One of the best feelings I’ve experienced in the dairy industry is the pride that comes from being part of an industry that is world class, profitable and sustainable. When the industry you work in is thriving, it makes daily problem solving a challenge and not a burden. However, realistically, sustainable profitability doesn’t apply across the board in the 21st Century dairy industry and there are many variables. While one area moves ahead, others fall behind and finding a sure thing to invest in is, itself, one of the fast changing variables.
Consumption Drives the Dairy Industry
Global dairy consumption is expected to increase by 2% per annum; production is expected to increase by 1.8% per annum. The impact that this will have on the global dairy cross border trade is far more powerful than what the deficit number may initially suggest. The deficits exist primarily in markets that are already short of product and where demand is rising fastest due to rising incomes such as China, India, ASEAN (and Indonesia in particular) and the Middle East. Such markets will have to turn to the global dairy trade to try to satisfy the domestic demand.
Dairy as an agricultural investment sweet spot
Even a rudimentary knowledge of economics, such as mine, accepts that supply and demand are key to investment growth of any global product. Dairy is unique in the fact that it has great versatility and can be marketed as many different products. Prem Maan, marketing from Southern Pastures in New Zealand, outlines the positives. “In its powdered form it has a long shelf life and can be transported and consumed at room temperatures. It is the only acceptable animal protein source for India’s primarily vegetarian population and is certifiable as Halal for Muslim markets. Infants can consume milk thereby providing protein during the critical development phase as they progress from mothers’ milk to solids. Dairy products are easily consumed by and fortified for the elderly for their protein, calcium and vitamin needs.” A Harvard study showed that even people who smoke and have high blood pressure reduce their risk of having heart related issues if they consumed grass fed milk. Having said that, markets are in a constant state of change and there is volatility in milk prices. Milk prices are expected to remain high as movements in global supply have a material impact. The volatility is due to many factors including climatic conditions in India, USA, NZ, Australia and Europe and feed costs.
What Markets are Hot, Cold and Cooling?
As 2014 winds down, it could be informative to look at how the industry is doing from a global perspective. Let’s look at what has been hot, cold or cooling in the past year.
New Zealand is Hot
New Zealand has a 37% market share of the global dairy trade; it is twice as important to the global dairy trade as Saudi Arabia is to oil.
The New Zealand dairy industry is based on grass-fed milk and sells at a premium compared to milk from other countries that rely on milk production from non-forage feeds. Hormones are not used. Any cow given antibiotics is excluded from milking. New Zealand dairying has a low carbon footprint. For example, products are deliver to UK consumers at less than half the carbon footprint of local products.
New Zealand’s production has been built on its fortunate geographical positioning that provides it with a temperate climate blessed with rich water resources. Lacking subsidies and consuming only 3% of the country’s milk production New Zealand has been forced to seek export markets and free trade agreements. New Zealand now exports dairy products to over 150 countries and accounts for around 90% of China’s imported dairy products.
New Zealand dairy industry structure, the bulk of the country’s milk production is sold to farmer owned cooperatives, provides unique advantages. It ensures that global dairy prices are transmitted in a timely and transparent manner to farmers whilst providing a greater part of the dairy value chain as the cooperatives profits are distributed back to shareholding farmers. In the current season when milk payments to farmers in other exporting countries such as Australia, US and Europe has increased by 25%, New Zealand farmers have enjoyed a 40% increase (and from a higher base).
In this latter respect New Zealand is well insulated against price volatility – a pastoral dairy farm locks in the bulk of future feed costs. New Zealand continues producing, when other key producers are culling cows due to high feed costs.
New Zealand enjoys the benefits of producing a premium product, a material market share, and the ability to withstand high feed prices.
Africa is heating up.
It looks like Africa is the new land of milk and money and could be a booming market for global agricultural investment. Speaking in Lexington Kentucky Charles Moore from Cape Town South Africa, outlined the challenges and opportunities involved in the rising African beef and dairy industries. Moore suggests Angola, Zimbabwe, Kenya and South Africa are most suitable for dairy investment.
