31 January 2013

5 minute read

As in the farm sector, the milk processing sector is undergoing continuing rationalisation. This has resulted in improved factory capacity, as larger operations have improved their efficiency and economies of scale. The lack of growth in milk production over the past decade has relieved the pressure on Australian dairy companies to continue to invest in increasing processing capacity—at least in the short to medium term. Instead, the challenge has been to remove surplus capacity and to utilise the existing capacity as profitably as possible.

The Australian dairy manufacturing sector is diverse and includes farmer-owned co-operatives, public, private and multinational companies. Famer-owned co-operatives no longer dominate the industry and now account for 33% of Australia’s milk production. The largest cooperative is Murray Goulburn accounting for over 30% of national milk output.

Other Australian dairy companies cover a diverse range of markets and products, from the publicly listed Warrnambool Cheese & Butter and Bega Cheese Limited (who now own both Tatura Milk Industries and De Cicco); to the privately owned Regal Cream (Bulla Dairy Foods), Burra Foods and Longwarry Food Park to name just a few; together with many highly specialised cheese manufacturers.

Large multi-national dairy companies have operated in the Australian dairy industry for many years and currently include Fonterra (New Zealand), Kirin (Japan) and Lactalis (France)—who took over Italy’s Parmalat in mid-2011.

There were a number of changes in the ownership of dairy companies in the Australian industry during the 2011/12 season.

• Bega Cheese obtained shareholder approval and listed on the Australian stock exchange in August 2011 and acquired the remaining 30% of Tatura Milk Industries that they didn’t previously own.
• Hastings Co-operative sold its Hastings Valley Dairy factory (in Wauchope) to Indian company Sungrow.
• Tasmanian Dairy Products (TDP) purchased the Gunns Ltd sawmill plant in Smithton in the north-west Tasmanian dairying region to develop into a milk processing plant to produce a range of milk powders for export. TDP is owned by a consortium of investors including Murray Goulburn (55%), Mitsubishi Japan (25%) and the original local dairy farmer investors (20%).
• Chinese company Bright Food purchased a 75% stake in Australian distributor Manassen Foods, owned by the Champ private equity group since 2006. Manassen distributes a range of local and imported cheese brands.
• United Dairy Power [UDP] acquired Lion— Dairy’s Murray Bridge and Jervois cheese factories in South Australia.
• US yogurt company, Chobani, purchased Dandenong-based Bead Foods (Gippsland brand yogurt).
• Private equity group, Pacific Equity Partners, purchased the Peters ice cream business from Nestlé.

The major manufactured product streams are:

• drinking milk—fresh and UHT long-life;
• skim milk powder (SMP)/buttermilk powder (BMP)/butter;
• butter/casein;
• cheese;
• wholemilk powder (WMP);
• other consumer products, such as yogurts, custards and dairy desserts; and
• specialised ingredients, such as whey proteins, nutraceuticals, etc.

Cheese is consistently the major product stream; utilising around one third of Australia’s milk production in 2011/12 and has remained around this level for a number of years.

Skim milk powder / butter and drinking milk production were the two next largest users of milk; each taking about a quarter of the total milk produced in Australia.

Around 60% of manufactured product (in milk equivalent terms) is exported and the remaining 40% is sold on the Australian market. This contrasts with drinking milk, where some 97% is consumed in the domestic market.

Dairy Markets

Over the past two decades Australian milk production has been well above the volume required for domestic consumption, so that a significant proportion is destined for export markets. The share of total production exported has ranged from 40–60% over the period shown in Figure 17. Over recent years Australia has exported around 45% of its milk production— the lowest proportion since the mid-1990s, due to the reduced availability of product over these years—and this estimate dropped below 40% in 2011/12.

While Australia accounts for an estimated 2% of the world’s milk production, it is a significant exporter of dairy products. Australia currently ranks fourth in terms of world dairy trade— with an 7% share—behind New Zealand, the European Union as a bloc and the United States.

Japan is the single most important export market for Australia, accounting for 19% of exports by value. Australian exports are concentrated in Asia, which represented 74% of the total dairy export value of A$2.76 billion in 2011/12.

This concentration of exports in Asia/East Asia reflects both Australia’s geographic proximity to these markets and the extent to which Australia has been excluded from other major markets by direct restrictions (as in the case of the European Union) or the impact of the export subsidy programs of major competitor countries.

Asian markets have considerable potential for consumption growth as incomes rise and diets become more ‘westernised’. Australian dairy companies have proven track records in supplying these markets over a number of decades. The Middle East and the Americas are also becoming increasingly important markets for many Australian exporters.

Australia’s top five export markets by both volume and value in 2011/12 were Japan, Greater China, Singapore, Indonesia and Malaysia. The fastest growing export market for Australia in recent years has been Greater China; which is made up of mainland China, Hong Kong and Macau.

Further Reading You can view the full report by clicking here.

January 2013