Sup­ply chain revo­lu­tion poses more ques­tions than an­swers

Dairy News Australia - - MARKETS -

THE SOUTH­ERN Aus­tralian dairy in­dus­try is in the midst of a ‘sup­ply chain revo­lu­tion’, with un­prece­dented change to the way milk is pro­cured, priced and pro­cessed, ac­cord­ing to a jus­tre­leased in­dus­try re­port. The Aus­tralian dairy sup­ply chain — the great re­set, a re­port by agribusi­ness bank­ing spe­cial­ist Rabobank, says these trans­for­ma­tive changes have been in­sti­gated by a num­ber of ma­jor events, which have caused sig­nif­i­cant ten­sion right along the dairy sup­ply chain. The re­port says three key events have been pri­mar­ily re­spon­si­ble for driv­ing this change — a drop in na­tional milk pro­duc­tion to a 20-year low, the in­ter­nal chal­lenges fac­ing Aus­tralia’s largest dairy co­op­er­a­tive and the re­set in far­m­gate milk prices to bet­ter align with global mar­kets. “To have so many changes in such a short time frame is un­prece­dented and there is no doubt Aus­tralia’s dairy sup­ply chain will emerge from all of this look­ing vastly dif­fer­ent and al­most un­recog­nis­able,” says re­port au­thor and Rabobank se­nior dairy an­a­lyst Michael Har­vey. While this sec­tor trans­for­ma­tion is lead­ing to short-term un­cer­tainty and po­ten­tial busi­ness dis­rup­tion for dairy farm­ers, Mr Har­vey says, it will present op­por­tu­ni­ties for some dairy farm busi­nesses — par­tic­u­larly around choice to sup­ply new mar­kets and more com­mer­cially at­trac­tive sup­ply con­tracts. How­ever, the re­port cau­tions, farm­ers need to thor­oughly as­sess these op­por­tu­ni­ties, and as­so­ci­ated risks, be­fore tak­ing ac­tion.

Changes to milk pro­cure­ment

The re­port says the fall in milk pro­duc­tion, along with the an­tic­i­pated slow rebuild, is set to see com­pe­ti­tion for milk amongst pro­ces­sors re­main fierce — chang­ing the way milk is pro­cured in Aus­tralia’s south­ern dairy re­gion. “While milk sup­ply is down across all dairy re­gions and is at its low­est level in two decades, northern Vic­to­ria has ex­pe­ri­enced the most sig­nif­i­cant drop, ac­count­ing for 50 per cent of this de­cline,” Mr Har­vey says. Mr Har­vey says Rabobank is fore­cast­ing a small bounce in Aus­tralian milk sup­ply in the 2017–18 sea­son, in the vicin­ity of 2.5 per cent. And in the medium-term, milk sup­ply is ex­pected to grow by a mod­est 1.8 per cent per an­num. “Based on this fore­cast, and as­sum­ing no ma­jor mar­ket or atyp­i­cal cli­matic dis­rup­tions, na­tional milk pro­duc­tion is not ex­pected to sur­pass the 10 bil­lion litre mark again un­til 2020– 21,” he says.

Re­set in milk-price lead­er­ship

Mr Har­vey says Aus­tralia’s largest pro­ces­sor, Mur­ray Goul­burn, has faced the most sig­nif­i­cant con­trac­tion in milk sup­ply, chal­leng­ing the role of the co­op­er­a­tive as the lead for price dis­cov­ery and bench­mark­ing in south­ern Aus­tralia. “While Mur­ray Goul­burn is on a jour­ney to turn­around its busi­ness, and a suc­cess­ful turn­around could see the re­turn of ‘co­op­er­a­tive prin­ci­ples’ as the bench­mark for set­ting milk prices — the re­al­ity is that this is years away and a new method of price dis­cov­ery will need to emerge.” This is an is­sue for the en­tire dairy in­dus­try, Mr Har­vey says, be­cause if Mur­ray Goul­burn isn’t set­ting the price, than who is?

Find­ing a bet­ter prod­uct-mix

“As mar­ket con­di­tions have started to im­prove in re­cent months, there has been an ac­cel­er­a­tion in pro­cess­ing in­vest­ments, with at least 700 mil­lion litres of new pri­mary pro­cess­ing ca­pac­ity com­ing on­line across south­ern Aus­tralia this sea­son,” Mr Har­vey says. “Much of this in­vest­ment has been con­cen­trated on in­creas­ing pro­duc­tion ca­pac­ity for ex­port-ori­en­tated cheese pro­duc­tion to tap into mar­ket op­por­tu­ni­ties — par­tic­u­larly in Asia with grow­ing de­mand in both the re­tail and food­ser­vice chan­nels.”

Michael Har­vey.

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