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13 Jun 2014

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Dairy Market Blog – 13th June, 2014

Buoyant long term dairy outlook – Europe more competitive, and China to remain strong player

 

 EU mapChina map

 


 

 

IFA attended the annual DIN Conference in London in late May, where the focus was on the competitiveness of Europe as a major exporter post 2015, and the importance of China.

Addressed by a large number of senior managers within the international dairy industry – including our own Siobhan Talbot, CEO of Glanbia Plc and Jim Woulfe, CEO of Dairygold Co-op – the event strongly reinforced our view that the outlook for fast growing dairy demand remains very positive indeed, with a strong part continuing to be played by China.

Even more heartening was the analysis by all participants that Europe was improving its competitiveness compared to New Zealand, and that Ireland’s level of readiness far exceeded that of most other EU countries with expansion ambitions.

 

The following is a report from the Conference.

 

IRELAND’S PLACE IN GLOBAL DAIRY MARKETS: YES WE CAN!

Can Europe compete for growing global dairy markets, including China? This was the question international dairy industry leaders were asked to answer at last week’s annual Dairy Industry Newsletter conference in London. IFA attended, and reports:

Attendees to the Conference were left in little doubt that growing populations in emerging countries, a rising number of affluent middle classes and the evolution of diets from vegetable starches to animal protein are all auguring well for dairy demand in such regions as sub-Saharan Africa, the Middle East, South East Asia, and of course, China, which all agreed would remain a dominant factor. Europe could compete for those markets, but had a great deal of preparation to do.

New Zealand and the US are well advanced in targeting those markets. New Zealand benefits from bilateral trade agreements with China which favour its powder exports, as outlined by Fonterra’s Jan Willem van der Windt and Paul Campbell, and has invested very heavily in no less than 7 new infant formulae plants since 2011, with more new powder plants being planned for 2015.

The US has gone from opportunistic exporter of subsidised surpluses to strategic exports in the face of strong production increases. John Davis of family dairy processing company Davisco and Dermott Carey of Darigold, a major US dairy co-op based in Seattle, both outlined their determined export oriented strategies.

China, and its importance as a large scale consumer of dairy, was the main focus of the Conference. Some recent reports of GDP growth in China falling from over 10% per annum to around 7% currently had led to fears of an economic downturn potentially affecting dairy demand.

Frank von Stipdonk of Interfoods Netherlands and Tim High of Tetra Pak New Zealand detailed the real demographic and economic factors at play in China. Urbanisation is a major factor: from a current 80/20 distribution of population between countryside and cities, the situation is expected to be reversed by 2030. Rural populations consume only 1/8th of what the urban Chinese do, and so consumption will continue to rise very fast. The urban Chinese are better fed, and 6 ft plus teenagers are a common sight in Chinese cities. Dairy is a strong element in this, with Government supported policies encouraging consumption, especially among children and the young. Milk and dairy are considered healthy, almost medicinal additions to one’s diet, rather than a mere normal part of it. The products consumed include drinking milk – reconstituted from powders – infant formula for babies, more recently yoghurt and UHT milk. Cheese does not feature: the average national consumption is under 200 grs per annum per capita – which speakers said would take 5 to 10 years to double! The relaxation of the one-child policy will boost annual births by 10%, or an extra 2 million babies per year. None of these factors, both men stressed, will be reversed, so that China will remain a very buoyant market for dairy products.

Exporters will not have all of the market to themselves, though, as China has been developing its own domestic industry for 30 years, and ambitions to improve its self-sufficiency beyond the current 70-80%. In the medium term however, the attempts to improve quality control and to restructure the industry by closing down smaller producers and replacing them with large-scale units have flopped. The sector is plagued with high imported feed costs, quality control failures, animal disease decimating the herd, and corruption, all of which have depressed domestic production in the last year, and ruined consumer confidence. Imports are trusted more – allowing for the Fonterra blip last year – and consumers are prepared to pay massive price premiums.

Even more heartening was the clear indication that Ireland is ahead of most of the rest of Europe in terms of its readiness to compete. United Dairy Farmer’s David Dobbin stressed that strategies of growth outlined by various UK and other European organisations had less support and follow up from national governments than our Food Harvest 2020.

All speakers agreed on another point: volatility of milk prices, and margins, will continue to challenge the sector. The ability of companies/industries to manage this will play a crucial part in their ability to compete.

For all that the long term outlook is rosy, the short term is more challenging. IFCN’s Torsten Hemme said strong profitability on dairy farms globally in the last number of months has raised global output by 3% in the period to May 2014, 4% for the same period in the EU alone, while demand growth has eased to 2% or less. This time last year, supplies were 2% down, and demand growing faster. This was always bound to have an effect on dairy prices – albeit a temporary one, until weather events, costs or price evolutions help redress the supply/demand balance.

Encouragingly, however, Torsten Hemme showed that both the US and the EU dairy industries had improved their cost competitiveness while the New Zealanders and Australians had disimproved theirs. Europe is well placed to compete on the global market, and Ireland is at the forefront of that move.

It was impossible to walk away from this conference feeling anything other than optimistic for Irish dairy farmers. We are well ahead of our British and most of our EU competitors in terms of our preparation for the post 2015 era. But we need not be complacent. Competitiveness is key to successfully reap the very real opportunities of international dairy markets, and we need to learn how to manage the roller coaster ride of volatility.

 

CL/IFA/13th June 2014

 

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