Plant-based protein diets have been heavily promoted in recent years as traditional meat producers and dairy companies look for ways to excite consumers with nutritional, healthy and premium food and drink products. While COVID-19 has increased consumers’ interest in plant-based diets, they are also paying more attention to ingredients and practices that support safer, alternative food and drink production and innovation. For example, a third (33%) of Indian consumers* pledge to eat fewer animal products (e.g., dairy, meat) as part of their post-COVID food and drink resolutions; in South Korea, 71% of consumers** agree that climate change will have an effect on the foods/drinks they buy; meanwhile, 57% of urban Chinese consumers agree that the environment has become a higher priority since the COVID-19 outbreak. Read more
According to Maxum Foods, one of Australia and New Zealand’s principal dairy suppliers, global market fundamentals remain supportive of prices as northern hemisphere milk production peaks. Read more
Fonterra Co-operative Group Limited has announced it is looking at ways to reduce its use of coal at nine of its 29 sites as part of a commitment to transition to renewable energy.
The Australian dairy industry mandatory code of conduct will come into effect in January 2020, months ahead of schedule.
Minister for Agriculture, Bridget McKenzie, said the aim of the mandatory code is to improve the contractual arrangements between dairy farmers and dairy processors.
“As Deputy Leader of the Nationals we understand the importance of the mandatory code being delivered as soon as possible in order to provide clearer safeguards for how farmers are treated as members of the supply chain,” Minister McKenzie said.
“That’s why we have taken measures to speed up the process and deliver the code well before the original deadline of July 2020.
“The dairy industry is on notice to make sure that the contracts offered to farmers are appropriate and fair ahead of its formal introduction—the community expects no less.
“The mandatory code is an outcome of the April 2018 Australian Competition and Consumer Commission’s (ACCC) report into the dairy sector.
“Following extensive consultation with the dairy industry, a draft mandatory dairy code of conduct was developed by the department. This will be released as an exposure draft for consultation next week.
“I expect dairy processors to keep the exposure draft in mind when developing new contracts with dairy farmers in the coming months.
“Consultation on the exposure draft will be open for four weeks and, from January 2020, the industry will be bound by the new code.
“Stakeholder consultation is an essential component of the development of this mandatory code and vital to its success.
“The department has run targeted consultations on the discussion paper and code options in order to develop the draft code.
“These were held across eight dairy regions with a broad representation of farmers, processors, industry representative bodies and other relevant stakeholders to ensure view points from all stakeholder groups were included.”
The Australian dairy industry will continue to face considerable headwinds as it enters the 2019/20 season, however there are some green shoots on the horizon, according to Rabobank’s just-released dairy seasonal outlook, with the prospect of record high milk prices for southern Australia.
In its latest annual seasonal outlook, Thirsty work – A journey to rebuild begins, agribusiness banking specialist Rabobank highlights the pressures mounting on Australia’s dairy supply chain, despite the favourable price outlook, and the clear downside risks to farmgate margins if the season remains unfavourable.
And dairy companies are not immune to the margin squeeze, the report says, with the processing sector “confronted with record levels of surplus processing capacity” – in excess of two billion litres – in the new season.
However, Rabobank senior dairy analyst Michael Harvey says, there are signs of a bottoming in the margin cycle, with farmgate milk prices improving and more upside to come in 2019/20.
Releasing the bank’s milk price forecast for the 2019/20 season, Harvey says Rabobank’s global market forecasts point to an indicative weighted average farmgate milk price in the Southern Export region of AUD6.40/kgMS – a mark only attained or exceeded once in the past.
Harvey says the ability of dairy farm operators to capitalise on the higher farmgate milk prices will be determined by seasonal conditions and the cost of purchased feed.
“The importance of a timely autumn break this season cannot be overstated,” he says. “The volume of milksolids in the system is now at a 24-year low, and milk supply will drop further without an autumn break.”
Even with good seasonal conditions, Mr Harvey concedes it will be a slow recovery in the milk pool, “with the national herd and number of dairy farm businesses now structurally smaller”.
