Situation Analysis Australian Dairy - May 2019
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Australian Dairy Plan
Australian Dairy
Situation Analysis
May 2019
1
Australian Dairy Plan Disclaimer Whilst all reasonable efforts have been taken to ensure the accuracy of Australian Dairy Situation Analysis Report, use of the information contained herein is at one’s own risk. To the fullest extent permitted by Australian law, Dairy Australia disclaims all liability for any losses, costs, damages and the like sustained or incurred as a result of the use of or reliance upon the information contained herein, including, without limitation, liability stemming from reliance upon any part which may contain inadvertent errors, whether typographical or otherwise, or omissions of any kind. © Dairy Australia Limited 2019. All rights reserved. ISBN 978-1-925347-43-2 (Digital)
Introduction
1
Australian Dairy Plan Context By the early-2000s favourable seasonal conditions and productivity growth supported by strong uptake of new technology and improved farm practices has driven more than a decade of strong growth. Investment was strong and confidence was generally high. Milk production was above 11 billion litres and Australian exports were 16 per cent of world trade volumes, placing Australia as the third largest dairy exporter. 2 Australian Dairy Situation Analysis
Key external factors Key internal factors
However, the past 20 years have • Australia has the most variable • Farm profitability is essential
presented new challenges for the climate on Earth and is now for milk production growth and
Australian dairy industry: notably drier in dairy regions. supply chain efficiency, but flatter
• Despite significant progress, the production curves, while suiting
• Increased market and climate
international trade environment manufacturer supply needs,
volatility has made the operating
remains distorted and many have increased production costs
environment more complex for all
of our competitors continue to on farm.
parts of the industry.
benefit from significant levels of • Yet farm profitability varies
• Recent drought events have government support. significantly across regions and
widely impacted dairy regions,
• Australian dairy markets are many farms are not achieving a
driving farm exits higher
open to supply from international sustainable return on investment.
in general, but particularly
competitors and imports
in the Murray region and • The collapse of the Murray
are increasing. Currency
northern states. Goulburn Cooperative following
exchange rates have changed
a recent market down turn has
• Productivity growth has slowed, considerably, which influences
shaken farmers’ confidence and
increasing the difficulty of our competitive positioning.
trust in their processors, driving a
managing conditions in which • Expectations of dairy customers, reduction in supplier loyalty.
input costs have increased faster retailers and food manufacturers
than milk prices. related to animal welfare and the • Confidence in traditional industry
environment are growing. The dairy advocacy structures has been
• Despite growth in some years,
industry is responding with greater challenged and new ways of
the overall milk production
transparency, goal setting, and supporting the Australian dairy
volume has declined to levels not
consumer engagement. industry have emerged.
seen since the mid-1990s.
• Competition for inputs such as • Industry is well served in RD&E
• Many manufacturers are short of
irrigation water are rising, and the capability, providing innovations
milk, resulting in higher costs as
availability of labour (from entry to lift overall performance,
plants are underutilised.
level to Farm Manager level) is however uptake more broadly
• There is a growing milk shortfall limited and can often difficult in the industry could be
in traditionally ‘domestic to retain. significantly improved.
market’ focused regions (NSW/ • Growing regulation creates • The rising complexity of dairy
QLD) which is being filled by additional restrictions and costs farming is highlighting areas
traditionally ‘export market’ to the industry (e.g. Labelling – where increased skill levels are
regions (VIC). Country of Origin, Health Star required and our ability to attract
• The Australian share of global Rating; proposed mandatory and retain capable people is
trade in dairy products is now six Dairy Code of Conduct). critical to ongoing success.
per cent and we are the world’s
• This rising complexity is
fourth largest exporter, leading
stimulating change in farming
some to question our relevance
systems and structures,
on the global market.
but sometimes this change
This Industry Situation Analysis compromises profitability and
draws on a broad range of cost competitiveness.
knowledge, history and experience
• Highly profitable farms with
to combine commentary and
different production systems
considerations on range of topics.
in different regions shared
This material is intended to
the common characteristic
be a conversation-starter for
of business operators with
consultation forums online, and also
excellent technical, people
those scheduled in dairy regions as
and business skills.
part of the Australian Dairy Plan.
3
Australian Dairy Plan
Consequential impacts A better future
• Limitations on our ability to meet The ability of the industry to adapt
the growth needs of customers and adjust to the changing conditions
has impacted the industry’s has been testament to its resilience
reputation as a relevant and over many decades. There are still
reliable supplier. many positive factors that point
toward a better future:
• Critical mass of farmers and milk
supply volumes in some regions • Strong domestic and international
is now a concern for processors growth in demand for dairy and
with milk transportation current price forecasts are positive.
costs increasing.
• Customers are discerning and are
• Reduced farm numbers is prepared to pay a premium for
affecting service providers in the quality dairy Australian products.
dairy regions as their customer
• We have many efficient farmers
base is diminishing.
who have been successfully
• Confidence amongst normally operating under some of the lowest
resilient industry participants levels of Government support
is impacted, and the tone of across the OECD.
reporting on the dairy industry
• We have world-class RD&E
tends to now focus more on
infrastructure and support in
challenges rather than strengths
delivering important innovations.
and opportunities.
• The trading environment for
• Collaboration is reduced as
Australian dairy has improved
manufacturers compete to secure
through completion of Free Trade
milk supply in a shrinking milk
Agreements and the removal of
pool and environment where
export subsidies via the World
farmer loyalty to one processor
Trade Organisation (WTO).
is diminished.
• We have a diverse, highly
competitive dairy manufacturing
base who are committed to
the industry.
• While markets and climate will
remain volatile, this volatility also
offers ‘upside’ potential if we utilise
the current and developing tools to
anticipate and respond volatility.
• Despite current challenges, the
prospects for the industry are bright
but the pathway toward a better
future will require concerted and
sustained collective industry action.
