THE START of 2019–20 has seen record high milk price announcement as processers compete for a smaller national milk pool. Cost of production is elevated, due to high cost of feed, electricity and purchased irrigated water, which is impacting farmer margins.
While global commodity markets remain well balanced, a majority of milk produced in Australia is sold on the domestic market. Thus, value creation in Australia is the most direct way to drive returns. This is especially true in domestic focused dairy regions, where global influences have a longer lead time.
Of all milk produced in Australia roughly 65 per cent is sold on the domestic market as liquid milk or manufactured dairy products. This varies significantly between states, from 100 per cent in Queensland to less than 30 per cent in Tasmania.
Liquid milk is the key dairy product sold in the domestic market (largely for practical reasons) and one of the most heavily featured in media over the past year. Following the implementation of the $1/litre price policy in early 2011, the share of private label milk sold grew to reach a peak in early 2016.
Consumers respond to media campaigns
Over the past eight years, consumers have quickly changed their purchasing behaviour follow various media campaigns.
The ‘permeate’ controversy, generated one example of a rapid consumer response. Over a few weeks, sales of private label milk plummeted and forced retailers to follow the lead of branded product lines in eliminating permeate, in order to attain customers.
The most effective media campaign against sales of private label milk sales occurred in 2016, when prime-time television panel news program The Project released a segment called ‘Milked Dry’.
They urged consumers to purchase company branded products to support dairy farmers. In addition to a sharp immediate response (an approximate 10 per cent change in market share virtually overnight), full year sales data showed private label share of the total fresh milk market drop more than 7 per cent.
This demonstrated consumers’ willingness to pay more for a product if they believed it benefitted the farmer.
Interestingly in late 2018 when retailers introduced a ‘drought levy’ on private label milk, consumers chose to purchase more private label milk as it was advertised as an effective way to support dairy farmers.
Growth in domestic market
The end of the $1/litre milk price point has generated additional value growth in the domestic market since the start of 2019. Evidence from Dairy Australia’s Domestic Sales data suggests that an additional $25 million has been added to the dairy supply chain since the $1/litre price point was removed, during the first quarter of 2019.
While the increase in the price of private label milk has captured attention, unit value growth for other smaller dairy product segment continue to deliver additional money to the dairy supply chain.
This has been particularly true for sales of flavoured milk and deli-style cheese.
Flavoured milk is a significant value creator for dairy companies, due to its premium retail price and growing demand across the country. It is likely to remain an important product in the future, due to its ability to generate value growth in the domestic market.
Deli cheese also continues to grow in popularity with Australian consumers and deli cheese sales made up 17 per cent of cheese sold. This marked an increase of almost 6 per cent compared to 2009 as it is becoming increasingly popular to consume a wide range of cheeses.
Deli cheese is retailed at a significantly higher price compared to chilled cheese and continued to be the main driver of value growth.
Rain will be of paramount importance to improve conditions this season and relieve cost-pressures on farm.
While domestic value growth won’t change farmers’ cost of production, it can provide some grounds for optimism about the opportunities that do exist, even in a challenging market.