Asian demand for Australian milk is continuing to grow but export margins have been squeezed and could potentially tighten further, according to new research.
The report, Liquid milk exports to Asia – avoiding the crush, by agribusiness banking specialist Rabobank, says competition in Asian markets will remain fiercely competitive as both international and local brands fight for market share and consumer spend.
Report author, Rabobank senior dairy analyst Michael Harvey (pictured below) says the automatic premium that international brands had historically received was unlikely to be repeated.
“It wasn’t long ago that being an imported brand automatically provided a retail price premium but that is no longer the case,” Harvey said.
“This has particular consequences for Australia and New Zealand given the previously alluring retail price premiums, combined with trade opportunities and relatively low capital outlays, which fuelled a period of significant investment in liquid milk processing capacity across Oceania.
“This increased capacity has been specifically geared towards Asia’s liquid milk markets, the short-term consequence of which has been a contribution to diminishing export margins.”
The flood of investment in the regions has resulted in capacity almost doubling across Australia and New Zealand, with additional investment potentially in the pipeline.
This region’s dairy exporters are also competing with their European counterparts, many of which have large-scale and highly efficient processing plants complemented by a growing milk supply.
And while competition from Europe is continuing to squeeze the market, local Asian brands are providing additional competition.
Harvey says while the companies behind local brands have also been pressured by increased import competition, they are by no means looking to surrender.
However, despite some of these home advantages, the report says, longer-term a major hurdle for local brands will still be accessing enough locally produced milk in a cost- effective manner.
Strategies to ease the squeeze
While the Rabobank report is forecasting growing export volumes of liquid milk into Asia, margin growth is likely to be the bigger challenge.
“The key areas of focus that dairy export businesses will be looking at to increase their margins will include ensuring processing efficiency, improving their distribution chains and building a premium platform,” Harvey said.
While economies of scale will be important to remain competitive in the Asian liquid milk export market Mr Harvey says developing a premium platform will be essential for those companies wanting to increase their margins.
“For dairy exporters this is not just about product and packaging innovation, but also category expansion, R&D and behind-the-border support to better cater to changing consumer demands,” he said.
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