Despite the current challenges the
prospects for further progress in
the industry are significant but the
path to a better future will require
concerted and sustained collective
industry action.
The Australian Dairy Plan offers the
opportunity to decide on that pathway
and the actions that will follow.
4 Australian Dairy Situation Analysis
Situation analysis snapshot
The market has evolved faster Making a profit on farm has Our people and organisations
than the industry become more difficult need to adapt to succeed
The world market On farm dynamics Skills, knowledge and mindsets
• Competition: Our global • Farming systems and • Farming skill needs: Farmers
competitors have caught up and structures: The way we farm need skills in a broader range of
are now moving ahead of us in is becoming more complex in areas than was once the case.
international markets. This includes response to market, pricing and • Education and training: Farmers
a complex trade environment. climate variability. are changing the ways in which
• Relevance: While still a major global • Margins and input costs: Input they learn.
dairy exporter, our relevance on costs (water, feed, labour and
global markets is being questioned energy) have increased much Attracting and retaining people
because of our shrinking scale and faster than milk prices and • Attracting people: There is a
competitiveness. productivity gains can cover. widespread shortage of skilled
• Volatility: With the gradual removal • Farmer investment: Farmers labour at all levels in the dairy
of quotas and export subsidies have invested heavily in recent industry.
overseas, volatility in dairy markets years but are questioning their • Retaining people: Keeping skills
has increased. capacity and confidence to and knowledge in the industry,
continue investing. and encouraging farm succession
The supply chain
Risk profiles is an increasing and critical
• Processor investment: Processors challenge.
have invested heavily on the back of • Climate volatility: Australia • Promoting the industry: We can
clear opportunities for the Australian has the most variable climate do more to portray a positive
dairy industry but are now struggling in the world being 22 per cent image of dairy as an industry to be
to fill their plants. Production growth more variable than South Africa. involved in.
is required, but at the moment This variability adds to
processors are transporting milk production costs. Industry structures
to fill regional shortfalls. • Risk management: Risk • Industry structures and
• Supply chain divergence: management has become critical services: The structures and
Fierce competition has challenged to manage the peaks and troughs. services that exist to support
our capacity to collaborate. industry are under pressure to
Regional profitability
• Ownership structures: Processor adapt to changing industry needs.
ownership structures have evolved • Community sustainability and • The advocacy environment is
from the traditional cooperatives resilience: Farm consolidation changing: Expectations of how
which is also influencing processor is shifting our relationship with industry advocacy organisations
decision making. regional service providers and should operate are changing
communities. and there is a need for a trusted,
The consumer
• Export region margins being authoritative voice.
• Sales channels: Our production challenged: Milk prices are not
mix has had to adapt to changing keeping up with the rising costs of
consumer preferences and price/ production in some regions.
positioning competition from milk • Domestic region margins being
alternatives. challenged:
• Demand remains strong: Strong import competition
Consumption in Australia is robust means domestic producers are
and global dairy demand continues increasingly competing with the
to grow. international market.
• Social licence: Public expectations
are changing and consumers
are increasingly questioning the
attributes of their food.
5
Australian Dairy Plan 6 Australian Dairy Situation Analysis
Contents
Introduction 1 Our people and organisations need to adapt 61
to succeed
Key external factors 3
Skills, knowledge and mindsets 62
Key internal factors 3
Farming skill needs 62
Consequential impacts 4
Education & Training 66
A better future 4
Attracting people 67
Situation analysis snapshot 5
Attracting and retaining people 67
The market has evolved faster than the industry 9 Retaining people 68
The World Market 10 Promoting the industry 69
Competition 10 Industry Structures 70
Relevance 17 Industry structures and services 70
Volatility 19 The advocacy environment is changing 74
The supply chain 21
Processor investment 21
Supply chain divergence 24
Ownership structures 25
The consumer 26
Sales channels 26
Demand remains strong 28
Social License 30
Making a profit on-farm has become more difficult 35
On farm dynamics 36
Farming systems and structures 36
Margins and input costs 40
Farmer investment 44
Risk profiles 45
Climate volatility 45
Risk management 49
Regional Profitability 51
Community sustainability and resilience 51
Export region margins being challenged 53
Domestic region margins being challenged 56
7
Australian Dairy Plan 8 Australian Dairy Situation Analysis
Challenge 1
The market
has evolved
faster than
the industry
9Australian Dairy Plan
The World Market
Competition: Our global competitors have caught up and are now moving ahead of us in
international markets. This includes a complex trade environment.
By world standards, Australia markets and reducing the negative reforms in international trade policy.
has taken a relatively unique effect on world prices of overseas Due to the complex interactions of
approach to supporting domestic domestic support regimes and a number of subsequent internal
food production and trade. export subsidies. and external domestic market and
Many countries (like the USA, industry shocks (and overseas
In the 1990s Australian dairy
EU, Canada, Japan, Brazil and competitor reactions to policy and
significantly expanded both milk
Argentina) intervene in markets market changes) this pathway has
production and exports as the
to support domestic food not developed as expected. Some
combined effect of favourable
industry returns, address local of the drivers of this outcome are
exchange rates, world price
food affordability or boost the discussed below:
movements and improved trade
sustainability of regional food
outlooks and policy settings lifted
production. In contrast, Australia,
industry confidence and investment. The effect of the Australian
for some decades, has favoured
By the end of the decade, Australia mining boom on agriculture
an open market approach to
was supplying around 16 per cent
agricultural production and trade In the decade to 2013, the Reserve
of the measured world exports of
with government intervention Bank of Australia (RBA) estimates
dairy products.1 The two largest
focusing primarily on maintaining the mining boom increased real
local processors (MG and Fonterra)
food safety and environmental per capita household disposable
ranked in the world’s top 20 to 25
sustainability, research and income by 13 per cent3. However
firms in terms of raw milk intake
development and drought recovery. the subsequent increase in the
(although their heavy focus on
value of the Australian dollar had a
In the specific case of Australian bulk commodity sales meant that
negative impact on trade exposed
dairy, this approach resulted in the they ranked considerably lower
industries like manufacturing and
broad exposure of local industry on a revenue basis). Both firms
agriculture.
