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Chapter 1: What is the main topic discussed in this episode?
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If I had to pick one word to describe America's history in the Middle East, I'd probably go with mistake. But it was the Americans believe all a dreadful mistake. The backpackers crossed the poorly marked border by mistake. The war in Iraq was a big, fat mistake. So why is it happening again? I'm Matt Bevan, and on my show, if you're listening, we actually try to learn from the world's mistakes.
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One of the industries most affected by the closure of the Strait of Hormuz is the food industry, through freight costs, plastic packaging and the rise in the price of fertiliser. Now to get a sense of what that means for our food prices, this week on That's Business we've got Pete Finlay, the CEO of Bega Group, the 125-year-old dairy company that also makes peanut butter and Vegemite.
In preview, he reckons that we can expect 5% to 6% inflation as a result of what's going on in the Middle East. There are also some big trends in food consumption that he's also having to deal with. The rise in protein consumption and general wellness, but also the increase in the use of weight loss drugs. What's that doing to food consumption? And then there's also migration and global warming.
So we tackle Pete Finlay on all of these issues and more. So here he is, Pete Finlay, the CEO of Bega Group. G'day, Pete Finlay. Thanks for joining That's Business.
Alan, thank you for having me. Great to be here.
Let's start with the straight of all moves. How's the closure of the straight affecting your business?
Oh, look, it's reasonably significant from a cost perspective at the moment, Alan. So we sort of look at it in two ways, the cost and then the actual supply of goods. So we've obviously focused on trying to make sure that our supply chains are standing up. We do import A lot of product and a lot of product comes through that straight.
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Chapter 2: How is the closure of the Strait of Hormuz affecting food prices?
So there's a cost impost just with our traditional suppliers where we can get product. How much? It varies. But, you know, we're seeing sort of 20%, 30%, 40% increase on those direct products, which then might sort of add a sort of an 8%, 9%, 10% increase on our products.
And that's on your plastic jars and stuff, is it?
Yep. Yep. But the overall impact on total cost of products around about sort of 8% to 10%. Then you've got the, so that's all of our plastics and our materials coming from overseas. And then you've got what's coming through our suppliers here in Australia. So all of our freight.
So obviously we're in a process now where we're making sure that all of the freight coming into our business is supported through the cost increase. And so that's adding cost and then our farmers. So we've separately to sort of the 8% to 10% cost increase we're getting through our supplies, our direct supplies have then gone back to our farmers and we're looking to support them.
with a sort of a step up in milk price to help support their costs. Their main costs are urea or fertilizer on their farms, which impacts their output significantly and the fuel that they use in sort of day-to-day farm activities, you know, sowing crops or feeding livestock or running their dairy through their generators.
So are you fully matching the cost increase that the farmers are seeing or are they having to swallow some of the costs?
No, we're trying to fully match that. Yeah, so we've done a fair bit of work. So it depends. It's quite difficult. So different farmers in different regions have very different cost structures. So a farmer in a high rainfall area will mostly be using natural paddock-based fodder for their kilojoules for their cattle to produce milk, whereas a farmer...
In a drier area, less rainfall feeds, does a lot of supplementary feeding, so they're importing wheat and grains, and they would be impacted more. But overall, we've tried to make sure that we've done an average cost at the higher end across our farmers, and we've worked across sort of all their different pricing structures to make sure that they're not out of pocket.
So across all this, you've got plastics, you've got freight, and you've got the actual milk where you're having to pay more to the farmers. What sort of cost increase? Is it 8% to 10% across everything that you're seeing?
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Chapter 3: What inflation rates can we expect due to global energy crises?
Our total cost base here is probably about 10%.
Right. And are you passing that on fully to consumers or are you having to absorb some of that in your margin?
Not at this stage. Not at this stage. So we're passing a large chunk of it on to consumers, but we are actually absorbing some of it at this stage. But we'll just have to see how long the crisis goes for. And so we're sort of evaluating that every month. We do calculations on that every month to assess the cost.
Chapter 4: How are food consumption trends changing in Australia?
What's your view about the long-term impact of this? I mean, what happens if it stays closed for, I don't know, another month, another three months? Give us a sense of what you think will happen.
So our first thing is getting supply materials. So I think that's the key thing. How do you make sure that we've got packaging, cleaning materials, we've got components to run our sites and that our farmers are getting the right materials that they need? Are they able to get to fertiliser? Because that will impact their output.
