February 22, 2012
The world dairy sector looks set to be characterised by a future of solid market growth but unevenly spread, a Rabobank's new industry report said.
The increase would be dominated by developing markets, Rabobank senior dairy analyst Michael Harvey said. Many of the markets, he added, would require outside assistance to supply enough product to meet rising appetites for dairy. "This will sustain an era of trade growth and provide a substantial opportunity for many farmers, traders and processors in export regions," he said.
The report reveals that the cost of producing milk in these exporting regions remains much higher than it was prior to the 2007 commodity price boom. With most of the growth in consumption volumes expected in regions that are already short of milk, such as China and South East Asia.
"Importantly, we also find evidence that the gap between 'low' cost and 'mid-table' cost milk producers is narrowing, providing a more level playing field for exporters in a range of regions, and increasing the importance of export cooperatives in ensuring that their farmers are best placed to benefit from opportunities abroad," Harvey says.
The report expects production costs to remain elevated for the medium-term, supporting a high trading range for dairy commodity prices.
Harvey says in essence, Rabobank's analysis indicates the vast increase in money flowing through the dairy supply chain in recent years has been either 'eaten up' by farmers' input costs or capitalised into the value of farmland.
"On-farm profitability has improved somewhat, but not enough in most cases to improve the average return on assets despite the increased difficulty of managing what has become a more volatile business," he says.
"Nor has there been a large improvement in the position of the downstream dairy processing industry, though the sector has done extremely well to defend or modestly improve its position despite the challenge of rising costs." In reality, Harvey says: "An era of strong demand and heightened prices for dairy has brought as many challenges as opportunities for the sector".
"Experiences for dairy processors have varied depending on the which part of the sector they have exposure to - despite a step-change in ingredient costs and, for many, a difficult market environment, processors have generally maintained or improved their margins," he says.
"Outsiders looking to enter what may in some regards appear to be an industry that has entered a 'golden age' will need to carefully choose their investments, while those already inside need to continue to closely track industry direction and competitor moves to ensure they manage the risks adequately to position themselves to prosper."