to world prices for manufactured separately accounted for five per
dairy products from 1984 (through cent of world export volumes.2 The RBA used AUS-M (an
CER with New Zealand) and the economic model of the Australian
In 2000, local industry fully
phased removal of domestic price economy) to estimate the real
expected that its share of world
support arrangements from 1985. exchange rate would have been
dairy production and trade would
Government did, however, work 44 per cent higher in 2013, relative
continue to grow based on
with industry to try and enhance the to its level in the absence of a
Australia’s relatively low production
international trading environment mining boom. In effect remaining
costs, its proximity to emerging
for Australian agriculture by largely at similar levels to where it’s
markets in Asia and expected
securing better access to major traded for the previous 20 years.
1
ADC – Dairy Compendium 2001, Page 54.
2
Leatherhead Food RA 1997. Key Players in the Global Dairy Industry. Report prepared by Information Group Services of Leatherhead Food RA,
November 1997.
3
https://www.rba.gov.au/publications/bulletin/2014/dec/pdf/bu-1214-3.pdf
10 Australian Dairy Situation AnalysisFigure 1: RBA Real trade weighted exchange rate without the Australian mining boom4 Trade and market policy changes
As noted above, Australia
has long embraced an open-
market approach to multilateral
trade reform. The WTO Uruguay
Round of 1995 vindicated this
approach with its commitment to
significantly cut the use of (market
damaging) export subsidies.
This gave a permanent boost to
world prices and industry sentiment.
The Uruguay Round was less
successful in generating real reform
in the areas of market access
and domestic market support.
However, it did create expectations
within major producers and traders
such as the EU and USA that they
would have to substantially adjust
their existing support policies
in future years to comply with
expected WTO rule changes.
Fluctuations in currency can be exacerbated by individual company hedging Subsequent WTO Rounds
policies and Australian farmgate returns are influenced by commodity (Millennial and Doha) have failed to
markets and individual business decisions relating to product and market mix. make further substantial progress
Independent of individual business decisions, the rapid appreciation of the AUD in these areas agricultural trade
increased competitive pressure on Australian exporters given much dairy trade policy reform (with the exception
occurs in US dollars and the AUD increased faster than the NZ dollar and Euro of the Doha Nairobi sessions of
against the US dollar; eroding Australian exporter returns. 2015 which formalised the end of
all export subsidies).
Australian dairy exporters faced more competitive pressure from 2009 to 2013
as the Australian dollar was trading comparatively higher than pre-mining boom As a result, the WTO considers the
(2002) levels, relative to competitors in New Zealand and Europe. This means in global dairy market to still be one
order to earn an equivalent local currency return, Australian exporters needed to of the most protected and distorted
sell Australian dairy product for a premium in US dollar terms in export markets. food markets. Many countries
continue to apply high tariffs on
dairy imports (see Figure 2 next
page) and to employ non-tariff
barriers – such as restrictive
customs procedures, excessive
port of entry inspections, product
testing, factory inspections or
veterinary certificate requirements –
in order to restrict trade and protect
local production. Governments also
continue to intervene in domestic
markets to distort and reduce
import trade opportunities.
Dairy Australia estimates that
Australian dairy exports attract in
excess of $200 million in direct tariff
charges each year as they enter
destination markets.
4
https://www.rba.gov.au/publications/bulletin/2014/dec/pdf/bu-1214-3.pdf
11Australian Dairy Plan Figure 2: : Average Applied MFN Tariff for All Dairy Products by Country. Source: WTO The failure of the Doha Round has led many countries to seek to gain trade advantages and protections for their local industries through a patchwork of domestic reforms and an expanding number of preferential market access agreements. Companies have also acted to advance their positions through cross-border alliances and investments in developing markets. While Australia has tried to be active in this area, its success lags that of some major competitors, leaving the local dairy industry at somewhat of a crossroads as a global market supplier. 12 Australian Dairy Situation Analysis
These include:
Europe: The EU regularly jockeys for the position of the largest dairy
exporter with New Zealand. For some time, the EU government and • Budget pressures on planned EU
dairy industry have expected that WTO reforms would force it to modify spending on direct farm payments
key tariff settings and domestic support regulations under its Common post 2020
Agricultural Policy (CAP). This has strongly influenced the EU’s approach • Moves by countries such as the
to world trade over the past decade. Netherlands to impose significant
environmental constraints on farm
production systems
An early EU response was to • The shift from price to income
expand its internal market by support, in turn, saw a gradual • General ‘greening’ measures
increasing its membership from convergence of EU domestic that could threaten the cost and
15 to 27 countries from 2004 wholesale dairy prices and efficiency of EU milk production
to 2007.5 From 1996 to 2010, the international market prices. • The impact of Brexit on Irish dairy
EU also entered into preferential This has helped sustain internal industry trade opportunities –
trade agreements with another 22 EU demand. More importantly, given that country’s significant
countries where it saw demand it has reduced the EU’s growth over the last decade.
growth opportunities for EU attractiveness as a dairy import
industries and products across market and reinforced the
North Africa, the Middle East and effectiveness of its existing tariffs
Central America. It has sustained in preventing any import trade
this push for bilateral FTAs over outside of narrowly defined tariff
the past decade – signing a rate quotas.6
further 12 agreements with various • EU expansion was also a driver of
Asian, American, African and East the removal of EU milk production
European nations since 2010. quotas in 2015. This change
In dairy, the EU is not only using saw many European farms and
these bilateral deals to gain processors, particularly those in
preferential access for EU dairy more cost-competitive grass-fed
into key import markets. It is also regions (e.g. Ireland, Denmark),
(successfully) seeking to limit gear up to expand production and
competition in these markets from exports post 2015 – an outcome
third country cheese producers that has come to fruition with both
like Australia via the enforcement EU milk supplies and exports
of EU GI regulations in each deal. growing since 2016.
