The dairy industry is one of Australia’s major rural industries. Based on a farm gate value of production of $3.9 billion in 2010/11, it ranks third behind the beef and wheat industries. Approximately 40,000 people are directly employed on dairy farms and manufacturing plants. Related transport and distribution activities, and research and development projects represent further employment associated with the industry.
Dairy is also one of Australia’s leading rural industries in terms of adding value through downstream processing. Much of this processing occurs close to farming areas, thereby generating economic activity and employment in country regions. ABARE estimates the regional economic multiplier effect to be roughly 2.5 from the dairy industry.
Today, dairy is Australia's third largest rural industry and a major regional employer, not only on-farm but also through processing, manufacturing and distribution of finished products. It is a cost-efficient and proficient producer of high quality milk. On-farm productivity continues to increase through improved pasture, feed and herd management techniques.
While supplementary feeding with grains is becoming increasingly common, the Australian dairy industry remains predominantly pasture-based. All States (Victoria being most dominant) have viable milk productions, supplying fresh milk to nearby cities and towns. As a major regional employer, the industry value-adds through the processing of milk to produce fresh lines such as butter, cream, cheese and yogurt. Bulk milk and specialised powdered milks are also significant.
Situation and Outlook
The 2011/12 season has started positively, particularly for southern farmers. Opening farmgate prices were 3 to 5% higher than last year, while seasonal conditions are mostly favourable.
While 78% of farmers surveyed in August felt positive about the future of the industry, there were differences based on seasonal and market factors. All regions – except NSW - were more positive in August than in the earlier survey.
Despite overall confidence, the outlook for milk production is mixed, with a slight drop in herd size reported. Milk production started slowly, with wet conditions in southern VIC, and farms still recovering from floods in QLD and drought in WA.
However, a favourable seasonal outlook and opportunities for profitable production should see momentum build in coming months. As a result, Dairy Australia is forecasting a 1.5% increase in 2011/12 milk production to 9.25 billion litres. The subdued production outlook will maintain pressure on companies in southern exporting regions as they compete for suppliers.
Another financial crisis, should it occur, could have serious implications for commodity markets. Credit and currency markets are already affected, adding to uncertainty in the economic outlook.
Given the conditions affecting developed economies, the stability of international dairy markets is remarkable, the question is will it remain so?
Milk Powder Statistics
Australian manufacturers produce a range of milk powders. The technology used in both the production and use of powders has seen the range of specifications available from Australian manufacturers expand in line with customers’ needs. In the years up until the peak milk production season of 2001/02, the most obvious trend in milk powder production was a steady increase in the share of whole milk powder (WMP) output—from a low of 25% in the early-to mid 1980s to a peak of 50% share of all milk powders produced in Australia in 2001/02. Thereafter the trend has reversed again, with skim milk powder (SMP) production regaining share to make up some 60% of total milk powder production in the last couple of season
Less than 20% of Australia’s powder production is sold domestically. Retail outlets account for only a small percentage of domestic sales, with local usage mainly as a food ingredient. Strong international prices saw skim milk powder production increase by 17% and whole milk powder volumes increase by 20% in 2010/11. Exported milk powder is often recombined into liquid milk products, particularly in tropical climates where fresh milk supplies are not available. It is also used in bakery products (improving the volume and binding capacity of bread, and ensuring crisper pastry and biscuits), confectionery and milk chocolates, processed meats, ready-to-cook meals, baby foods, ice-cream, yogurt, health foods and reduced-fat milks. Industrial-grade powder is used for animal fodder. The major export markets for Australian milk powders are concentrated in Asia; with 80% of SMP export volumes and some 67% of WMP destined for the region in 2010/11. The Middle East is a growing market; now taking around 15% of Australia’s milk powder exports.