Headwinds to continue
Farmgate margins are expected to remain tight in 2019/20, the report says.
“Soil moisture profiles are below average, there are shortages of home-grown feed, and high water and purchased feed costs are leading to elevated cost of production,” Mr Harvey says.
“While dairy farm operators are mitigating the margin squeeze by making adjustments to their feeding programs and reducing herd sizes, the need for a timely autumn break is critical if farmers are to grow their own home-grown feed and create a feed ‘wedge’. Otherwise we will see feed shortages quickly emerge on-farm.”
Harvey says the Murray Dairy region, given its reliance on irrigation water, has been hardest hit, with the region’s milk pool falling by 285 million litres (year-on-year) to February 2019.
“While history has shown that, with the right settings, milk production can rebound quickly in the Murray Dairy region, the water price continues to be a key risk for the region heading in the new season,” he says.
“Looking to the new season, water prices are likely to remain high given the low water storage levels in the Southern Murray Darling Basin, and this could see milk production in the Murray Dairy region fall by a further 5.1 per cent – with risks mounted to the downside.”
Some green shoots
As the 2018/19 season winds down, Harvey says farmgate milk prices have risen to around $6.00/kgMS.
“While this has been partly achieved through a late-season improvement in commodity prices, with the slowdown in global export supplies, competitive tension here locally has also played a role,” he says.
Looking to the 2019/20 season, Harvey says global milk supplies are expected to remain tight, particularly in the first half of 2019. And this will bring further upside to prices.
“Based on this global outlook, our forecast for farmgate milk prices in the Southern Export region to average 6.40/kgMS is based on an AUD/USD exchange rate of 0.71,” he says. “However should the currency drop back to USD$0.68 – as we currently anticipate – prices could lift by more than AUD$0.20/kgMS.”
Can milk production bounce back?
In the season-to-date, Mr Harvey says the Australian dairy supply chain has already lost a significant volume of milk. And further milk losses are expected, as culling activity remains elevated and many dairy farm operators are drying their herds off early given the shortage of feed.
In the 2018/19 season, Harvey says, the national milk pool is expected to finish the season at 8.6 billion litres – down eight per cent (year-on-year).
“The Murray Dairy region has been responsible for around 70 per cent of that fall in milk supply,” he says, “yet some of the industry’s most cost-efficient plants reside in that region. And this is creating a real conundrum for the industry.”
Looking to 2019/20, Harvey says national milk production is forecast to fall by a further 0.8 per cent – assuming an ‘average’ autumn.
“As such, there are clear risks to the outlook for milk production,” he says, “as without a timely autumn break there could be another wave of farm exits and ongoing herd reduction.”
On the other hand, Harvey says, if the 2019/20 season shapes up to be supportive of good on-farm profitability, some dairy regions are well placed to rebound if they are able to build a feed ‘wedge’ for the new season.
“However, even with good seasonal conditions, it will be a slow recovery for the nation’s milk pool given the national herd and number of dairy farm businesses are now structurally smaller.”
For the second consecutive year, there are no new entrants to the Rabobank’s Dairy Top 20 list, but there’s been a slight shuffle in rankings.
The world’s largest food and beverage company, Switzerland’s Nestlé, reigns supreme on the list, but the gap between number one and number two has narrowed.
French Lactalis swapped places with Danone, moving into second place.
Danone slipped to the third spot, after divesting Stonyfield following the acquisition of WhiteWave, reducing its stake in Yakult, and selling its holdings in the Al Safi Danone joint venture in Saudi Arabia.
Dairy price recovery in 2017 has positively affected the combined turnover of the top 20 global dairy companies, which was up 7.2 per cent on the year in USD, RaboResearch has shown.
Dairy senior analyst Peter Paul Coppes said the USD five billion threshold was difficult to achieve due to a scarcity of large acquisitions or mergers.
“However, while the names have remained the same, the order shifted in 2017.”
