Milk price wars force dairy producers to turn to China

The supermarket milk price wars have forced fresh milk producers to seek new markets and revenue sources, according to IBISWorld. China has been the focus of many producers’ efforts.

Since 2008, China has increased its intake of dairy products - in particular, milk and whey powders used in infant formulae and western-style baked goods. Recent successes in reducing customs and quarantine delays have made China a viable export customer for a broad range of dairy products, including fresh milk.

According to IBISWorld, the 2013 botulism scare in New Zealand served to enhance Australia’s reputation as a source of safe dairy products. IBISWorld predicts that, with the growing revenue from China and other export markets, Australian dairy producers will be able to compensate for revenue lost to the supermarket price wars.

Recent happenings in the Australian dairy industry include:

• Saputo’s acquisition of the Warrnambool Cheese and Butter Factory earlier this year, allowing the company to enter the Chinese and South-East Asian markets with the infrastructure and reputation of Australia’s oldest dairy producer.
• Norco Co-operative reduced export lead times to China to less than seven days, paving the way for fresh milk exports. The initial shipment sold for between $7 and $9 per litre.
• In April 2013, Norco signed a five-year supply agreement with Coles that is expected to lead to higher farmgate prices and further investment in processing facilities.
• In April 2013, Murray Goulburn signed a 10-year fresh milk supply agreement with Coles.
• Murray Goulburn has also announced plans to invest $19 million in its baby formula factory to cash in on growing Asian demand.

“The opening up of the Chinese market delivers a potential reliable revenue source that will be of great benefit to the industry, especially as domestic price growth is likely to be constrained as long as the supermarket milk war continues,” said IBISWorld’s Michael Jayaranjan.

“Increases in farmgate prices to sustainable levels will reduce farmers’ cost pressures and allow them to reinvest in their operations. The Chinese currently pay a premium for Australian wine and beef, and there is now hope that fresh milk can be added to that list.”