The Australian dairy industry is teetering on the brink of a new era as it prepares to milk demand for dairy products in Asia, and it is this evolving landscape that set the scene for the recent Warrnambool Cheese and Butter (WCB) takeover battle.
Domestic and international companies have been jostling to better position themselves to supply export markets with Australian dairy products, and this came to a head in the WCB bidding war.
WCB shareholders were in turn wooed by NSW’s Bega Cheese, Australia’s largest dairy company, Murray Goulburn (MG), and Canadian dairy processor Saputo.
When Saputo emerged victorious, MG's managing director, Gary Helou described it as a “lost opportunity for the Australian dairy industry”.
Then in February, a second Aussie dairy company went under the hammer to an overseas buyer. United Dairy Power (UDP) was snapped up by Hong Kong businessman William Hui, a shareholder and chairman of manufacturer Swing Media Technology for $70 million.
More consolidation is on the way, according to IBISWorld. It says there are currently 107 businesses operating in Australia's $3.8 billion butter and dairy products industry, and it predicts this number will fall at an annualised 0.4 per cent over the five years through 2018-19, as economies of scale and the ability to establish national operations become more pronounced.
Until now, local dairy processors have largely structured their operations to serve a mature domestic market. However, Asia’s growing appetite for quality baby formula and other high value dairy ingredients like whey protein and lactoferrin has changed the game. Demand for these sorts of products is outstripping supply, leading to higher world prices.
The trend is expected to go beyond milk powders and into retail categories such as fresh and flavoured milk as modernisation in developing countries like China leads to a move toward western dietary patterns.
In Australia, where one of the key obstacles to tapping these markets is the number of small-scale processors, it’s little wonder that local companies are so acquisitive. MG and Bega both saw the acquisition of WCB as a potential path to expansion.
There’s more to the story though. WCB has also been quietly building a strong export business, and is now said to be Australia’s second largest dairy exporter, selling into 45 countries, and producing 150,000 tonnes of dairy products annually.
It has formed joint ventures and invested in its manufacturing capabilities to produce cheese, and whey protein concentrate, and is currently commissioning a plant at its Allansford factory to extract lactoferrin, which sells for up to $1,000 a kilogram.
These sorts of activities are what made it such an attractive prospect for its new owner, and Saputo is now well placed to capture growing opportunities in Asia, as well as boost its presence in Australia.
WCB is not the only Australian company that's been on the export path, but without greater capital investment in processing infrastructure, it will be tough for Australian processors to fully capitalise on global dairy opportunities, according IBISWorld.
“Australia’s dairy manufacturing industry will require significant investment and a refined export strategy if it hopes to be competitive in global markets,” the market researcher says.
“Potential export growth signals the productivity gains that could be made through further capital investment in dairy and production infrastructure. Additional capital investment will also be required to develop transport networks that support the export of these often temperature-sensitive products.”
NSW in particular has very little dairy manufacturing infrastructure, according to Dairy Connect NSW CEO, Mike Logan. This makes it a logical candidate for investors.
NSW dairy farmers must currently freight much of their milk to Victoria, he says, so there is currently a strong opportunity for someone wanting access to large volumes of quality milk.
“We believe there is a vacuum in the manufacturing of dairy in NSW and we believe a co-investor with the farming sector would give the investor access to really good quality milk product they could then add value to.”
Logan says these sorts of opportunities may appeal to companies that already have an end use market to sell value-added dairy products into.
A number of Chinese state-owned organisations are in talks over the creation of new milk powder plants to supply milk powder to the Chinese market, and have been visiting locations in NSW's Hunter Region, the Central West and the Southern Highlands with this in mind.
This type of activity will in turn up the ante for local companies, according to IBISWorld, which notes that foreign ownership of the industry has been increasing over the past five years, and is expected to continue to increase gradually, in line with the consolidation of the global dairy and food industries and strong competition in the retail market.
“The potential rewards for industry participants and prospective entrants to the industry are increasing, and domestic and international players will continue to fight to supply export markets with Australian dairy products,” IBISWorld says.
