Edinburgh in the autumn is a lovely place to be. Against the backdrop of the Castle Rock, the European dairy industry met on George Street 15-16 October to discuss where it’s going and the new start afforded by the ending of quotas this year in the European Union.
Kevin Bellamy and Matthew Johnson of Rabobank started off the economic breakout session, with Johnson noting that since the end of quotas on 1 April, Ireland and the Netherlands have “powered ahead” on milk production. Overall, there is an export surplus in areas such as Europe, New Zealand, Australia, Argentina, Brazil, Uruguay and the US, he says. Bellamy states that there is too much milk on the world market, caused mainly by the European Union, and wonders what will bring it all back into balance.
Discussions then focused on various analysts from around the world reporting into the session. In Christchurch, Emma Higgins notes that the milk prices have firmed, but are still 20 per cent less than the cost of production in New Zealand. Predictions for the 2015-16 year are 7-10 per cent lower output than last year, with lower stocking rates, El Niño and rougher weather accounting for the drop. However, there are hopes for a quieter season after a “torrid 2014/15 season.”
In Australia, the country is seeing an upturn after a difficult period. There is a slightly improved story with milk production and the Australian dollar both holding up well, and Australian farmers seeing A$5.60 per kg of milk solids. The trade situation has improved, according to Mick Harvey in Melbourne. He also notes that moderate sea temperatures in the Indian Ocean are moderating the effect of El Niño on output.
Tom Bailey in New York says the US is an “increasingly positive story for dairy. Farmgate prices have been at a 15 per cent premium versus other regions, with high domestic prices.” However, exports have dipped by 16 per cent and inventories are increasing, as exports have gone up by 37 per cent. “We expect farmgate prices to ease at the end of 2015 or beginning of 2016,” Bailey notes. Production will increase only marginally in 2016, but the exportable surplus will decrease by 800,000 tonnes due to increased domestic demand.
Russia and China
The continuing dairy ban in Russia is having a huge effect at European level, Johnson says. Around three billion kg of milk has had to find new markets, mostly in the form of cheese. The approval of several New Zealand plants will aid imports into the country, and provide an outlet there.
Bellamy says China is the bigger story. “China was the driver in the world market for five years. In 2013, it couldn’t get enough dairy, and in 2015 they’re pouring milk away. There is less GDP growth and less consumer growth. Sandy Chen in Shanghai notes demand growth was better than expected in the first half of 2015, at two per cent, and production has increased by 5.5 per cent. The prediction is that China will return to the world market in the second half of 2016, as the de-stocking continues and consumption will outstrip production. “We expect China will become a lot more normalised,” Bellamy says.
Looking at opportunities for Europe, Asia and Africa have the most capacity for consumption expansion, he notes. India is the world’s biggest dairy consumer, but there is not much participation in global trade by the country. Global dairy growth is expected to reach two per cent, which is faster than the last five years. The sectors seeing the most improvement will be food services and pizza ingredients, as well as ingredients for drinks, not cheese or liquid milk.
Meanwhile, over in Brazil, Andres Padilla in Sao Paolo says that dairy is seeing a tough environment, as sales are slowing. Prices are eight per cent lower than 12 months ago, and the currency is depreciating. Production should continue its decline, but in some categories such as cheese, a bit of growth is predicted for this year. UHT also continues to do well in Brazil.
EU exports to the Middle East are becoming very important, especially to Saudi Arabia, according to Johnson. Another bright spot is the improved diplomatic relations to Iran, and its 80 million population market that has not been available for years. “It is an exciting opportunity,” he notes.
The Rabobank analysts made several predictions to conclude. The first that the consolidation of dairies will continue until 2020, and globalisation will happen, as the European market is saturated and dairies have to look outside Europe. Specialisation will be key as competition increase, and players outside dairy, such as Coca-Cola and Pepsi Cola will continue to move into the dairy sector for more healthy drink options. There will also be growth in international partnerships, and significant investment in dairy by the top 20 dairies.
The co-op model
Mark Voorbergen of CM&P analysts discussed the co-operative model in a rapidly changing world. He points out that the end of the quota system means that member milk pools will be unpredictable but mostly rapidly growing, while demand growth will be largely outside the European market. These new markets will require different formats to the ones developed for Western markets, he notes. The shift will see 16 million kg of growth each to 2020 for India and Asia outside China, with Africa seeing 14m kg demand growth by the same year.
The forum
Michel Nalet, president of EDA, opened up the next day’s proceedings by noting that Dairy Europe has to sell quality and heritage, and it also has to sell increased quantities to fulfil the increases in production. He reminded the audience that 85 per cent of production remains within the EU, so the sector must be a champion for dairy, from the largest companies to the artisanal producers.
Dr David Dobbin, Dairy UK’s new chairman, noted that the end of quotas “has made things more challenging. We have to be market led, not just product led. And we have to have customers in mind for our products. If we expand without a plan, we can make matters worse.”
Dobbin notes that emerging markets may not be all they seem. For example, the BRIC economies, Brazil, Russia, India and China, are supposed to be driving growth, but their demand has eased back and is not as strong as the last three years. Dairies have to look at age groups too. Over 65s are the largest consumers, while under20 consumption is dropping, and demand could go down.
The EU28 produces 25 per cent of global dairy output, and many in Europe may have to ease back in the case of low prices. “Do we ease back or find new markets?” he asks. “Right now we have to get better at exports, and take market share from other exporters such as New Zealand and the US. However, I propose we compete not on price but on value. The challenge is to not become bigger, but better.”
He warns that there are no hiding places from competition in the modern world, and the key to thriving is to look at innovation and market-led improvements. “Not just the Chinese are very aware of food quality. We have to persuade health officials, who, while well-meaning, do no justice to dairy processors. For 30 years we’ve had to deal with the idea that saturated fat is a killer – eat butter, have a heart attack. But we’ve not seen better health outcomes, and the butter market was affected by the bad press for 30 years.
“Single nutrient health policies are bad for production and bad for the consumer,” he continues. “The recent salt reduction policy is affecting cheese. Over the next year we will engage with health professionals and officials, how to promote dairy in schools, and educate the general public.” A new All-Party parliamentary group has been formed to develop a framework with the government to enquire into dairy and health.
“We must stand on our own two feet,” Dobbin says. “We have to actively promote and educate the new generation on the value of dairy products.”
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