Bega Cheese has warned that increased pressure on dairyfarmers as a result of drought and the rising cost of grain to feed their cattle will create intense competition for milk among processors.
Executive chairman Barry Irvin foreshadowed that Bega would have to pay more for milk supplies as a result of the dry conditions.
Bega was able to increase its milk supply by almost 100 million litres to 750 million litres in 2017-18 and said its fiscal 2019 procurement was up by another 115 million litres.
Mr Irvin said Bega had been successful in shoring up additional supply for the newly acquired Koroit dairy processing plant in western Victoria over and above the 300 million litres a year locked in until mid-2020 under the terms of the $250 million Saputo divestment of the plant.
Canadian dairy giant Saputo and Fonterra have both made it clear they are on the hunt for more milk along with Bega, which now expects to process up to 450 million litres at Koroit in 2018-19.
Mr Irvin said it had been a tumultuous past year for the dairy industry and for milk procurement.
"While we have seen some growth in the total milk supply for Australia ... it still remains highly competitive in terms of acquisition of milk," he said.
"Commodity volatility does remain, meaning there is price volatility for farmers. It is fair to say that while we were pleased that we did improve price for our suppliers in the year just past, they too have been suffering from costs and they are beginning to feel the genuine challenge of drought.
"In terms of milk supply, as the year unfolds we will obviously see that farmers will be affected by drought and the cost of inputs."
Mr Irvin said Bega was pleased to have delivered normalised earnings before interest, tax, depreciation and amortisation (EBITDA) of $109.6 million for 2017-18, which was within guidance of $105 million to $115 million, despite increasing its farmgate milk payments late in the year.
Bega's announced normalised net profit of $44 million, up from $30.3 million the previous year, and it declared a full-year dividend of 11¢ a share.
The company remained tight-lipped about a possible capital raising in the wake of the Koroit acquisition.
However, analysts suggested it was still on the cards given Bega's track record following the purchase of the Australian grocery business of Mondelez, including the Vegemite brand, in January last year.
In that case, Bega waited five months before announcing a $160 million capital raising to help pay down debt.
It is understood Bega will resist the temptation to launch a rival bid for Capilano Honey despite frequently expressing an interest in diversifying into honey.
A consortium headed by private equity fund Wattle Hill and Roc Partners has made a $190 million bid for Australia' biggest honey maker.
Select Equities analyst Mark Topy said it appeared a case of now or never for Bega in relation to Capilano and he was confident the dairy processor had capacity to make another acquisition on top of Koroit and Mondelez.
Bega did not comment on Capilano but one insider suggested the company had enough on its plate in bedding down the Koroit plant.
Mr Irvin said Bega had successfully integrated the Mondelez grocery business, now known as Bega Foods, over the past 12 months and was in a strong position in what has been dubbed the "peanut butter wars" after the strategic acquisition of Peanut Company of Australia in 2017-18.
Bega stepped up spending on brand transition and promotion in the face of competition and a legal battle launched by Kraft Heinz in the Federal Court over peanut butter packaging and advertising.
It is also battling Fonterra in the Supreme Court of Victoria over the use of Bega trademarks.