Is the dairy industry in Australia set to sour?

Over the past 10 years, the Australian dairy industry has performed something of a miracle considering the various circumstances it faced. Sam Murden asks if this is likely to continue.

Any farmer worth his/her salt across the country would point to the Millennium Drought – the drought affecting most of Australia from 1995 to 2009 as the darkest days for the agricultural sector.

It’s worth remembering that in the past, Australia had previously relied solely on water from dams for agriculture and consumption. The drought changed the way Australia treated its water resources, placing tough restrictions on industries.

Add on the impacts of the Global Financial Crisis in 2008, which significantly slowed Australia’s economy and trade and the situation for Australia’s dairy industry looked dire.

Eight years later, the dairy industry in Australia has survived against all odds and has been experiencing a relatively slow trend towards growth.

But new challenges have come to fruition. According to the specialist advisory business focusing on the Australian Food & Beverage industry, Comet Line Consulting’s Ben van der Westhuizen, Dairy has been the most active sector in the domestic and international industries.

“The demand for Australian dairy products in Asia resulted in a rush to secure supply and gain access to expanded ranges,” van der Westhuizen said.

“We expect the pace of the deal making sector in the dairy making sector to continue well into the latter half of 2016. Investors are seeking to secure source of supply and create opportunities to expand product ranges in order to meet the rising demand from Asia and specifically China.”

Global dairy production

In October 2015, New Zealand dairy co-operative, Fonterra, sold a 9 per cent shareholding in Bega Cheese (which it had acquired in 2013). The shareholding in Bega Cheese was considered

non-strategic and Fonterra intends to invest the proceeds on disposal in higher value-add dairy products.

Global demand for dairy remains sluggish. The main factors affecting demand are declining international oil prices, economic uncertainty in a number of emerging economies and a slow recovery of dairy imports into China. On the supply side, in Europe, milk volumes have continued to increase significantly and these surplus volumes are being exported.

Declining international oil prices have weakened the spending power of countries reliant on oil revenues. As many of these countries are major dairy importers, the situation has contributed to the weakening of global demand for dairy.

Although New Zealand farmers have responded to lower global prices by reducing supply, that has yet to happen in other milk production regions, including Europe where milk volumes continue to increase.

It’s not just industry analysts that are keeping a close eye on the increasing role of China’s renewed interest in Australian dairy products and, in particular, it’s powdered milk.

The story is in the stats

Each year, the Australian Department of Agriculture and Water Resources publishes an annual compendium of historical statistics covering the agriculture, fisheries, food and forestry sectors.

The report also contains statistics on agricultural water use and macroeconomic indicators such as economic growth, employment, balance of trade, exchange rates and interest rates – alternatively known as the Australian Commodity Statistics.

In the 2013-14 period, milk exports grew slightly from the period year: 9, 372ml in 2013-14 up from 9,317ml in 2012. 2014-2015 saw a substantially larger increase in milk production with almost 9,732 ml being produced.

Interestingly, butter and cheese production over the last three years has largely stagnated – cheese production in particular has not risen above 350kt since 2009, whilst butter fluctuated from 4,142kt in 2011 to 4,542kt in 2014.

For Dairy Australia Industry Analyst John Droppert, lower milk flows had given Australian processors room to move in adjusting their product mix to optimise returns in response to lower commodity prices.

“Continuing supply growth is the key factor keeping the market depressed, but prices are ultimately a function of the supply/demand balance, and dairy demand hasn’t kept pace,” Droppert said.

“In recent months, growths in global demand have been relatively small and on a slowing trend as inventories have built up.”

Since the dairy industry is a predominant source of greenhouse gas emissions, pressure to reduce them was expected from the Government.

The National Farmers Federation therefore developed a strong policy position on agriculture reduction schemes, and Dairy Australia has had significant input into it.

“The dairy industry needs new skills and capabilities to respond to climate change. Some capabilities can be brought in via strategic alliances (i.e. climate science and seasonal forecasting) when building specific dairy industry capability is not appropriate,” Droppert said.

Regional challenges remain, especially where drinking milk is the focus: significant differences exist between the industry’s geographic regions from both a natural resource and economic perspective.

The WA, QLD and northern NSW regions are closely tied to the fresh drinking milk market with a requirement for more expensive year round supply systems on farms.

In other regions there is volume manufacturing capacity (cheese and powders) and farm gate pricing is much more closely linked to the international commodity prices. There has been a trend towards consolidation of manufacturing in SE Australia which is unlikely to be reversed.

The recently announced arrangements between industry co-operatives and a major retailer may lead to changes for the drinking milk supply market, with new processing capacity intended in Melbourne and Sydney. The touted “price premium” may provide more dairy farms with improved profitability and longer term financial certainty but this is yet to be proven.

In any case, addressing the diversity of needs across Australia’s dairy regions is one of the key challenges in delivering appropriate research development and extension services.

NSW Dairy defies expectations

The NSW dairy industry is worth about $497 million in gross value of production in a total state value for agriculture of $12 128 million. The NSW industry is based largely (around 70 per cent) on the production of milk for domestic consumption, mainly fresh bottled milk.

NSW has the widest differences among dairy regions of any Australian state, as highlighted in the variety of feedbase systems. These differences even out the quality and quantity of milk supply during extreme weather events, making them a distinct advantage during bad weather.

The NSW dairy industry has undergone a decade-long period of consolidation and rationalisation throughout the supply chain. Milk pricing has fluctuated from year to year as a result of competition between the major processors in negotiating supermarket supply contracts, the ‘milk price war’ between the two major supermarket chains, and a lack of processing capacity to deal with milk supply over and above the needs of the liquid milk market.

Despite indications of strong demand for dairy products globally, NSW dairy farmers must continue to manage their businesses to account for a range of external risks in order to remain viable. Dairy production systems in NSW will need to be adaptable and resilient in the face of the likely market volatility affecting milk price, labour supply, climate and input costs. Farm incomes are under pressure from milk pricing competition, increasing input costs slowing of productivity growth in recent times.

Challenges to growth in NSW include managing a dairy business in an increasingly uncertain and volatile environment, the influence of processors and the milk marketplace, managing pasture-based farms in a changing climate, declining herd fertility, and access to resources and markets in an increasingly urbanised south-eastern Australia. All of these factors increase risk.

The challenges that the dairy industry faces on the road to maintaining sustainability are too difficult for any one organisation or company to face alone. Ultimately, cooperation between farmers, manufacturers and producers can alleviate (but not prevent) the impact that falling prices would have on the market.

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