The expansion of the EU’s Various public reports have
membership had several important indicated that EU company
market and policy consequences: investment in new dairy processing
• Commercially, it increased the facilities between 2012 and
size of the internal EU market for 2016 exceeded 5 billion Euros
products like dairy. (AUD $8 billion) 7.
• Politically, it forced a shift in Despite this recent growth, there
domestic support policy away are some factors that could limit the
from a more expensive system future growth in EU milk production
of maintaining high wholesale and export availability.
domestic prices (with government
purchase of market surpluses
at agreed minimum prices) to a
‘cheaper’ policy of direct income
support for local farmers.
5
Membership extended to 28 countries with the addition of Croatia in 2013.
6
Australian dairy exports to the EU have dramatically fallen over the past decade.
7
The Land – Europe leads the world in dairy processing investments – April 2016
13Australian Dairy Plan
United States: While the US has a very large dairy industry, for many
years it considered export sales as a market of last resort for surplus
local production.
This approach has changed over Based on this growth, the USA
the last decade or so. While US retains an ambition to significantly
milk production has steadily climbed increase its share of global dairy
around 2 per cent per annum, the trade over the next decade.
country has doubled dairy exports However, there are also some
(in milk equivalent terms) from restraining pressures on the
2010 to 2017. The US is now the US’s continued ability to grow its
world’s third largest contributor export presence. These include:
to dairy trade.8 This trade growth
• The high exposure of large-
reflects several factors including:
scale US farm systems to rising
• The US entering into 14 purchased feed costs, as world
preferential trade agreements in feed markets become tighter and
key target markets like Mexico, more volatile;
and Korea. In the case of Korea, • Stronger land and water-use
US dairy exports were fuelled by competition in south-western
the agreement’s rapid removal of growth regions, and barriers
tariffs under the FTA which has to new large farm and factory
seen Korea become the US’s developments from local
number two export market; communities in some regions;
• The development of large • The affordability of safety-net
scale factory operations for regulations for farm producers in
export in the Western half of more volatile markets.
the US (a number of which are
joint-venture partnerships with However, at this stage, the intensity
European export firms); of these pressures on US milk
production are well behind the
• The active physical presence of
pace of community expectations
industry organisations like the US
in competitor regions like the EU
Dairy Export Council (USDEC) in
and Australia.
major demand markets in Asia on
trade development missions;
• Significant uptake of genetically
modified herbicide tolerant and
enhanced digestibility lucerne/
alfalfa9 and increased ear
biomass and high amylose
content maize10 has improved
productivity in US agriculture.
8
IDF – The World Dairy Situation 2018, Page 8
9
https://www.ers.usda.gov/amber-waves/2017/may/genetically-modified-alfalfa-production-in-the-united-states/
10
http://www.isaaa.org/resources/publications/briefs/53/default.asp
14 Australian Dairy Situation AnalysisNew Zealand: Australia’s competitiveness with New Zealand is critical
to Australian dairy farming due to the Closer Economic Relations trade
agreement signed in 1983 which effectively treats New Zealand as the
seventh state of Australia for purposes of trade in goods and services
between the two countries.
New Zealand’s milk production have subsequently signed FTAs
has grown strongly over in the with China, New Zealand retained
past two decades (although the a clear tariff preference for its
pace of growth has slowed in products and first-mover advantage
recent years). This growth has been in the China market over much of
aided by several factors including the past decade. This allowed it
an entrenched enterprise culture, a to expand exports of products like
focus on wealth creation and dairy’s cheese to China by 30 per cent per
greater profitability compared to annum from 2012 to 2017 and to
other land uses which has seen the secure more than 50 per cent of the
significant conversion of other farm expanding Chinese import market
land into dairy production. for this product.12
While small alternate pathways As with other dairy producing
to market exist, New Zealand’s industries, there are issues that
industry development is closely may limit the future growth in
linked to the dominant position of its New Zealand milk production
major processor, Fonterra. This has and exports. These include:
allowed it to develop a consistent
• Regulatory measures imposed
export vision for the ‘industry’.
by regional councils, such as
Australia’s competition laws have
limits on stocking rates and
specifically excluded such a market
water access to address the
dominance position of one player in
environmental impact of milk
a similar way to New Zealand.
production in sensitive areas;
Fonterra has also used its control • The increased need for
over seasonal milk supplies purchased feed on larger scale
to invest heavily in some very farm units that will introduce new
large-scale export commodity costs, volatility and complexity
production plants (for milk powder to farm systems;
and cheese).11 These plants have
• Reduced land conversion
much lower per-tonne production
opportunities; and
costs than their Australian
counterparts, a factor that has • Increased production costs,
been very important in maintaining especially in South Island
New Zealand’s competitiveness in enterprises as they seek to
international markets. lift land and cow productivity.
The importance of New Zealand
dairy exports to its economy has
also meant that dairy interests given
a strong focus in that country’s
trade negotiations. The NZ–China
FTA provides a good example
of how this has benefited the New
Zealand industry. While other
countries, including Australia,
11
Fonterra’s investments from 2012–16 in this area exceeded $AUD 2 billion. Rabobank’s – Asia’s Fast Moving Cheese Markets, September 2018,
Page 6, notes that following a NZ$240 M investment, Fonterra’s Clandeboyne Mozzarella cheese plant is the largest in the Southern hemisphere
and its patented technology allows the firm to control a significant share of China’s pizza cheese trade.
12
Ibid.