Merger-and-acquisition (M&A) activity in the dairy sector grew in 2017, fuelled – as in other sectors – by the availability of cheap capital.
Cooperatives are still dominating, but they are also challenged. Deals between Danone and WhiteWave, and Saputo and Murray Goulburn, had limited impact on rankings within the Global Dairy Top 20.
While M&A occurs in the dairy sector, dairy acquisitions tend to be limited in size and financial impact.
There is potential for growth within increased collaborations between Chinese and non-Chinese companies. If this happens, China has the potential to create a pipeline of global management talent.
Chinese companies need to address the integration of non-Chinese management as they consider global growth opportunities.
Rabobank sees an increased amount of disruption-based M&A deals, either defensive or opportunistic.
By nature, these deals are often small and involve start-ups, but they are growing in volume.
New Zealand-Australian company a2 Milk recently expanded its range by introducing a Mānuka honey milk powder to the Chinese, Australian and New Zealand markets.
The company aims to further expand into the adult nutritional powder market.
The product combines pure a2 Milk powder with Mānuka honey, sourced from New Zealand.
The product, packed by Fonterra New Zealand, comes in a 400g tin.
Mānuka honey helps improve the digestive system, it helps with sore throats and it can aid in healing wounds.
Combined with a2 Milk, it should create a more nutritious milk.
Most cows’ milk brands today contain a mix of both A1 and A2 proteins. All a2 Milk products come from cows hand-picked to naturally produce only A2 protein and no A1.
This is because, recent research suggests that the A1 protein in regular cows’ milk might cause discomfort in the stomach.
Recently, the company was also quick to pay a $20,000 fine by the Chinese Government for using a child in its advertising.
The advertisement breached Chinese advertising regulations, which state that children under 10 years old cannot be brand ambassadors.
The company used Chinese movie star Hu Ke and her son An Ji to promote the brand.
There were 29 other companies named by China’s advertising market regulator, in July, that breached child advertising regulations.
Other regulations in advertising in China include restrictions as to how companies can advertise baby formula.
For example, it is prohibited for an advertisement to claim that it is a full or partial substitute for breast milk.
The Chinese government aims to encourage breast feeding, therefore it enforces these rules.
Bega Cheese is expanding its reach by buying a Western Australian facility for $250 million.
The company is purchasing Saputo Dairy Australia’s Koroit facility, which currently processes about 300ML of dairy products per year.
Bega expects the facility to generate about $20m at its current intake per year.
Items produced include milk, retail butter and milk powders.
As part of the transaction, Bega and Saputo entered into agreements whereby Saputi is required to guarantee the supply of 300ML milk per year until June, 2020. The transaction is subject to ACCC approval.
Bega CEO Paul van Heerwaarden said the Koroit facitily would give Bega operational flexibility its other milk processing sites.
It would also provide the cheese company with a better presence in Western Victoria, said van Heerwaarden.
“The acquisition will support the continued growth of our core dairy business and provide domestic and export customers with an expanded range of products.
“We welcome the 108 employees of Koroit to Bega Cheese.”
Bega executive chairman Barry Irvin said it was a delight to have acquired the dairy facility.
“Bega Cheese has been collecting milk in Western Victoria for almost 1 years and the opportunity to acquire such significant and quality infrastructure will cement our presence in one of the strongest dairy regions in Australia.
“We will work closely with dairy farmers to grow supply to the Koroit Facility. This is another important step in creating an Australian owned dairy and food company that is competitive and efficient in Australia and the world.”
For the last six years, big players in the dairy industry including Murray Goulburn, Parmalat, Fonterra, and Lion Dairy and Drinks, have come together to help Foodbank provide more than 8 million litres of milk to vulnerable Australians experiencing food insecurity.
“Our charity partners regularly inform us that people who are struggling to put food on the table often have to sacrifice dairy products,” said Foodbank Australia CEO, Brianna Casey.
“This makes regular milk donations from the dairy industry vitally important in providing a consistent source of calcium to Australians in need.”
