FEED Business Worldwide - August 2012

 

 

by F.E. OLIMPO

 

 

Thailand's dairy production experience remains a model among ASEAN countries. While all appears well on the surface, the ASEAN Economic Community's (AEC) impending 2015 import liberalisation is causing considerable anxiety.

 

Lately, Vietnam has been trying to upstage Thailand through massive dairy cow importation and rapid expansion of milk-processing facilities and dairy operations. Vietnam's state-owned dairy company Vinamilk now has a capacity that is three times that of Dutch Mill, Thailand's leading milk producer.

 

Only recently, Vietnam also imported 30,000 dairy cows to form part of the backbone of 12 state-of-the-art mega dairies and a milk processing plant now under construction.

 

But while it aims at becoming a dairy leader in the region, Vietnam still imports three-fourths of its milk needs, compared to Thailand which is 60-70% self-sufficient.

 

 

 

However, there's more than meets the eye in Thailand's so-called dairy success. Now it appears, as pointed out during a recent Milk Forum in Bangkok organised by leaders of the industry to map out strategies for the coming full implementation of the ASEAN Economic Community in 2015, that such success has been largely on account of high tariff barriers used by the government to shield the industry from foreign competition.

 

Without those barriers, Thai milk industry leaders now warn, the country's THB60-billion (US$1.9 billion) dairy industry would be in jeopardy and could lose out to China and Vietnam. The sad part of is that those barriers will be gone in just over two years.

 

From 2015, the 10-member Association of Southeast Asian Nations (ASEAN) will become one big economic community where goods and services from among themselves will flow freely. This leaves the industry little time to address serious structural problems.

 

 

 

Compared to Vietnam and China, Thailand's dairy industry has markedly lower dairy cow efficiency. The production capacity of each cow in Thailand is only 10 kg a day, while the world's average production standard is 15-16 kg a day, with some countries producing up to 25-30 kg per day. With its low efficiency per cow, Thailand's cost of producing milk is very high.

 

Nor are the dairy sector's problems confined to the bottom of the supply chain. With its high production costs, Thai fresh milk is 40% more expensive than powdered milk. A big difference like that could encourage Thai consumers to migrate to powdered milk, which could be much cheaper if imported.

 

At the Milk Forum, industry leaders agreed that the full implementation of the AEC would hurt, instead of help, Thai dairy producers. They said that major milk producers such as Australia, New Zealand, South Korea and China could easily penetrate the Thai market with cheaper, higher quality dairy products.

 

Among Asian countries, China and Vietnam pose the biggest threats. In Cambodia, Thai milk used to dominate the market. In recent years, Vietnamese milk, which is cheaper, has been giving Thai milk a run for its money in Thailand. This dim import penetration scenario could happen in the Thai industry's own turf, Thailand, once the AEC comes into effect.

 

And because of its free-trade agreement with ASEAN, China's cheap milk exports are expected to flood the local Thai market soon. Even now, China's Mengniu milk products have already made some inroads into Thai supermarkets.

 

China is particularly seen as the greater threat to local milk producers. Visit Limprana, chairman of the Federation of Thai Industries' food processing group, says China could easily dump high quality but relatively cheap fresh milk into the Thai market. Only China's reputation for milk scandals could, in theory, prevent it from routing Thai dairy producers in their own market.

 

But what can the government or industry do? A fait accompli for ASEAN, there's nothing much Thailand can do about it. The universal call among industry players is for the government to take measures to make the industry more competitive. But the call, made during the Milk Forum, is more on generalisation but less in specifics.

 

Vorathep Rangchaikul, the managing director of Dairy Plus Co, a UHT milk production subsidiary of the Dutch Mill Group, said, "the government should issue a national policy to solve the imbalance of raw milk supply and demand, inconsistent raw milk quality and high production cost for dairy farmers." But a mere national policy declaration would not move things as quickly as is required. For example, the government has long had a national policy of promoting pork exports but an export driven swine sector still remains a pipe dream.