15Australian Dairy Plan
Commercial scale Fonterra is by no means unique in With Australia’s major export
and partnerships this regard. Other major firms that competitors continuing to grow,
have utilized this approach include: this situation has led some
As the above section identified,
buyers to question the ongoing
all major dairy producing countries • Saputo (Canada) which has
significance and relevance of
face issues that could limit their expanded operations into the
Australia as a supplier into the
future growth in domestic milk USA and Australia;
global dairy marketplace.
supplies, and their ability to meet • Glanbia (Ireland) which has
rising world dairy demand. major joint venture processing Industry, however, has sought to
investments in the USA; re-affirm its export commitment,
These constraints may be new
working with government to push
(and more environmentally focused) • Lactalis (France) which has
for further dairy trade liberalisation
but world dairy has faced such operations in the USA, Australia
and individually working to
constraints before. A 2002 review and Asia to underpin its global
reinforce positive consumer
by Babcock13 identified how many brand strategies;
perceptions about the quality,
of the world’s largest, and more • Yili (China) which has invested safety and integrity of Australian
successful, dairy processors had in New Zealand manufacture industry practices and products.
maintained effective company supply base, and
growth strategies in the face of To date, Australia has secured
• Nestle which has joint
limits on raw milk supply using a 14 bilateral trade agreements.
partnerships with multiple
combination of: Eleven of these are currently in
partners across a range
force – New Zealand, Singapore,
• Maximizing their manufacturing of regions.
Thailand, USA, Chile, ASEAN
efficiency (through scale
As a result, many of the world’s (AANZFTA), Malaysia, South Korea,
or technology),
major dairy players are now well Japan, and China – while a further
• Developing new markets for placed to operate across multiple three – Peru, Indonesia and Hong
their product in developing market and policy settings, and Kong – are awaiting ratification.
dairy markets; have a reduced dependence/
Australia is also a member of
• Securing access to increased focus on industry developments in
the 11 nation Comprehensive
milk supply – including through individual dairy producer countries.
and Progressive Agreement for
cross-border alliances; Consequently an Australian brand
Trans-Pacific Partnership
• Building market share and for dairy products has less capacity
(TPP-11) which entered into force
market power through their for impact in overseas markets.
in December 2018. The provides
brand portfolio. additional access rights for Australia
Many of the world’s major dairy Australia’s performance – into markets including Brunei,
firms have continued to pursue a comparison Canada, Chile, Japan, Malaysia,
these strategies over the past Mexico, Peru, New Zealand,
An irony of recent world market
decade to position themselves Singapore and Vietnam.
developments is that, while global
to meet rising dairy demand dairy demand is increasing, with Given with a range of competing
in emerging markets in Asia much of this growth being driven FTAs in place, it should be
and Africa. by markets that Australia is well recognised that the access rights
Fonterra, for example, has placed to service, local milk conferred on Australian dairy
actively pursued a strategy of production and export availability exporters by these agreements,
developing a ‘global’ farm supply have stagnated for almost 20 years. in some cases, only match those
and manufacturing footprint As noted before, a number of factors given to our competitors. So, while
(covering Europe, Asia, Oceania (drought, company collapses, they are essential for Australian
and the Americas). This allows it water availability, payment step dairy exports to remain competitive
to try and match demand growth downs in the wake of market crises in future, they do not always confer
in particular markets with its own etc.) have combined to badly affect major commercial advantages to us
multi-hub supply sources. farmer confidence, profitability and in all emerging markets.
production with a resulting decline
in regional milk pools even though
local consumption of dairy has
held firm.
13
W. D. Dobson and A Wilcox – How leading International Dairy Companies adjusted to Changes in World Markets- Babcock Institute Discussion
Paper 2002
16 Australian Dairy Situation AnalysisRelevance: While still a major global dairy exporter, our relevance on global markets is being
questioned because of our shrinking scale and competitiveness.
Global dairy markets hold significant Despite the strong brand and The two dairy commodities that
potential for the Australian historical presence Australia has have experienced the most
industry if our industry is able in international dairy markets, significant growth in international
to service market opportunities. some buyers are now questioning demand in recent decades are
These opportunities are being driven the ability of Australia to supply cheese and Whole Milk Powder
by demand growth, which in turn is future needs of dairy products. (WMP). World exports of each of
being driven by positive economic The changing production these two products have effectively
growth rates. The perception landscape in Australia is also doubled since the early 2000s to
in some markets that imported encouraging many Australian reach roughly 2.4million tonnes per
products are safer, rising incomes, dairy processors to reassess their annum in 2018. However, Australian
comparatively high birth rates and markets and reprioritise based on production and exports of these
increasing refrigerated infrastructure potential returns. products have not kept pace with
expanding opportunities for this world market growth.
As noted previously, in the late
fresh product.
1990s Australian dairy supplied Australian production of cheese
Trade data suggests global dairy around 16 per cent of measured has been relatively flat and exports
export trade volumes increased world exports of dairy products.14 have slowly dropped below 200,000
by more than 2.5 million tonnes The two largest local firms (MG tonnes per annum. As a result,
(21 per cent) between 2012 and and Fonterra) each separately Australia’s export market share
2018, while Australian dairy exports accounted for about 5 per cent has halved to less than 10 per cent.
according to the ABS increased of total world trade by volume. The limited growth in Australian
22,364 tonnes (3 per cent) over the By 2018, Australian dairy’s share cheese supplies also restricts local
same period. of (an admittedly expanded) industry’s capacity to participate
export trade has fallen to around in growing world markets for whey-
6 per cent.15 No local firm accounts based products.
for anywhere near 2 per cent of
In the case of WMP, recorded
this trade.
Australian production and exports
Figure 3: Exporter Shares – Sourced from Dairy In Focus and IFCN. have steadily fallen over the
past decade, with the result that
Australia’s share of world trade
has fallen from 13 per cent in 2000
to under 5 per cent in 2018.
