‘Supply chain revolution’ in Australia’s dairy industry

The southern Australian dairy industry is in the midst of a ‘supply chain revolution’, with unprecedented change to the way milk is procured, priced and processed, according to a just-released industry report.

The Australian dairy supply chain – the great reset, a report by agribusiness banking specialist Rabobank, says these transformative changes have been instigated by a number of major events, which have caused significant tension right along the dairy supply chain.

The report says three key events have been primarily responsible for driving this change – a drop in national milk production to a 20-year low, the internal challenges facing Australia’s largest dairy cooperative and the reset in farmgate milk prices to better align with global markets.

“To have so many changes in such a short time frame is unprecedented and there is no doubt Australia’s dairy supply chain will emerge from all of this looking vastly different and almost unrecognisable,” said report author and Rabobank senior dairy analyst Michael Harvey (pictured).

While this sector transformation is leading to short-term uncertainty and potential business disruption for dairy farmers, Mr Harvey says, it will present opportunities for some dairy farm businesses – particularly around choice to supply new markets and more commercially attractive supply contracts. However, the report cautions, farmers need to thoroughly assess these opportunities, and associated risks, before taking action.

Changes to milk procurement

The report says the fall in milk production, along with the anticipated slow rebuild, is set to see competition for milk amongst processors remain fierce – changing the way milk is procured in Australia’s southern dairy region.

“While milk supply is down across all dairy regions and is at its lowest level in two decades, northern Victoria has experienced the most significant drop, accounting for 50 per cent of this decline,” Harvey said.

Mr Harvey says Rabobank is forecasting a small bounce in Australian milk supply in the 2017/18 season, in the vicinity of 2.5 per cent. And in the medium-term, milk supply is expected to grow by a modest 1.8 per cent per annum.

“Based on this forecast, and assuming no major market or atypical climatic disruptions, national milk production is not expected to surpass the 10 billion litre mark again until 2020/21,” he said.

“This will see processors continue to scramble for milk and adopt aggressive milk-supply programs as they try to recruit milk and minimise excess capacity.

“We are also seeing a break-down in loyalty between dairy farmers and processors, with farmers now more willing to move processors, which is having repercussions across the supply chain.”

Reset in milk-price leadership

Mr Harvey says Australia’s largest processor, Murray Goulburn, has faced the most significant contraction in milk supply, challenging the role of the cooperative as the lead for price discovery and benchmarking in southern Australia.

“While Murray Goulburn is on a journey to turnaround its business, and a successful turnaround could see the return of ‘cooperative principles’ as the benchmark for setting milk prices – the reality is that this is years away and a new method of price discovery will need to emerge.”

This is an issue for the entire dairy industry, Harvey says, because if Murray Goulburn isn’t setting the price, than who is?

“It is important the industry establishes, and knows, who is setting the benchmark milk price, as dairy farmers will now be operating in a more commercially oriented and flexible market for their milk,” he says.

Finding a better product-mix

The report says there are lingering risks for all Australian dairy processors, as the sector emerges from the challenging market conditions in 2014 to 2016, which saw reduced earnings exacerbated by a period of aggressive milk-pricing strategies.

“As market conditions have started to improve in recent months, there has been an acceleration in processing investments, with at least 700 million litres of new primary processing capacity coming online across southern Australia this season,” Mr Harvey says.

“Much of this investment has been concentrated on increasing production capacity for export-orientated cheese production to tap into market opportunities – particularly in Asia with growing demand in both the retail and foodservice channels.”

This is a trend that is set to continue, he says, as processors try to shift up the value- chain to allocate available milk supply to higher and more stable return streams.

“This is a particularly good strategy given Australia’s finite volume of milk and consumers’ evolving attitudes to dairy fat,” he said.

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