This financial year, the collaboration has produced one million litres of fresh milk for Foodbank’s Milk Program. On top of this, the dairy processors also regularly donate other products from their ranges such as yoghurt and cheese.
To ensure the supply has a wide reach, each partner is responsible for donating fresh milk in specific states and territories. Parmalat provides fresh milk in QLD and the NT, Murray Goulburn in NSW/ACT, Fonterra in Victoria, and Lion Dairy and Drinks in WA, SA and Tasmania
“Our annual Foodbank Hunger Report tells us that rural and regional communities are 11per cent more likely to be food insecure than their metro counterparts,” said Casey.
“In fact, more than a third of the food and groceries distributed through Foodbank’s network of more than 2600 charities goes to country Australia.
“Despite the prevalence of food insecurity in rural and regional areas, these communities are also some of our most generous in terms of donations of milk, fresh produce, eggs, and meat, so initiatives like the Foodbank Milk Program means that Australian dairy processors are often helping farmers in quite a unique way.”
The Foodbank Milk Program is one of the food relief organisation’s longest running programs. Within six years of its launch, Foodbank has been able to deliver more than 8.6 million litres of milk to Australians in need.
“The countless meaningful contributions and extraordinary community spirit shown by our milk partners, even during tough times for the industry, has ensured Foodbank can provide one of the core ingredients of a well-balanced diet to vulnerable Australians,” said Casey.
The global dairy and soy food market will rise from US$617.9 billion in 2015 to US$773.4 billion by 2020, representing a compound annual growth rate of 4.6%, according to consumer insight firm Canadean.
The company’s latest report states that this cautious growth will be driven primarily by emerging and developing markets in Asia-Pacific (APAC), Middle East and Africa (MEA) and East European regions, in contrast to West Europe and North America, whose economic fragility has resulted in risks of weaker market growth.
“Changing consumer preferences and purchase patterns due to socio-economic and demographic changes have created new market dynamics,” said Kiran Akkineni, Analyst for Canadean.
“While the key markets of Western Europe and North America have witnessed stagnancy in liquid milk consumption paired with fast growth in processed and soy products, developing countries have recorded steep growth in demand for dairy products owing to their fairly low per capita consumption.”
Consumption of milk in North America is currently declining as consumers opt for alternative beverages such as juices and vitamin-infused water. By contrast, the rise in per capita consumption of dairy by the growing middle-class population in developing markets in the APAC, MEA and Eastern Europe regions will drive growth in the dairy and soy foods market.
Canadean’s analysis reveals that consumers in developed markets tend to base their beverage choices on their level of personalization, whether they can be consumed on-the-go, and whether they can provide a novel experience. Consumers in emerging countries including Brazil, China and India, on the other hand, place a greater emphasis on nutritional value, following health and wellness trends.
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.
Fonterra Co-operative Group has announced a net profit after tax of $506 million for the financial year ended 31 July 2015 – up 183 per cent – after a stronger second half performance in difficult market conditions.
The Co-operative will pay a final Cash Payout of $4.65 for the 2015 season for a 100 per cent share-backed farmer, comprising a Farmgate Milk Price of $4.40 per kgMS and a dividend of 25 cents per share.
Chairman John Wilson said extremely challenging trading conditions globally had affected all parts of the Co-operative’s business.
“Falling global dairy prices due to a supply and demand imbalance impacted the Milk Price, while the dividend reflected higher funding costs following significant investment in capacity to support milk growth in New Zealand, essential investments in the key strategic market of China, and the costs of maintaining a higher Advance Rate through the season.
“The strengthening of performance in the second half resulted in normalised earnings before interest and tax almost doubling, with good growth in our consumer and foodservice businesses and the results of a major push in our ingredients business to offset low milk prices with improved margins.”
Mr Wilson said that despite drought in some regions and floods late in the season, milk collection across New Zealand for the 2014/15 season to 31 May 2015 was 1,614 million kgMS, up two per cent on the previous season.