The global demand for Australian dairy products is set to grow annually by 2.4% over the next five years, according to a Rabobank study.
Australia-based Rabobank senior analyst Michael Harvey told FoodNavigator-Asia most of this demand would come from the burgeoning middle classes of India and China.
“But that is not to say that these two would be the only sources,” he added. “We expect demand to also grow in other export destinations such as Africa, Latin America, and South East Asia.”
This demand from emerging markets will help the Australian dairy sector offset the flat growth in demand from the more developed and saturated markets of Europe where economy and population growth are both slowing.
“With regions like South Asia, China, and South East Asia, Australian dairy also has the obvious advantages of geographical location, but also existing trade linkages into those markets,” he said.
Domestic pain would continue
Pointing out that the Australian market is also saturated much like other western markets, Harvey said there would also be pain in the long term with the retailer actions.
Since January 2011, both Coles and Supermarket have been in a long-running price war with milk, with the former going as far to cut the price of its house brand of milk to A$1 a litre.
“The consistent push towards private label milk brands is hurting the domestic dairy market. But while it does impact the supply chain, private labels only make up 5% of the annual dairy production,” he added.
Farmer goodwill may be more gravely affected, Harvey said. “The sentiment is that their milk is being sold for A$1 at a time when the input costs are increasing. And this sentiment keeps getting compounded.”
“They need to buy more cows”
Harvey said that regardless of the demand, there are real challenges that the Australian dairy sector faces including production disruptions owing to natural disasters in the country.
“The last decade has been about droughts and more droughts. And recently we had floods as well, though the last two seasons have been very positive for the dairy sector,” Harvey remarked, noting two years of good weather.
Most necessary for the Australian dairy sector is that dairy farmers find the appetite to spend and invest in expanding their farms to keep up with demand, said Harvey.
“They need to grow in confidence and spend on their farms. They need to buy more cows. And that is a challenge right now given that cow prices are really at their peak,” he said.
Given the dismal past perfomance of the Australian dairy sector, Harvey said the sector would have to invest in risk management tools to ensure that they are able to work against the challenges.
Australian dairy sector not immune to consolidation
Noting the ongoing drama around the sale of Crafar farms in New Zealand, Harvey said that the Australian dairy sector is not immune to any such buyout interest from domestic or overseas entities.
“Australian and Kiwi dairy farms have had continuous interest shown in them over the last 10 years. If any thing, the interest would grow from here on,” Harvey pointed out.
One of the reasons behind that are favourable seasonal conditions for the past 24 months, which has shown in the increased production. “Interest would only grow in the dairy sector if such conditions continue.”