Australian imports of both cheese
and WMP have risen sharply in
the past decade. In the case of
cheese this is likely to reflect local
companies maintaining export
volumes while using imported
bulk cheese to meet demand from
certain domestic sales outlets.
In the case of WMP (and imported
lactose and whey products) imports
are most probably re-exported as
recombined retail powder products.
The benefits accruing to the
local dairy industry from this
development are limited at best.
Source: Dairy Australia Source: https://ifcndairy.org
14
ADC – Dairy Compendium 2001, Page 54.
15
IDF – The World Dairy Situation 2018, Page 7
17Australian Dairy Plan
These raw trade data do not, by Australia has also successfully
themselves, imply that Australia established retail and food service
has no capacity to regain position sales channels for shorter shelf life
in world dairy markets and trade. products like yogurt and milk across
As Rabobank has identified:16 Asia in recent years. This is providing
a positive platform for industry to build
• Australia has a strong reputation
outlets for more value added products
with dairy buyers in Asia and
such as cheese in the years ahead.
beyond as a reliable supplier
of technically advanced, However, perhaps the key driver
high-quality, safe products. of Australia’s future export market
• The industry continues to relevance will be its capacity to
have access to a strategic restore some level of sustained
milk pool which it can use to growth in local milk production in
deliver significant volumes of coming years. This is needed both
competitively priced products to convince buyers that Australia
to key markets in Asia. retains a capacity to meet emerging
product demand and to ensure that
• Against this, Australian dairy
local factories have sufficient
manufacturers no longer appear
throughput volumes to generate
to have any absolute production
utilisation synergies and keep
cost advantages against
processing costs competitive.
major competitors.
• So Australia remains vulnerable
to competition from alternative
exporters, with improving access
rights that operate larger scale
plants and have reliable year
round milk pools.
There has been substantial investment
in recent years to upgrade and expand
dairy manufacturing operations in
Australia and to set up a number
of greenfield powder and liquid milk
plants for export sales. While these
upgrades are important in promoting
industry competitiveness, in general
they have not been designed to match
the scale of operations now present in
many overseas operations.
16
Rabobank – Asia’s Fast Moving Cheese Markets, September 2018, Page 8
18 Australian Dairy Situation AnalysisVolatility: With the gradual removal of quotas and export subsidies overseas, volatility in
dairy markets has increased.
Unlike most of our competitors, Australian dairy farmers operate in a deregulated Compared to New Zealand, the
and open market, and have done so for almost 20 years. This does make us Australian milk price does not vary
more exposed as an industry to the global market shocks that increasingly define as much from year because of
the dairy industry. reduced exposure to international
markets (Australia exports less
Dairy commodities prices are extremely volatile, commonly perceived as one
than 40 per cent of milk production
of the most volatile of all globally traded commodities. More specifically, it
compared to New Zealand
is reported that WMP prices are more volatile than other key traded global
exporting around 95 per cent of
commodities such as sugar and oil (WMP claims to have a volatility > 60 per cent
milk production). While Australian
versus sugar at 26 per cent and crude oil at 22 per cent (Commerzbank, 2016;
farmgate prices avoided the rapid
Fonterra, 2015)).This is in no small way due to the fact that globally traded dairy
and prolonged drop New Zealand
commodities are arguably more sensitive to a variety of external impacts that can
dairy farmers experienced between
variously affect milk supply and demand.
2013 and 2015, it has spent the last
Increased levels of market and margin volatility within the industry have three years settled around levels
undermined confidence in the outlook for many farmers, who are seeking reliable not since seen since 2009. The
returns on which to build a longer term future. New Zealand milk price has since
Figure 4: Industry volatility as indicated by farm business profit
recovered in US dollar terms to be
the equivalent milk price in the USA
or EU-27 average.
In the past decade, dairy market
returns have been greatly affected
by several unexpected market
shocks. Some obvious examples of
this include:
• The step down in farm gate prices
following the Global Financial
Crisis and its impact on world
trade and pricing;
• The flow effects of Russia’s
2014 ban on cheese imports
While world dairy trade is growing, it still represents less than 10 per cent of that carried through into
global dairy production. So dairy remains a ‘thinly’ traded commodity, and significant temporary downturns
international dairy prices remain susceptible to market shocks. in international cheese prices
Figure 5: International farmgate milk price comparison (USD/100kg) and an extended fall in world
Skim Milk Powder (SMP) prices
(following a build-up of surplus
SMP stockpiles);
• More recently, the United
States has imposed higher
tariffs on a range of imported
products. Some US trading
partners, such as China,
have retaliated with their own
tariff increases (particularly
on US agricultural exports).
19Australian Dairy Plan While these disputes raise the farm gate milk prices. Coupled with will vary over time, affecting dairy scope for opportunistic short term increased volatility in the availability markets, competing foods and input sales for exporters like Australia, and pricing of key production inputs costs. It is imperative that Australian ultimately they raise market such as water and feed, this has dairy industry participants build uncertainty and volatility due to undermined local farmer confidence volatility into their business potentially adverse trade diversion in the long term dairy market expectations and resilience into impacts and the reduced clarity and outlook and the scope to extract their business practices. predictability of market conditions reliable returns from their milk on and opportunities. which to build a longer term future. Australian dairy farmers operate The map below is a summary of the in a deregulated and open market, variables identified in Horizon2020 leaving them quite exposed to that would drive greater volatility the product price adjustments in food and dairy markets in the induced by global market shocks next decade. The coincidence and and associated flow on impact to relative intensity of these influences Source: Horizon2020 20 Australian Dairy Situation Analysis
The supply chain
Processor investment: Processors have invested heavily on that back of clear opportunities
for the Australian dairy industry but are now struggling to fill their plants. Production growth is
required but at the moment processors are transporting milk to fill regional shortfalls.
