GROWING per capita consumption of dairy products in China since 2010 has contributed 33 per cent to global growth in consumption of fresh milk, 36pc to growth in skim milk powder, and 80pc to whole milk powder growth, according to a market research report by Commonwealth Bank commodities.
Since 2010 total global milk consumption increased by 2.6pc per annum with stronger rates of growth in whole milk powder and skim milk powder. Trade in these is up by more than 7pc pa.
But the report suggests there is much more to come. If per capita consumption of dairy products in China were to match that of developed Asia, global demand for fluid milk would increase 12pc, butter 10pc, cheese 16pc and skim milk power 32pc.
Moreover, future growth in Chinese consumption is expected to be largely satisfied by imports. Notwithstanding attempts to boost local production, the country has very limited capacity to meet this increase in demand itself.
What all this suggests is that the fundamentals point to sustained growth in the dairy sector. The question for Australian producers is, are they competitive enough? Can they capture a significant share of it and, in the process, compel Coles and the other supermarkets to pay higher prices domestically?
New Zealand has been a major beneficiary of the growth to date. NZ exports of milk powders (whole milk and skim milk) have surged 9pc and butter exports 3pc pa to make it the world’s largest exporter of both commodities. It is a fundamentally low cost producer based on pasture, has a free trade agreement with China (still being phased in), with a shorter shipping route than most of its competitors.
But many of Australia’s producers are no less competitive. While our climate is more variable and water security less assured, droughts also occur in NZ. Moreover, NZ is not a low wage country and its currency offers no advantage relative to Australia. Indeed, if competitiveness was only driven by currency values, EU and US exporters would now own the Chinese market.
It says a lot about NZ’s export abilities that it is the only developed country with a free trade agreement with China and has succeeded so well in spite of its high dollar.
What Australia does not have is a free trade agreement with China or the same overwhelming focus on exports.
True, our processors look for export markets, but not with the same dedication as NZ. There, the domestic market is so small that it is a matter of absolute necessity. Here, exports are what’s left over once the domestic market has been satisfied.
What Australia’s dairy producers require is the same focus on international opportunities as their NZ colleagues, with politicians and trade emissaries reading from the same script. Berating supermarkets for their purchasing policies won’t increase demand for milk, but exporting to China will.
Global dairy prices tend to be volatile, like agricultural markets generally. Floods and droughts in one part of the world can lead to higher prices throughout the world. A particularly good season everywhere can send prices crashing.
But the fundamentals of demand and supply cannot be beaten. And if there is one sector in which Australia can definitely benefit from growing demand for food, it is dairy.
The best revenge Australia’s dairy producers could inflict on Coles would be to refuse to supply them with milk unless they raise their prices, because selling it to the Chinese is more lucrative.
David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at email@example.com