Unprecedented volatility in the international dairy market combined with the onset of the global financial crisis has had a significant impact on the fortunes of the milk and cream processing industry.
The industry has also had to contend with adverse climatic conditions, rising production costs and an increasingly health conscious marketplace. Over the past five years, there have been dramatic increases in milk prices due largely to rapidly rising demand from Asian markets that were left unaddressed by large dairy-producing countries. Industry producers were, however, able to pass on most of the cost increases down the supply chain, resulting in dramatic increases in revenue at the expense of profits.
Milk and cream processors also benefited from clever product and packaging innovations, especially in the flavoured milk and yoghurt product segments. In the five years through 2011-12, industry revenue is estimated to increase by 7.1% to total $7.4 billion. In the current year, revenue is expected to increase by 0.8%.
The advent of the global economic downturn resulted in sharp falls in world demand for dairy products and created a situation of oversupply, thus leading to downward pressure on prices. This was combined with a crippling drought and forced many players out of the industry, resulting in significant industry consolidation over the past five years. The future prospects of the industry, however, are optimistic given the recent strong rainfall in milk-producing regions and the expected economic recovery. Milk production is expected to grow marginally in line with a stabilisation of world milk prices towards the later half of the coming five-year period. Domestic demand will be driven by product innovation, growth in disposable incomes and population growth. Over the five years through 2016-17, industry revenue is forecast to increase by an annualised 2.2% to total $8.2 billion.
The performance of the milk and cream processing industry over the next five years will be affected by domestic seasonal conditions, the expected recovery in world demand and economic conditions, and product innovation. The outlook for domestic milk production is optimistic given a meaningful autumn season, which is critical to the spring pasture and feed grain crops. Further, the global economy is expected to begin its cyclical upswing, thus driving demand from Asia, Europe and the United States. To this end, industry revenue is expected to increase by an annualised 2.2%, to total $8.2 billion in 2011-12.
Domestic dairy product prices for the industry are expected to moderate over the next five years in line with forecast stability in world dairy prices. World prices are forecast to remain firm due to strong global demand, increasing costs of milk production because of high feed and oil prices, resource constraints in many countries, and low world stock levels. Growth in dairy demand will be driven by population growth and stronger world economic growth, including in key markets such as China and East Asia. Many export markets, such as China, have low per capita consumption levels relative to Western diets, leaving room for the industry to expand.
Dairy product production is forecast to grow over the five years through 2016-17, based on forecast strong growth in milk production. Milk production is forecast to grow as dairy herds are rebuilt and milk yields increase, assuming a return to average seasonal conditions. Dairy cow numbers will increase at a strong annual rate, while milk yields will grow at a marginal annual rate. Dairy farmers are expected to increase their dairy herds in response to increased profitability due to higher prices, lower feed costs and increased efficiency. Yields per cow will increase due to improved weather conditions, ongoing improvements in farm management practices and new research into herd, pasture, breeding and fodder.
Domestic demand for dairy products will depend on disposable income growth, population growth and consumer preferences. Australia’s population is forecast to grow at a marginal rate of 1.3% per annum over the next five years, which will support some volume growth. Real disposable income is forecast to grow at a relatively strong rate as signs of the economic recovery become more pronounced, which will aid demand for high-margin dairy products such as flavoured milk and functional yoghurt. In line with consumer trends of health and convenience, milk and cream processors are expected to introduce new products that address these criteria. These include the addition of functional bacteria such as probiotics to traditional milk and yoghurt, the introduction of new and exotic milk and yoghurt flavours, and innovative packaging and promotional initiatives.
Over the five years through 2016-17, industry profitability is expected to grow marginally, with declines during the early years due to falls in milk prices. Subsequently, profit will rise in line with price stability, volume growth and the shift towards high-margin products. Investment in automation and production technology will also aid profit as costs will be kept to a minimum while productivity increases. Industry net profit is expected to average 2.5% of revenue over the next five years.
Industry participation is forecast to increase by an average 1.4% per annum over the five years through 2016-17, as economies of scale and the ability to establish national operations become more pronounced. Employment is similarly expected to grow by an average 1.2% per annum. The majority of this growth will include the employment of research and development engineers and food scientists who focus on creating healthy and innovative products. Wages are accordingly expected to grow by 2.6% per annum, with the average wage increasing by 7.1%.
The industry will face a number of challenges over the next five years, ranging from the effects of climate change and water allocation to the growth of private-label dairy processors. Dairy production is highly dependent on favourable seasonal conditions to ensure adequate pasture and water availability. The 2007-08 drought crippled many dairy farmers and resulted in a significant supply shortage that pushed up prices and caused many players to exit the industry. The proposed carbon tax will have significant ramifications across all agricultural industries if it is introduced. Farmers are faced with the prospect of increased production costs, as they will be expected to pay a fee for emissions from their herds. This could raise overall production costs across the dairy industries and create a situation where small and medium-sized farms will be forced to exit the industry, thus increasing concentration and reducing competition from private-label producers.
The level of penetration of private-label products varies across product segments, with fresh regular milk accounting for nearly 75% of private-label sales, but yoghurt accounting for only 7%. Increased efforts by major retail supermarkets and grocery stores to grow their own private labels have worked well, as they have coincided with households seeking cheaper food options.
This trend is expected to continue over the next five years, with supermarket labels directly competing with branded dairy products in high-margin segments such as flavoured milk, dairy desserts and functional yoghurt. Although disposable incomes are expected to grow over the next five years, consumers tend to be less brand loyal when making dairy consumption choices.
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