Angola: The strong economy fueled by the oil industry makes Angola excellent for dairy. The large population, suitable climate and access to water also are positive attributes. Furthermore, proximity to Middle East and Southeast Asian markets is also an asset.
Zimbabwe: On the one hand Zimbabwe has a built-in infrastructure, a culture that values cattle, a favorable climate and quality water sources. On the other hand, political upheaval could be a major negative to realizing the full potential.
Kenya: The numbers are right in Kenya. A million Kenyan dairy farmers milk 3 million cows. At only 3 cows per farmer, there is a lot of room for growth of the home based, small land base dairy industry.
South Africa: Moore believes that South Africa needs to look at value added products to increase profitability. Much like the rest of the world, there is a lot of consolidation within the South African dairy industry. Farmers there are on the cutting edge compared to the rest of the continent. South Africa produces approximately 50% of Africa’s milk. Moore believes that South Africa’s model will be “the way to go in Africa with 500 to 1,000 cow herds. The small producers are going to get eaten up.”
On the cool side is Russia.
When Russian authorities banned all dairy imports from Ukraine, the decision was justified by authorities as being based, among other things, on misleading branding. However, banning has been used in the past by Russian officials in retaliation for strained relations. Banning wine from Georgia and fruits and vegetables from Moldova are two examples.
India is Hot
Before 2025, India will overtake China to become the most populous country in the world. Milk and dairy products are fundamental to Indian tradition and culture, Having said that, there is high regional diversity in eating habits and thus huge potential for supplying dairy products that meet that diversity. Distribution is currently a complex market with 15 million scattered retail ships. Furthermore, there are millions of dairy farmers with two or three animals, making a huge potential to expand national dairy numbers. In this direction, there has been effective development of a strong cooperative movement in India as the dairy industry becomes organized. For example, AMUL, turned a small dairy collecting 200 liters of milk per day into a dairy giant handling 16.6 million liters of milk daily. As of 2012 that placed that processor at #18 of the 20 top milk processors in the World.
China is Hot
Rising consumption (12.8% annually) is driving dairy imports into China, with 82% of those imports being skim or whole milk powder. Liquid milk imports from the US grew from 40 tons in 2010 to 2,750 tons in 2012. It is reported that four foreign companies have capitalized on the uncertainty which grew out of the melamine and price-fixing scandals. They now have 42 percent of the Chinese infant formula market. Here too, as in India and Africa, there is huge potential to grow from the small herds. Before 2007 there were 2.1 million farmers milking less than five cows. That number fell to 1.7 million in 2010. At the same time, herds over 1,000 cows grew from 330 to 836. The herds from 500 to 999 cows grew from 760 to 2,061. Investors are setting targets for investment in China.
Canada/China Heat is Cooling
Last year 5.2 billion in agriculture export sales to China made Canada their second largest agriculture trade partner after the U.S. That $5.2 billion represents only five percent of China’s agriculture imports. A column in June by John Ivison writing for the National Post states that “China is debating moving its North American base from Toronto to New York.” Besides concerns over investment performance, Ivison feels that “dairy would be another area for mass a (investment) appeal were it not for the aberration of supply management.”
The US is a Catalyst
As investors look for the best place to grow their dollars and dairy producing countries seek ways to be attractive to those investors, there is a growing niches for dairy expertise. When China went looking for this the UW-Madison was chosen from a wide field that included top agricultural schools in several countries says UW dairy science professor, Dr. Pamela Rueeg. She believes the UW-Madison was selected because of its reputation as a world leader in dairy science overall and particularly in the area of milk quality and food safety, which have been major issues for milk processors in China. Another key factor was the UW-Madison’s long experience doing dairy training in China and its extensive network of connection within the Chinese dairy industry.”
The Bullvine Bottom Line
It’s time for all dairy producers to recognize that we are in a world of global trade. Global supply and demand economics means that milk prices, inter and intra seasonal volatility notwithstanding, should continue to appreciate. The potential for dairy investment is attractive.