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Asian dairy: "the race is on"

15 Oct 2018

The race is on to win market share in Asia’s cheese market, with the region offering “a compelling growth opportunity" for Australian dairy exporters in the medium term, according to a just-released report by Rabobank Australia.

The race is on to win market share in Asia’s cheese market, with the region offering “a compelling growth opportunity" for Australian dairy exporters in the medium term, according to a just-released report by Rabobank Australia.

Despite the robust growth outlook, the report - Asia’s fast-moving cheese markets – Australia’s race to win - warns other exporting nations with a much larger production base and export potential are also looking to expand their presence in the Asian region.

There is evidence market competition is already increasing, but, according to Rabobank senior dairy analyst Michael Harvey, it is set to intensify as leading cheese manufacturers in New Zealand, the US and Europe invest in production capacity.

“Over the next three years, we will see this new processing capacity come online,” he said, “which potentially be more than sufficient to service the Asian markets.”

With “a lot riding on Australia’s ability to succeed in the Asian cheese market”, Harvey said, the industry “must play to its strengths” by focusing on maintaining and growing market share in the high-end segments of the market. Citing investment in dairy innovations and formulations as the way forward, he says tailored products could include improved functionality and desirability (to suit local cooking styles), clean label initiatives, nutritional demands (such as, additive free, sodium reduced) and the development of snacks tailored to local consumers.

“But much of Australia’s ability to grow exports into the Asian region will hinge on the sustainable growth of our milk supply,” he said. “And, while possible, growth prospects are up against hard constraints and seasonal impediments at the moment.”

Australia’s cheese production has grown in recent years, Harvey said, with close to half a billion dollars injected into the nation’s cheese-processing capacity since 2015 – to account for 54% of total capital expenditure in dairy processing.

“And this bias towards cheese production doesn’t look like abating any time soon, with new processing capacity continuing to come on board, while the tight supply of milk is being prioritised for the higher growth and healthier margins offered by cheese and whey streams,” he said.

“This comes at a time when Asia’s cheese imports are also growing, with China notching up an annual cheese import growth rate of more than 20% between 2012 and 2017. While growth has been around 10% per annum over the same period, in the ASEAN-5 countries of Indonesia, Malaysia, Thailand, the Philippines and Vietnam.”

Harvey said growth has been slower in Japan and Korea (at an annual rate of 2%). However, these two countries, together, import ‘three times more cheese than China (importing 340,000 tonnes in 2017, compared with China’s 100,000 tonnes).

“That said, China is where the growth opportunities lie for Australian cheese exports, “ he said, “with China’s annual cheese imports set to potentially double by 2023.”

While cheese is not part of the traditional Asian diet, Harvey said, there are many fundamentals (namely, the increasing dominance of the younger consumer with a preference for convenience and eating out) which are supporting the forecasted increase in cheese demand over the medium term.

“Most of the growth is set to come from quick-service restaurants (QSR), with many pizza and burger chains expanding their store footprints and penetration in Asia,” he said. “For example, McDonalds opened more than 900 new stores in China between 2012 and 2017 and is expecting to double the number of its stores in the next five years.”

While the outlook for growth is strong, Harvey warned, there are downside risks that could disrupt growth in Asian cheese consumption. “The trade war between China and the US continues to pose the largest risk, while retail foodservice chains are showing signs of margin pressure from macroeconomic and inflationary headwinds,” he said.

The report says that, while Australia is well-placed to be an integral part of global QSR supply chains, “the competitive environment is rapidly changing as other exporters also look to expand their presence in the region”.

“New Zealand has set the pace in terms of growing cheese exports to Asia,” Harvey said, “and now supplies half of China’s cheese import requirements.”

While in the Northern Hemisphere, he said, “a number of countries have expanded cheese production to absorb the oversupply of milk and to generate better returns from cheese versus milk powder”.

“The EU and US cheese industries have sizeable and growing milk pools, as well as significant cheese production capacity, with some big investments in large-scale cheese plants coming on board,” Harvey said. “Over the next three years we will see much of this new processing capacity come online, and these facilities will have the capacity to service the Asian market, should market dynamics warrant it. This looms as a major competitive threat to Australia.”

Despite Australia’s proximity to the Asian market and its ability to compete on price, Harvey said Australia has “no absolute competitive advantage” in supplying Asia’s cheese market.

“As such, if Australia is to succeed in its industry-wide Asian strategy for cheese and whey-derived nutritionals it must to play to its strengths,” he says, “as an alternative supplier to other regions as well as a reliable supplier to customers demanding high-quality product.”

While China will offer significant scope for growth, Harvey said, it is important not to underinvest in slower growth markets such as Japan and South Korea, particularly as trade access to these countries is improving.

“Strong demand is also pegged to come from the ASEAN-5 region,” he said, “and further afield there will be opportunities to ride the QSR expansion wave into other priority markets such as the Middle East and potentially, India.

“But the immediate priority for Australia to increase its cheese exports lies with the industry here sustainably increasing milk production and improving plant utilisation. While possible and Rabobank forecasts a modest growth in milk supply over the next five years, there are many headwinds to achieving this, particularly in light of the current season.”