The underlying competitiveness and attraction of the Australian dairy is However, reduced milk flows in
illustrated by the estimated $3 billion that processors have invested in many regions around Australia are
acquisitions and upgrades in Australian dairy assets over the last five years. straining production economics
Figure 6: Investments, acquisitions and upgrades in the Australian dairy industry of the newly constructed plants.
At the time several new plant
construction or upgrades were
budgeted for, industry confidence
and growth forecasts for
Australian milk production were
substantially stronger. The current
reduced milk production levels are
requiring processors to:
• Concentrate their fixed overhead
recovery over a smaller volume
of milk inputs and finished
product outputs
• Face increased competition for
raw milk thereby increasing the
cost of their main input.
The dynamics of the domestic
and international markets are
contributing to growing pressure
on dairy processor margins.
As Australia is an open market for
dairy, local dairy manufacturers
and processors compete for inputs
and sales both with international
suppliers in overseas markets and
with domestic competitors at home
in the Australian market.
Processors operating in traditionally
fresh product domestic markets
(typically based in Queensland,
NSW and WA) earn on average
over 70 per cent of their revenue
from fresh drinking milk. Yoghurt,
cheese, cream, other dairy
products and a relatively small
amount of UHT milk make up the
remaining revenue.
21Australian Dairy Plan
Particularly in these ‘fresh milk states’, the widespread introduction of $1/litre Since 2011/12 Queensland
milk and private label milk at retail level has had considerable negative effects hasn’t been self-sufficient with
on industry confidence and margins. respect to milk production and
consumption and has relied on milk
Evidence supplied to the ACCC Dairy Inquiry suggested that, while private label
produced in NSW to fill seasonal
contracts are profitable for some processors in isolation, many private label
gaps in production. (see figure 8
contracts are at best profit-neutral for processors and that firms may operate at
and figure 9). Reduced regional milk
a loss once overheads are fully accounted for. It is well recognised that processor
flows since 2017/18 have meant
margins are better for branded product, compared to private label equivalents.
that there is now a combined QLD
With this being the case, the discount milk policies have eroded the profitability
and NSW seasonal milk deficit, with
of the broader supply chain by reducing the market share of branded milk.
this gap having to be filled with milk
Indirectly, there has been no question about the impacts of heavy retail price shipped north from Victoria.
discounting and how it has eroded the perceived value of dairy by consumers.
Dairy farmers have felt the emotional impact as they invested their livelihood
into caring for animals and producing fresh milk in an industry that appears to
be de-valued.
Traditionally fresh milk production states (NSW, Queensland, and WA) supplied
milk to fulfil domestic demand requirements. However, reduced milk production
in these regions in recent years has created significant supply tension in the
Australian domestic market.
Figure 7: Movement of milk around Australia
As indicated in figure 7 ‘movement of milk’, there are clear supply pathways
moving milk from production surplus areas in the south eastern states, further
north to meet seasonal supply shortfalls.
Often this milk has been transported to meet domestic market supply contracts
(for retail, food service or industrial users) for fresh, short shelf life products
— which means processors have limited scope to use global suppliers to meet
their obligations.
In times of production surpluses in south eastern states this isn’t a problem as
the south eastern milk price is generally lower than that for northern and western
milk production states, suggesting freighting milk up the eastern seaboard, or
fresh manufactured product across the Nullarbor to WA is economically viable.
However, milk production dynamics within Australia are changing.
22 Australian Dairy Situation AnalysisFigure 8: : Combined NSW & QLD Fresh Milk Balance However, the 2018/19 season
has been significantly affected by
drought, reducing milk available to
fill this NSW/QLD gap and raising
significant concern amongst some
processors as to how (and at what
expense) they will fulfil contractual
supply obligations.
This shortage of milk also means
processors have needed to
buy milk off each other to fill
contractual obligations. This milk
is often procured at a price higher
than average farmgate milk prices
off the liquid milk spot market.
This is not an open and transparent
market, so farmers do not receive
pricing signals to produce more
milk on the basis of these inter-
Figure 9: Queensland Fresh Milk Balance processor purchases of milk.
The open Australian market
also allows customers to fulfil
their requirements with imported
dairy products if they are not
concerned about country of origin.
A combination of the declining milk
pool and choices to export dairy
product to some markets rather
than focus on the domestic market
has opened the door for significant
growth in dairy imports, which
have more than doubled in the
last decade.
Figure 10: Australian dairy import volumes The combination of a gradual
decline in dairy production volumes,
competition for milk at the farm
gate and significant competition
from imported dairy in Australian
domestic market is ratcheting up
the challenges faced by processors
in the Australian market.
23Australian Dairy Plan
Supply chain divergence: Fierce competition has challenged our capacity to collaborate.
The Australian dairy industry has Figure 11: Horizon 2020 working group scenarios for dairy industry future
seen a more intensely-competitive
environment between dairy
companies which are offering
different propositions and business
models through to customers.
Industry has collaborated in limited
areas where necessary but this
is far less obvious than was the
case a decade ago. The more
competitive climate has meant there
are winners and losers, and less
integration results in more exposure
to volatility.
The Horizon2020 project17
completed in 2013 identified
four potential scenarios for the
dairy industry of the future along
dimensions of; an integrated
or fragmented industry where
participants collaborated or worked
Over the last five years the industry has unfortunately drifted toward the
closely with market (integrated),
Scenario 4 (bottom left), demonstrated by declining milk production volumes,
or pursued individual interests and
limited post farmgate collaboration, a high level of competition and limited
had limited farmer ownership post
farmer ownership beyond the farmgate.
farmgate (fragmented). The second
dimension of these scenarios The significant diversity in the industry is a reflection of the many groups of
was growth or contraction in milk industry stakeholders pursuing what they’ve identified as the ‘best strategy’.
production volumes. Yet the industry could be more successful in responding to the external
environment with a coordinated approach.
