At times it seems that there is a bush fire under the billy down by the billabong as Australia and New Zealand hasten to outdo each other in the name of deregulation and industry consolidation. Every week brings news of another merger or proposed merger in the dairy industry. In this article, Alan Vickers of IMES describes the Australian dairy scene and some of the recent developments.

Australia, like its neighbour New Zealand, should be one of the few ideal locations for dairy farming in the world with some of the lowest milk production costs. Normally there is good pasture and adequate supplies of water, although as might be expected in a country of 7.7 million square kilometres, some areas are much more suitable for dairying than others. The key characteristics of the sector together with recent salient trends, may be summarised as follows:

• Australia produces around 2% of the World’s milk – 10,850 million litres estimated for the latest year 1999/2000. This volume has been growing strongly in recent years (for example, by 6.6% last year) as a result of increased numbers of cows and higher yields.
  
• While the number of farms has been in decline, the average herd size has grown. In 1990, there were 15,396 farms but this had fallen to 12,888 in the latest year. Average herd size has gone from 77 in 1975 to 170 in 2000.
  
• Milk has traditionally been considered as being either ‘market milk,’ that is drinking milk or ‘manufacturing milk,’ that is to say milk used for processing. Market milk accounts for approximately 18% of the total and is declining because domestic milk consumption per capita is static while Australian exports of processed dairy products increase. Market milk was for years affected by regulation (see below) and the average price during the 1990s was roughly double that of milk used by processors.
  
• Approximately 60% of all milk produced is exported either as liquid milk (86,000 tonnes) or in the form of dairy products such as milk powders (413,000 tonnes), AMF/butter (125,000 tonnes) and cheese (222,000 tonnes).
  
• The high level of exports puts Australia in third place for share of international trade in dairy products with 15% after the EU (34%) and New Zealand (30%).
  
• Although only accounting for around 3% of the total national land mass, Victoria has the best natural conditions for dairying and 60% of the country’s dairy farms are in Victoria, which produces 62% of total Australian milk. New South Wales, in second place, accounts for only 13% of total milk production. There is an understandable correlation between States with a high level of milk production and the percentage of milk going into processed products. For example in Victoria, this is around 93% of the total compared to between 50-60% for Queensland, New South Wales and Western Australia.

Even before deregulation, the structure of the Australian dairy industry was concentrated. The top five processors (Murray Goulburn, Bonlac Foods, the Dairy Farmers Group, National Dairies and Nestlé Australia) handled 74% of all milk processed (up from 50% ten years previously). The top three Cooperatives, that is to say Murray Goulburn and Bonlac based in Victoria and the Dairy Farmers Group in New South Wales were alone responsible for 60%. Other milk processors include such international names as Nestlé, Parmalat, Kraft and Cadbury. The following table lists the major milk processors ranked by order of milk intake.

The Path to Deregulation

In the 1980s a levy ofA$0.02 per litre was applied to all milk produced in Australia to subsidise Australian dairy exports. Such export subsidies became impossible under GATT/WTO rules and, in 1995, the Domestic Market Support Scheme (DMS) was introduced to restrict support to the domestic industry. Under the new arrangements, levies were raised on drinking milk and on manufacturing milk used in products for the domestic market. The scheme was due to be terminated on 30 June 2000. Also for much of the 1990s the individual States had controlled the sourcing, distribution and pricing of market milk using either quota systems or State pooling arrangements.

The regulatory arrangements had had the effect of both preventing a truly national market in drinking milk and also making imported products more competitive on the Australian market (New Zealand had gained a 15% share of the Australian domestic cheese market for example). Although Victorian farmers had received almost 90% of the support funds, the large Victorian processors were keen to deregulate and it was thought that the Government’s review under the National Competition Policy would require deregulation of the Victorian industry. Victorian processors believed they would be more competitive in export markets compared with the producers of dairy products in other Australian states who had allegedly benefited from cross subsidisation of their manufacturing milk.

GlobalData Strategic Intelligence

US Tariffs are shifting - will you react or anticipate?

Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.

By GlobalData

Learn more about Strategic Intelligence

The prospect of a compensated deregulation scheme compared with an abrupt and uncompensated deregulation following the expiration of the DMS, concentrated the minds of milk producers in the other states (and especially those with pooling arrangements such as South Australia and Tasmania). In fact liquid milk prices had come under pressure even before deregulation and longstanding “gentlemen’s agreements” to stay out of territories were being threatened. The New South Wales based Dairy Farmers Group was not surprisingly one of the fiercest opponents of deregulation.