Indonesia was the largest single export market for Australian-produced SMP in 2010/11, followed by India, Singapore, China and Thailand—out of some 50 export destinations. Singapore was the largest single export market for Australian-produced WMP, followed by China, Sri Lanka, Indonesia and Saudi Arabia—out of a total of 65 export destinations, following is the top 10 destinations (Source Dairy Australia & ABS)
Australia exports of milk powder
These graphs both illustrate the demand for milk powder in Asia compared to the rest of the world. In terms of whole milk powder Australia shipped a massive 67 percent of its total milk powder exports to Asia. This figure is even greater for skim milk powder where roughly 80 percent of all skim milk powder exports were to Asia. This clearly indicates that Asia is a market with huge potential for milk powder and will most likely only continue to grow. Of further interest, is the noticeable spike in the years of 2008/09 which is a tell tale sign of the milk powder crisis in China at the time, where Melamine poisoning in Chinese milk powders, resulted a number of deaths and thousands in a critical condition. This has buoyed demand for Australian milk powder in China as consumers have lost faith in Chinese brands.
Source: Dairy Australia & ABS
Source: Dairy Australia & ABS
The Chinese Market
Due to several public mishaps involving local Chinese brands there has been a significant increase in the importation of foreign milk powders in China. If we are to briefly examine this history of such events it becomes obvious that most of this stems from the 2008 incident whereby melamine was being utilised in milk powder formula by Chinese companies (in particular Sanlu Milk Products) to produce falsified results of high protein content.
Melamine is used to manufacture melamine-formaldehyde resin, a type of plastic known for its flame retardant properties and commonly employed in countertops, dry erase boards, etc. Melamine itself is nitrogen-rich and is sometimes illegally added to food products to increase their apparent protein content. It has also been employed as a non-protein nitrogen, appearing in soy meal, corn gluten meal and cottonseed meal used in cattle feed. Melamine is known to cause renal and urinary problems in humans and animals when it reacts with cyanuric acid inside the body, sometimes present in drinking water and in animal feed, so its use in food production is universally banned.
The Kieldahl and Dumas methods used to test for protein levels fail to distinguish between nitrogen in melamine and naturally occurring in amino acids, allowing the protein levels to be falsified. Introduced into milk, it can help conceal its fraudulent dilution with water. Melamine adulteration of food products also made headlines when pet food was recalled in Europe and the U.S. in 2007.
On 17 September 2008, Health Minister Chen Zhu stated tainted milk formula had "sickened more than 6,200 children, and that more than 1,300 others, mostly newborns, remain hospitalised with 158 suffering from acute kidney failure". By 23 September, about 54,000 children were reported to be sick and four had died. An additional 10,000 cases were reported from the provinces by 26 September. A World Health Organisation official said 82% of the children made ill were 2 years of age or below. The Hong Kong Centre for Food Safety said that 99% of the victims were aged under 3 years. Ten Hong Kong children were diagnosed with kidney problems, at least four cases were detected in Macau, and six in Taiwan. Non-human casualties included a lion cub and two baby orangutans which had been fed Sanlu milk powder at Hangzhou Zoo.
Growing Foreign Market Share
Due to the scandal poorer consumers, reliant on local milk powder, which is approximately half the price of imported brands, have been left without alternatives to feed their children. Many have now lost faith in local brands, and others are uncertain which brands are safe. Supermarket shelves have been swept bare from product recalls. Shops in Hong Kong have reported a rush for imported formula from cross-border shoppers, and some retailers are reportedly rationing their stocks. Mainlanders have also been rushing to import milk powder from Kinmen. Wet nurses are enjoying resurgence in popularity in major cities. New Zealand media reported Chinese sailors and expatriates have been buying local dairy produce for sending back to relatives in China.
Essentially, although the government is attempting to internally regulate the Chinese dairy industry it is having a hard time doing so as there was at one point an almost incestuous relationship between the local businesses and the local governments. Many companies invited local officials to become "silent partners" in their corporations - in return for "protection" at the political level; former Sanlu chairman Tian Wenhua, was made honorary deputy to the Provincial People's Congress.
Currently the Chinese milk powder market is growing at 3.3 percent annually on average. This means that for foreign milk powders with a proven track record of safety and quality assurance there exists a strong, escalating market driven by the middle class, rising household incomes (especially outside of the cities) and growing health consciousness.