17
https://www.dairyaustralia.com.au/about-dairy-australia/about-the-industry/horizon-2020
24 Australian Dairy Situation AnalysisOwnership structures: Processor ownership structures have evolved from the traditional
cooperatives which is also influencing processor decision making.
Processors occupy a critical position in the value chain between producers and One of the advantages multinational
consumers of dairy products and ingredients. processors offer customers is the
notion of consistent supply from
The importance of processing capacity has also been recognised in the
multiple origins. This consistency
prevalence of cooperative ownership of processing infrastructure by farmers
can be provided because of the
during the history of the Australian dairy industry. In a global context there are
internal standards and processes
still many large cooperatives in existence today, but the herd has progressively
of the organisation in all of the
thinned over the last decade. There are a number of reasons, from strategic
countries in which it operates.
missteps to improving access to capital and mitigating redemption risk.
These new ownership structures
In the context of the Australian dairy industry, the share of milk processed by
add complexity to traditional
cooperatives has gone from ‘major’ to ‘niche’ in just a few years. In the late
country of origin marketing
1990s, eight locally owned dairy firms18 (six of which were farmer-owned co-
because multinationals operate
ops) processed and sold around 85 per cent of Australia’s milk supply. The three
in multiple jurisdictions. In that
largest cooperatives controlled around 60 per cent of all milk processed.
context they are now looking to
Figure 12: Australian Dairy Manufacturing By Ownership Type, Market Orientation manage potential regional risk
that come with limiting marketing
efforts to only one country of origin.
This may mean that some firms are
more willing to contract for large
volumes of milk from other firms
than enter into open ended milk
supply arrangements with individual
farm suppliers.
Twenty years later, only one of these eight firms continues to operate
independently (and with an expanded business focus beyond dairy) and this is
no longer a cooperative. The factory operations of the other seven firms have
either been rationalised, closed or incorporated into the businesses of major
global players such as Fonterra, Lactalis, Saputo and Kirin Breweries (and, in
some cases, Bega). Essentially, Australian dairy processing has become one
of the supply hubs that major dairy players are using to meet their specific market
strategies – with these strategies largely being determined outside Australia’s
direct control.
As a result, where a cooperative might have traditionally been accountable
only to its member shareholders, the current corporate landscape has created
new dynamics which repositions the importance of Australian origin product
and means processors are accountable to shareholders and overseas
parent companies.
18
These were Murray Goulburn, Bonlac, Dairy Farmers (ACF), National Foods, Warrnambool
Cheese and Butter, Bega Cheese, Pauls (QUF) and Tatura Milk Industries.
25Australian Dairy Plan
The consumer
Sales channels: Our production mix has had to adapt to changing consumer preferences
and price/positioning competition from milk alternatives.
The Horizon2020 project identified Plant-bases now include soy, • However the industry must
an intense contest for ‘parent nuts, coconut, rice, oat, pea and positively manage how it is
brand’ trust by consumers in retail emerging sources like hemp seen by consumers keen to
food markets, which is dominated and quinoa. The products have demonstrate their care for welfare
by a core appeal to the ‘value’ also extended beyond ‘milk’ into and environmental concerns.
perception (representing ‘price ‘yoghurt’, ‘ice-cream’ and ‘cheese’. • Emerging retail channels
plus benefits’). outside of conventional grocery
Some products, particularly
It is not expected that this approach fortified soy milk and some of the and foodservice outlets offer
will change quickly due to: new pea milks, try to mimic the opportunities for real growth
core nutritional elements of milk. as lifestyles and technologies
• The entrenched desire for value influence decisions.
Others bear little nutritional
from a cautious shopping public
resemblance to the dairy products • While price discounting has
• The expansion of the Aldi and they take the name of. However, all defined the last decade of retail
Costco chains are marketed as dairy alternatives price competition, there is a
• The gradual improvement in the and attempt to mislead consumers growing view that commercial
return on investment by Coles to perceive them as such. This has capital can be gained by
been concerning for dairy industries ‘supporting the farmer’ and
Gains in grocery chains building
and government authorities around ensuring that the supply chain
consumer trust of parent brands
the world due to the significant lack is profitable. Recent fresh white
will be slow. UK retail parent brands
of perceived ‘fairness’ in the current milk supermarket developments
models started in a different place
marketing strategies being adopted have brought this consumer
to their local counterparts with a
by the alternatives. sentiment to the surface.
high-quality perception, yet have
taken 20–25 years to reach their The domestic consumer market is There are a number of strong
current levels of respect. responsible for consumption of the trends causing change in the
majority of Australia’s milk output, way consumers make their food
Australian consumers are relatively
yet grows slowly across major purchase decisions and influences
sceptical of major grocers that have
categories. But future growth is not shopping behaviour. These in turn
indistinguishable propositions.
assured, and the forces affecting have relevance for the range of
‘Gen Y’ and ‘Gen Z’ segments of the
dairy’s role are changing prospects products and usage occasions
community show less attachment
for growth are complex. A number across the dairy category.
and loyalty to ‘establishment’.
of factors have emerged that are
This implies that ‘value’ is likely re-defining the consumer market:
to remain a key plank of retailer
• There is ample scope for
propositions to shoppers, unless
growth in volume and value
there is a huge lift in consumer
as a result of shoppers trading-
sentiment and discretionary
off value, convenience, and
spending on food, which is not
indulgence priorities.
foreseen by grocers for the next
five years. • Dairy marketers have many
opportunities to capture growth
The scope for growth in unit values in an increasingly diverse market
of dairy products depends how with accelerating change due to
products can tap into the drivers the diversity of product offering
of premium, which were identified and meal and snacking occasions
during the Horizon2020 process that suit dairy.
based on feedback from retailers.
• There is widening scope to get
The last decade has seen a more more product into convenience
diverse range of products marketed purchases, where there is less
as dairy alternatives, with wide price-sensitivity.
variance as to the functional and/
or nutritional substitutability of
these products for dairy products.
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