Dairy leaders gear up to tap into growth in emerging markets

Industry predictions of soaring future consumption of dairy products in Asia and India are not being matched by demand in more easily accessible and lucrative European markets, according to analysts.

While Irish co-ops and farmer groups welcome the high demand predictions in the 2012-2015 Rabobank Dairy Outlook, the growing regional disparities also raise significant challenges — not least the need for market measures to protect farmers against milk price volatility.

However, it seems any EU hopes of gaining income from dairy will require a stronger focus on longer distance exports. Between them, China, India and South East Asia will account for more than 80% of future market volume growth.

Rabobank strategist Tim Hunt advised: “Supplying these growth markets with safe and affordable milk in coming years will require developing safe domestic supply chains in emerging markets and the expansion and marketing of surplus production in export regions.

“Tapping into emerging market growth will present a particular challenge for many of the world’s dairy processors, most of which are domiciled in, and still focused on, the EU and US markets.”

Irish dairy industry leaders have been gearing up for some time for the logistical challenges facing the sector’s longer distance export ambitions. With a clear focus on remote markets, Teagasc and the Irish Dairy Board are developing new cheeses and other exportable products at the Dairy Innovation Centre in Fermoy. Powders will also be crucial, notably with the output at the Danone infant formula plant in Macroom expected to soar.

ICOS dairy policy executive TJ Flanagan projects that global WMP prices will need to be of the order of $3,300 to $3,800 (€2,500-€2,900) per tonne for Ireland’s dairy model to be profitable, a rate which would allow Irish co-ops to pay 27c-32cpl to suppliers.

“Rabobank are talking about the real growth being in faraway markets like China, India and Africa, rather than in places like Germany, where growth is flat at around 1%.

“Ireland’s hope is to supply to those faraway markets. With the current 30cpl outlook, the world markets can work for us, but average prices don’t really tell how difficult it is for farmers to deal with price volatility.

“In the years from 2007 to now, the average 28-29cpl doesn’t seem not too bad, but that covers a range from 20c to 40cpl.

“Europe used to have market measures, with a dairy budget of €1bn annually to rescue the industry from price collapse. Now that money is in a generic “crisis” budget. Dairy needs its own separate support mechanism.

“Most Irish dairy farmers talk about 2009 as the big disaster year, with 22cpl being paid for milk. In fact, 2008 was far worse but the co-ops absorbed 3cpl of those losses. When the recovery failed to arrive in 2009, the co-ops had no reserves left.”

ICOS is working closely with Irish officials, watching as the EU’s farm ministers assess commission proposals to continue with measures to manage the agricultural commodity markets under the CAP post-2013.

Meantime, ICOS is also reminding farmers that the 35cpl which Dutch co-op Friesland Campina paid in some months of 2011 was for a far higher solid content than Irish milk. Significantly, the Dutch co-op’s 33.6cpl January price has come down to 30.5cpl in February.

Also of note, Irish milk and Dutch milk are two different products. The Dutch co-op is paying for 4.1% fat and 3.6% protein content, versus the Irish 3.6% fat and 3.3% protein co-op model.

The Dutch model also involves a 0.74cpl deductions for finance costs (principally loan repayments), plus 0.19cpl for fixed costs. Irish farmers would have to adopt a different farming approach to sell into that market.

The IFA and other farmer groups are all reporting an appetite for expansion, but note that members are also asking for some stability measures along similar lines to those sought by ICOS.

The IFA also shares the co-op umbrella group’s positive reading of the rise in demand for milk solids, for which Rabobank is predicting continued growth. The global price for butter has taken a mild hit, but as milk contains twice as much skim as it does butter, it is preferable that — of the two — skim should be the one to see greater future demand.

IFA dairy expert Kevin Kiersey said: “Despite global economic concerns, Rabobank’s 2012 to 2015 study, forecasts solid demand growth at 2.5% per annum, as against 1.6% in 2011. Most of the demand is expected from emerging countries, giving opportunities for the world’s dairy export regions, making dairy the envy of the food world. Rabobank suggests that milk production in low-cost regions like New Zealand, Australia and Argentina will not suffice to meet this demand, which creates opportunities for mid-cost regions such as Ireland.”

While Irish dairy industry leaders are conscious of the challenges, they are also keenly focused on the opportunities.

The visit this weekend of Chinese vice-president Xi Jinping is a timely reminder of the hitherto unimaginable scale of the opportunity awaiting Irish dairy exporters.