DEVELOPING the type of products that suit Asia rather than trying to sell them Australia will be the key to grasping potential as China’s import demand for dairy recovers this year, say those blazing trails in the sector overseas.
While the latest Australian Bureau of Agricultural and Resource Economics and Sciences forecasts have dairy as the only agriculture sector in Australia where farm earnings are forecast to end 2015-16 down, there is some light ahead.
Stocks of milk powders are still being drawn down in China, and domestic milk production rising, but by the second half of this year that situation should ease.
The 2016 forecast for dairy imports to China should finish 14 per cent higher, to 400,000 tonnes of whole milk powder, and five per cent higher in skim milk powder.
In the medium term, world trade in dairy is projected to rise, fueled largely by China’s demand plus the Middle East and North Africa.
ABARES senior economist Peter Collins said the moderate recovery in Chinese demand would help lift global prices but that would be limited by increased production.
Prices were projected to decline in real terms after 2018-19 as growth in world production outpaced growth in consumption, he said.
The challenge for Australia will be to secure the top-end markets that pay a premium and key to that will be taking the time to understand the customer and cultural nuances, according the producer chairmen of two East Coast dairy businesses that have ventured into new ground overseas in recent times.
Greg McNarama, from farmer-owned co-operative Norco and Barry Irvin, from Bega Cheese, outlined where they saw the opportunities in a changing dairy market at the ABARES conference in Canberra last week.
Mr McNamara said branding had given Norco leverage into China to date but the other distinct opportunity emerging was for a customer-formulated range.
Norco, a diverse agribusiness with rural retail and feed mill interests along with dairy processing and a turnover of $510 million, broke new ground exporting fresh milk to China two years ago.
Creating the right relationships while products were fine-tuned to meet the needs of a target market was now foremost on Norco’s mind in relation to China, he said.
“Contrary to popular opinion, Asian markets are price sensitive,” Mr McNamara said.
“Yes, our fresh milk sells for $8 to $11 per litre in China, but profitability of this market is still about volume.
“Educating the market in order to maintain premiums is necessary and that goes right down to making sure retailers don’t discount when products near the end of their shelf life.
“At the same time, we need to be educating ourselves on market dynamics - portion size, for example, in China is a different concept to what it is in Australia.”
Mr McNamara said seasonal benefits offered dairy manufacturers enormous opportunity.
Ice-cream, which is mostly made from November to February in Australia, was one such area.
Norco exited ice-cream brands years ago on the realisation margins were small but was good at manufacturing ice-cream and was now finding those brands were of interest to China, Mr McNamara said.
“Our productivity can increase by accessing out-of-season markets,” he said.
“Norco’s point of difference is that we are not a seasonal commodity player, we can offer consistency of supply.
“Our geographic supply spread covers a 1400 kilometre distance - that gives us a de-risking perspective.
“Reliability of supply is critical when attracting premium markets.”
Meanwhile, Mr Irvin said in the dairy world, as with many other agriculture sectors, what was once value was now commodity.
“Given the forecasts of increased population, an Australian agriculture producer may well think he or she is going to make out like a bandit,” he said.
“But we all know those moments are short-lived.
“Our industry is robust but fragile.
“The dynamics of why we sit at a particular point in the supply/demand curve change constantly and we have to think differently to find the way out.
“Around the world, I know all my competitors are trying to find a path that gets them away from global dynamics.”
Indeed, the European Union dairy industry saw opportunity in Asia too, according to Tassos Haniotis, from the European Commission’s Directorate-General for Agriculture and Rural Development.
Also speaking at ABARES, Mr Haniotis said the dairy price collapse in the EU was due to to world oversupply coinciding with a slowdown in demand from China and Russia.
Broader macro developments were also pushing commodity prices down and an increase in the EU dairy herd played a part, he said.
China was seen as important, given the Russian situation was not likely to improve.
Mr Irvin said that was why Bega, which takes product to 40 countries, moved into the health space via a partnership with Blackmores to produce nutritional foods and high-quality infant formulas.
“It was about separating ourselves,” he said.