in additional costs in FY23, including a 300 per cent increase in energy prices. However, the persistence of cost pressures—particularly with gas, electricity, labour, chemicals, and transport—continues to push up the cost of goods in FY24 and has adversely impacted profits and cash flows."
The company also blamed its problems on the "unintended consequences" of the Australian Dairy Code legislation introduced in 2019, which it claimed kept Australian farmgate milk prices at high levels, disconnected from global dairy commodity prices.
Bega Cheese made similar remarks in its 2023-24 annual report about the disconnect between local prices and global levels.
Beston claimed that the Dairy Code legislation had contributed to the closure of 11 dairy processing businesses in Australia over the past 18 months.
What are the chances of survival? Saputo, the big Canadian supplier, plans to close or sell off its King Island dairy business when the current season ends in 2025. Meanwhile, Fonterra, the New Zealand dairy giant, has been trying to sell its Australian operations for several months without an announcement.
However, industry reports from July suggested that Fonterra will retain a stake in the Australian business in any sale. The size of the stake is unknown, but market analysts believe it indicates that Fonterra is not confident of selling 100 per cent of its Australian consumer and business-to-business operations.