So I think the first thing is how do we make sure that our supply chain stands up so that we actually get product? So that's what we're really focusing on. And then secondly, I think if it keeps going, costs will stay elevated. And then companies like ours will probably look to try and claw back more costs than what we potentially have today because we just won't be able to absorb that.
So there'll be pressure there.
Chapter 5: What impact do weight loss drugs have on food consumption?
And then I think... what probably happens is it starts to then spread across the other parts of the economy as we see. So it won't just be food and it won't just be our manufacturing costs that are going up that then impact food costs. As you go through a wage cycle, you'll have to link your wages to increased costs of living. So I suspect wages will come under pressure.
to be elevated above normal wage increases. So I can sort of see it seeping deeper and deeper into our cost structures and probably impacting more elements of our business than what it is currently.
What do you think it'll do to overall inflation?
I think it'll drive inflation up.
Yeah, absolutely. Yeah, to what though? I mean, what do you think we're looking at?
I'm not an economist, Alan, but I would have thought north of 5%. Yeah. Yeah, 5% to 6% would be my view. Just as I said, just as it spreads into our wages and into other parts of the economy. I don't think it's flowed fully through yet. So if it keeps going, I would think that inflation will be 5% to 6%, maybe even higher.
One of the ways companies in the food business especially deal with cost increases is shrinkflation, where they have obviously smaller portions for the same price. Are you doing any of that?
No, we don't do shrinkflation. So we're pretty committed to our pack sizes. And so none of our pack sizes will be changing.
What do you think of shrinkflation? Do you think it's a bad idea? Do you oppose it? When you meet your food industry colleagues, do you tell them not to do it?
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Chapter 6: How is Bega supporting farmers amidst rising costs?
Huge. Huge, how much? If you're on a GLP-1 drug, you're consuming a lot less. And so basically what that does is that strips fat But it also strips muscle. And so what you want to be doing is the food that you are consuming, you want to be highly nutritious and you want to be high in protein to enable you to maintain your muscle mass.
Because whilst you want to lose weight, you don't actually necessarily want to lose muscle because it's terrific for your stability and your physical health. So we're seeing people on... GLP-1 drugs wanting to consume a lot of yogurt and milk-based beverage with high protein content in it. And so when we bought the business, yogurt was sort of growing at 3% or 4% volume per year, which is nice.
That's good. We're the number one yogurt producer in Australia, and we had sort of a nice 3% or 4% growth. Over the last couple of years, sort of with the emergence of GLP-1 and... It's not solely GLP-1, but certainly a big part of it. Our yogurts now growing sort of 10 or 11% volume year on year. And so it's having a significant impact on our business.
But is there also across the food industry generally, are we seeing a decline in food consumption generally?
I couldn't tell you that in Australia, Alan, certainly in the US where GLP-1 drugs are now sort of 10% plus of the community are on GLP-1 drugs. The average family in the US with a GLP-1 drug user is consuming 6% less food. And so if you think about that, the US, that equates to a 0.6% reduction in food consumption, which is significant if you think across that.
So I would imagine that those sorts of outcomes will start to play out in Australia. I would have thought that we will follow the same GLP-1 user depth within our community, and I would have thought that our food consumption will drop. So And people will turn to more natural, nutritious, high nutritious, dense foods, I would say from that.
Why do you think all these trends, the move towards more nutritious wellness and all this and GLP-1 drugs and so on, mean for the Australian food and agriculture industry? I mean, our industry is really based on dairy and carbohydrates and the idea of protein in Australia is basically a steak and a lamb roast. What do you think it means?
I think it's fantastic. So I think it's got huge – so do you think dairy's really a protein carrier? Dairy's got as much protein as fat in it, so it's a very high protein-based product. You've got two different types of – you've actually got a number of different proteins within dairy, all which meet protein users' needs. They're all whey protein and so forth. It's all very absorbable.
And so I think the dairy is ideally placed for this protein consumption drive that we're seeing. You've got red meat, chicken, pork, all of our wonderful meats that we produce, which are great protein carriers. And then plant-based protein, I think, will become bigger and bigger too. So plant-based protein, which can be extracted from wheat and various different sorts of plants that we grow here.
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