With the beginning of the 2017–18 season, it’s worth looking back over some of the changes that have taken place in the Australian dairy industry, and examining some emerging trends as we seek a clearer picture of where the Australian dairy industry is headed.
Firstly, there has been a growing consumer appetite for butter and saturated fats once again both in Australia and in countries such as the US, and a decline in sales of margarine substitutes.
In part this is due to a changing understanding of the risks of saturated fat consumption, which may not be directly responsible for cardiovascular disease, as once thought.
Whilst the demand for butter has captured the attention of the media, most of the discussion has focussed on the retail aspect of butter.
A more fundamental question is that if this demand for butter is here to stay, this will likely require long-term structural changes amongst processors.
Historically, protein has been the more valuable component within milk, with processing and payment systems developed to reflect this.
However, over the last few years the price difference between milk proteins (from SMP) relative to butterfat (from butter) has narrowed and since December 2016, has reversed itself.
Undoubtedly, EU’s intervention stockpile of SMP has distorted the market and suppressed the protein prices, and until the EU can provide clear and credible guidance on how it will dispose of this mountain of powder, it will likely be a source of instability that continues to undermine the market.
Nonetheless, with strong ongoing demand for fat, Australian farmers face a question of how to get more fat from cows and less protein, and Australian processors of what to do with protein rich skim co-products from butter manufacture.
Beyond this, what role will exports play in the Australian dairy industry?
The share of Australian milk exported in one form or another has trended downwards over the last two decades.
After steadily rising through the 1990s from 32 per cent in 1990/91 to 60 per cent in 1999/00, this proportion has steadily fallen to a low point of 34 per cent in 2014–15.
This is a function of both lower milk production, down from a peak of 11.27 billion litres in 2001–02, and a larger domestic market due to population growth which grew from around 19 million to 24.5 million over the same period.
However, since 2014–15 when milk production was 9.81 billion litres, production has fallen successively in 2015–16 and 2016–17 to 9.68 and then 9.01 billion litres, whilst the share of milk exported has increased, to 35 per cent and then 37 per cent.
With falls in Australian milk production, there were serious concerns that Australia would cease to be a major dairy exporter and cede its presence in major Asian markets to exporters from the US, EU and NZ, becoming ever more domestic-focussed.
Evidently that has not happened. Instead, what seems to be emerging is a pattern of importing to service lower-value segments of the Australian dairy market such as cheese for food-service and discounted generic shred cheese, while Australian companies focus on maintaining presence in high-value, long term markets.
Indeed, 2016–17 Australian cheese production and exports were down only slightly on last year (-2 per cent), while cheese now makes up a significant proportion of cheese consumed in Australia.
Australian butter imports have also increased strongly over the same period, with most of the product coming from New Zealand.
Part of the explanation for this pattern of simultaneous imports and exports may be the nature of Australia’s free trade agreements. Australia has a free trade agreement with New Zealand, giving New Zealand favourable access to a large dairy market.
At the same time, Australia has a free trade agreement with Japan (JAEPA) giving Australia better access to the Japanese market compared to the other major global dairy exporters.
Australia also has a free trade agreement with China, which importantly does not include the range of tariff restricted quotas for dairy products that feature in New Zealand’s own free trade agreement with China.
The effect of these tariff restricted quotas is that once imports from New Zealand exceed a certain volume, tariffs will snap back to pre-FTA levels.
Given the market access Australia has to certain Asian markets and the global supply chain links, some companies appear to be importing cheese and butter-fat products for the Australian market from overseas, whilst using scarce Australian milk to make products for international markets.
The implication is that processors cannot assume the domestic market will be there to offset volatility in the global market. Beyond drinking milk and certain fresh dairy products, almost every dairy category is potentially subject to foreign competition.
Australian companies are already competing with imports on price in the domestic market in certain categories, and this competition isn’t going away.
Historically, Australia has been a net exporter of dairy products. This was underpinned by the combination of a small population and cheap, abundant inputs meaning we had a cost competitive, marketable surplus that had to find a home overseas.
Neither of these factors are as true today as they were two decades ago; Australia has a much larger domestic market, and production costs have increased. Access to suitable land and water for dairying poses a constraint on industry production.
Faced with a smaller milk pool, numerous markets (both domestic and international) to service and a huge range of potential products, Australian processors have some difficult choices about how to extract maximum value from each litre of milk.
There is not enough milk to do everything, and processors can’t afford to have it tied up in low returning business activities.
Australia will continue to be an exporter, but the discussion needs to move beyond the volume of Australian dairy production and exports.
• Laurie Walker is industry analyst with Dairy Australia