The Australian Government put together a compensation package worth A$1.78bn designed to achieve a managed and orderly deregulation process. This mainly consisted of payments of A$0.4623 per litre of market milk and A$0.0896 per litre of manufacturing milk based on production in the base year of 1998/99. The total was to be split into equal payments over an eight-year period and paid quarterly. There were other inducements to encourage farmers to leave the industry entirely. The funds for the package were to come from a levy of A$0.11 per litre applied at retail level to all liquid milk products over the eight year period.

The expectation of industry observers was that the retail milk price would either stay the same or perhaps increase slightly. In any case, Victorian prices plus freight would set the market price. It was forecast that the number of dairy farms would shrink by possibly 30% while the average herd size would rise to around 300, that is to say the larger, more efficient farms would benefit. The number of dairy cooperatives, many of whom were encumbered with debt, would decline and there would probably only be room for two drinking milk processors serving the main concentration of the Australian population on the East Coast. The advantage of feed grain availability and cost in Australia was expected to give a competitive advantage over New Zealand producers, especially in view of the trend in New Zealand to take more pasture land out of milk production.

Proposed changes post-deregulation

Among the many structural changes which have been proposed or even introduced since the process of deregulation began are:

Parmalat, which had bought the large Queensland based Paul’s Dairy Group in 1998, offered to buy into the Dairy Farmers Group but was rebuffed. In 2000, merger talks with National Foods were also abandoned.

Bonlac’s increasing financial difficulties led it also to consider a merger with the Dairy Farmers Group before agreeing with the New Zealand Dairy Board (NZDB) for the latter to take a 25% interest in Bonlac and take over Bonlac’s export business (still to be confirmed however and may be delayed by a Murray Goulburn offer for Bonlac made at the end of February).

Under the NZDB scenario, NZDB’s and Bonlac’s domestic butter and cheese business in Australia would be merged. In the meantime of course, all the assets of the NZDB are now to be taken over by the new Global Dairy Company, arising from the merger of the two largest New Zealand cooperatives (assuming approval by the end of March).

Bega Cheese has decided to have its products marketed by the new Bonlac/NZDB Australian marketing company if this comes to pass and in return will take over the cutting and packing of all cheese for the company in its new cheese plant.

Kiwi Cooperative Dairies (the other half of Global Dairy) took a majority holding in August 2000in the Perth based dairy processor Peters & Brownes, which in turn owns Tip Top in New Zealand and also produces Cadbury ice cream (the number two ice cream brand in Australia) under licence in Australia.

National Foods also courted the Dairy Farmers Group but the negotiations failed at the end of 2000. The New Zealand Dairy Group (that is to say, one of the two New Zealand cooperatives making up the new Global Dairy Company) took an 18% interest in National Foods in January of this year, in the process making it difficult for National Foods itself to proceed with its intention of buying the New Zealand Dairy Foods company, which must be sold off by the New Zealand Dairy Group as part of the Global Dairy merger. National Foods has however bought the New Zealand rights and production facilities for the Yoplait brand from International Fine Foods of Palmerston North.

Dairy Farmers Group, which has the Danone franchise, is considering turning its branded yoghurt and milk business into a separate and publicly listed concern.
The background to these moves since deregulation has been a drop in retail milk prices and difficulties in milk production caused by severe drought conditions – in Tasmania for example there was no significant rain between Christmas and mid March. Market milk, for which farmers received an average of 52.5 cents per litre before deregulation, fell to 30.6 cents.

“Recipe for a hell of a scramble”

As the Chairman of the Australian Dairy Industry Council has said, “The structure of the Australian industry with three big supermarkets tendering for market milk and three major milk processors struggling to get home brand share is a recipe for a hell of a scramble for price to the detriment of the farm sector, and that is exactly what has happened.”

At first, following deregulation, the supermarket groups (which are responsible for about 50% of drinking milk sales in Australia) sought to improve their margins. In contrast to regional supply arrangements, which had previously prevailed, they moved to national tendering to secure lower prices. Dairy Farmers won the contract for Woolworth‘s own label milk in Victoria. This allowed Woolworth to cut the price on its own label milk by 25% nationally and brought pressure to bear on the price of own label milk from competing chains. Processors with a heavy dependency on drinking or market milk have suffered greatly – National Foods for example has forecast lost revenues of around A$A40m in the financial year 2000/01.

For the moment, the New Zealanders are naturally preoccupied with the detail of their mega merger. Once that is digested, there will be more consolidation in the Antipodes. It is perhaps not too far fetched to envisage eventually perhaps three giant processors sharing the Australasian milk market and the Australasian share of the world dairy trade. One should be Global-Bonlac. What the other animals might look like is still not clear – a Murray-National or even a Parmalat-Farmers perhaps?

The following article first appeared in Dairy Industries International, April 2001

IMES research reports can now be purchased quickly and easily through our Knowledge Store. For further information about the reports and how to order click here.

Sign up for our daily news round-up!

Give your business an edge with our leading industry insights.

Sign up