Markets

Australia becomes more entwined with global markets

By Laurie Walker

AUSTRALIAN DAIRY farmers produced an estimated 650 million litres in March, an increase of 2 per cent on March 2017.

On current numbers, this means Australian milk production for the 2017–2018 season is ahead by 3.4 per cent on a Year-To-Date basis, compared to the 2016–2017 season.

March production was up strongly in South Australia (around 12 per cent), Tasmania (around 11 per cent) and Northern Victoria (around 7 per cent), whilst growth in drinking milk oriented states such as New South Wales (-0.3 per cent) and Queensland (-5.4 per cent) show an altogether different trend.

Severe three month rainfall deficits have developed across much of east and southeast Australia, along with severely depleted soil moisture levels.

Whilst parts of New South Wales and Queensland have been experiencing these challenging conditions for a while, the effects are beginning to show further south, with total Victorian milk production for March up just 0.1 per cent.

Prolonged lack of rainfall, severe dryness and record breaking temperatures for April contributed to poor pasture conditions and bushfires in western Victoria, with milk production volumes down 3.9 per cent and 2.1 per cent in Gippsland and western Victoria respectively.

Whilst the BOM’s latest Climate Outlook suggests above average rainfall for parts of eastern Victoria and northeast Tasmania, much of this is expected in June.

The lack of a proper autumn break and the ongoing effects of the St Patrick’s Day Fires will continue to affect milk production, however with Victorian milk production still ahead by 3.7 per cent on an YTD basis, a projected total national milk production of over 9,200 million litres still looks probable.

Available data from Australian manufacturers continues to show a shift away from the butter/SMP manufacturing stream towards the production of Cheese and WMP, as manufacturers respond to the better overall returns offered by this stream.

Alongside these changes in Australian manufacturing mix, the composition of Australian imports also appears to be changing.

Based on Australian Bureau of Statistics (ABS) import data to February, the growth in Australian cheese import volumes appears much more subdued in the order of 5 per cent, or on trend for around 120 000 tonnes for the full 2017–2018 financial year.

Whilst still a record amount of cheese, this growth is significantly less than the surge seen in 2016–2017, when cheese imports grew by an astonishing 26 per cent.

This growth has come entirely from the US, with cheese imports from New Zealand down, and total volumes out of the EU flat.

Perhaps more extraordinary is the trade in infant formula.

Australia imports significant quantities of retail-ready infant formula, primarily from New Zealand, which are sold on the shelves of Australian supermarkets and pharmacies.

Based on available ABS data, Australian imports of infant formula have grown by 62 per cent this year, and are on track to hit almost 50 000 tonnes by the end of 2017–2018.

For some perspective, in 2011–2012 Australia imported just 6000 tonnes of infant formula.

Whilst there is a lack of clear data on the subject, actual domestic demand seems unlikely to account for all, or even most of this increased demand.

Since 2010–2011, ABS data shows that the Australian infant population (ages 0–3) has increased from 1.17 million to slightly over 1.25 million in 2016–2017, for a growth rate of 1.0 per cent, whilst sales of infant formula have grown by around 12 per cent annually over the same period.

Demand from the so-called Daigou, shoppers who buy this product off Australian shelves and then re-export to countries such as China via unofficial channels, may explain some of this phenomenal growth.

This same demand for Australian infant formula has also seen continued growth in direct Australian exports, with export volumes up 34 per cent YTD, and on track to exceed 30 000 tonnes by the end of 2017–2018.

Close to 90 per cent of this infant formula is exported to China and Hong Kong, where Australian dairy products attract a significant premium.

In 2016–2017, Australia exported around 24 000 tonnes of infant formula, worth $US310 million, whilst importing 30 000 tonnes worth $US240 million. The case of cheese or infant formula also illustrates a key point worth considering in light of the ongoing change and disruption in the Australian dairy industry.

Namely, that the global market is going to become more, rather than less important, for the Australian dairy industry.

Historically, Australia’s position as an exporter has always been around the idea of producing more than we could consume, creating a marketable surplus that could be sold into markets at a price lower than our competitors.

Now faced with a larger domestic population and smaller total milk production, the marketable surplus equation is undoubtedly smaller than it used to be.

Secondly, Australia’s status as the lowest cost producer is less assured than it used to, as a combination of factors have led to rising costs and more intensive production methods.

Australia certainly exports less both in absolute terms, and as a percentage of milk produced than it did immediately after deregulation.

However, when faced with the latest industry crisis, a fall in milk production did not necessarily lead to a decrease in Australian exports, however imports did increase noticeably.

Backed by Free Trade Agreements, Australian companies have a number of high value export markets, that if forced to make a choice due to limited milk supply, they will service ahead of segments of the Australian market.

Conversely, Australia also has Free Trade Agreements with two major dairy exports (New Zealand and the US), and is negotiating a further one with the EU.

Like it or not, Australia is locked into the global dairy market, through Free Trade Agreements and the presence of multinationals such as Fonterra and Saputo, which have global ambitions, with supply chains and strategies to match.

Australia is now an importer and an exporter of dairy products, and as shown in the case of infant formula can be a net importer by one measure and a net exporter by another.

With this in mind, the idea of two distinct domestic and export markets for most dairy products appears increasingly irrelevant, meaning that rather than retreating from world markets to focus on satisfying local demand, the Australian dairy industry will become only more interlinked with global markets.

While this offers opportunities, it is not without its challenges as the industry heads into new territory with the 2018–2019 season approaching.

• Laurie Walker is an industry analyst with Dairy Australia.