Europe takes cream from milk export margins in Asia

In particular, the export good times in China are waning as margins are squeezed by competition from Europe and by domestic dairies fiercely determined to hold their markets against milk shipped in from Australia and New Zealand.

The Chinese drink 17 billion litres of milk a year but have been paying big premiums for imports, particularly lines packed by Australian and NZ (Oceania) processors enjoying a “clean and safe” reputation with consumers.

Oceania will likely supply about a third of the 500 million litres of the liquid milk imported this year.

Europe, with long established market ties in China and a big milk surplus available for export, has bumped up its share of the fast expanding import trade from about half in 2012 to 60 per cent last year.

While export growth prospects are still expected to be steady, Rabobank research says the premium returns from China are shrinking.

Rising Chinese milk consumption is set to moderate to average about 2pc compared with 3pc in the past five years.

However, South East Asian (ASEAN) markets such as Vietnam, Malaysia and Indonesia do have much stronger import growth potential, albeit from a smaller base says Rabobank’s report, “Liquid milk exports to Asia - avoiding the crush”.

While the European Union is building its export position in ASEAN markets it supplies just 10pc of the imports market while Australia has more than 30pc.

Domestic ASEAN production is also small, offering plenty of Oceania trade growth potential, although consumers are price sensitive and cold storage networks need developing.

Since 2010 Australian dairy companies such as the Murray Goulburn co-operative, Victorian-based Pactum Dairy Group at Shepparton, Western Australia’s Harvey Fresh and French-owned Parmalat have upgraded or built new plants largely to cash in on strong Chinese demand for Australian-packed ultra high temperature (UHT) treated milk.

Fonterra, Miraka, Goodman Fielder and Westland Milk Products have made similar big investments in UHT (or long life) milk in NZ.

Processing capacity for the UHT market has doubled in NZ and Australia to almost 500 million litres, and more investment is planned.

Premium-priced fresh milk exports from Australia direct to niche markets in major Chinese cities have also been opened up by NSW-based Norco, and A2 Milk Company, Jonesy’s Dairy in Victoria and the South Australian Dairy Farmers Association (SADA).

Last week Tasmania’s big Van Diemen’s Land (VDL) Company confirmed it would also export about 10 million litres of "Van Milk" annually via weekly flights from Hobart to Ningbo in China, starting early next year.

VDL was bought for $280m this year by Ningbo-born Lu Xianfeng's Moon Lake Investments.

Rabobank’s senior dairy analyst, Michael Harvey, said while direct fresh milk sales to Asia represented an exciting top end development, now was worth almost 10pc of China’s imports, they were unlikely to be a game changer for our overall export trade.

“Unfortunately it’s a bit too much of an expensive niche market to make a significant change to farmer incomes or the way we supply overseas markets,” he said.

In fact, most Chinese consumers actually held UHT milk in high regard, and it was far more affordable.

Mr Harvey warned the automatic price premium which imported brands historically enjoyed in China was likely erode further for UHT and even fresh milk.

“A large portion of the milk trade will likely be in lower-margin business, with exporters essentially competing on cost,” he said.

This had particular consequences for Australia and NZ which had recently made large investments in processing capacity targeting Asia’s liquid milk markets.

The short-term consequence of that spending had contributed to their diminishing export margins of late.

On the other hand many European processors already ran large-scale and highly efficient processing plants supported by a growing milk supply since milk quotas were scrapped two years ago.

The closure of Russia as a buyer and reduced trade to Africa had further encouraged Europe to divert sales to China.

Mr Harvey said key areas for Australian dairy exporters to focus on to boost their margins were lifting processing efficiency, improving distribution chains in Asia and building a premium brand name.

Enhancing a premium brand’s reputation required product and packaging innovation, category expansion, research and development and support for changing consumer demands.

“For those willing to strategically build a strong value proposition and promote their point of difference, there are still plenty of opportunities to be had,” he said.

While much of Australia’s dairy export focus had been on expanding our Chinese footprint, building markets in the ASEAN six countries (Singapore, Malaysia, Indonesia, Vietnam, Thailand and the Philippines) would help offset Australian dairy companies’ exposure to China’s fiercely competitive sector.

ASEAN markets currently import 200,000t of liquid milk a year, with the region’s total market growing almost 5pc annually.