Report Highlights:

Australian milk production is expected to rise slightly in 2016 to 9.8 million metric tonnes, due to higher milk yields and improved seasonal conditions. The size of the dairy herd is comparatively unchanged at 1.7 million. Farm prices for milk and other dairy products are likely to decline further in 2016 as a result of higher world production and reduced demand. Domestic consumption of dairy products in Australia is relatively mature, but is expanding in Asian markets where most exports are directed. A series of recent trade agreements between Australia and countries in this region should facilitate dairy exports.

OVERVIEW

Australian milk production is expected to rise slightly in 2016 to 9.8 million metric tonnes, mainly due to higher milk yields and improved seasonal conditions. The size of the dairy herd is comparatively unchanged. Domestic consumption of dairy products in Australia is relatively mature, but is expanding in Asian markets. Lower world dairy prices could affect farmers in 2016 despite the significant depreciation of the Australian dollar over 2015. However, Dairy Australia's 2015 National Dairy Farmer Survey (NDFS) reported that three quarters of dairy farmers are feeling positive about the industry's future, a similar result in the previous year. Almost two thirds of those surveyed identified long term benefits to the industry from the Free Trade Agreements (FTA's) with Korea, Japan and China.

The dairy industry is the third largest agricultural industry in Australia and its exports account for around seven percent of world trade. One quarter of milk supply is used to produce drinking milk, while one third of output goes to cheese production. The remainder is used to manufacture skim milk powder (SMP), butter, wholemilk powder (WMP), consumer products such as yogurt and custard and ingredients including whey proteins and nutraceuticals.

Dairy processors in south eastern Australia are oriented towards the export market, while those in Queensland and northern NSW are more dependent upon the domestic market. Nearly 60 percent of manufactured product (in milk equivalent terms) is exported and the remaining 40 percent is sold domestically. Overall, around forty percent of dairy output is exported, mainly as cheese and milk powder, with China and Japan the largest markets.

The six largest dairy processors in the industry (Murray Goulburn, Fonterra, Lion, Warrnambool Cheese and Butter, Parmalat and Bega Cheese) use 90 percent of Australia's raw milk supply. There is significant international investment in the industry. Fonterra is a New Zealand-based cooperative, Parmalat is a subsidiary of French company Lactalis, Lion is a subsidiary of Japanese company Kirin, while Warrnambool Cheese and Butter is owned by Canada's Saputo.

SEASONAL FACTORS

Dairy farming is mainly pasture-based and milk production is significantly affected by seasonal conditions and reliability of rainfall. After suffering through drought in previous years, the outlook for dairy farmers in 2015 and beyond appears more positive, as average rainfall with improved pastures and water storages over 2015 and into the following year. Forecasts by the Bureau of Meteorology for the three months to December suggest most regions will enjoy above average rainfall. However, in Queensland the continuation of drought has led to a fall in the number of dairy farmers in the State.

The current outlook from the Bureau of Meteorology reflects a combination of very warm sea surface temperatures in the Indian Ocean, and a mature El Nino in the Pacific. El Nino is typically associated with below average winter-spring rainfall over the eastern half of Australia. Daytime temperatures from October to December are likely to be warmer than average along southern Australia, with warmer than average overnight temperatures across most of the country.

The three-month prediction (October to December) of the Bureau of Meteorology is for rainfall and temperature in most dairying regions to be about average. Overall, it appears that Australian dairy production will not be adversely affected by expected seasonal conditions, especially in the temperate areas where most milk and dairy product manufacture occurs.

FLUID MILK

Production

The volume of milk production in Australia is expected to be 9.8 million metric tons in 2016, up slightly from previous estimates. This increase is supported by the return of better seasonal conditions and a rise in milk yields, especially in Victoria and New South Wales. In 2016, the dairy herd size is expected to remain virtually unchanged at 1.7 million head. The farm gate price for milk is likely to average around A$0.40 a liter, down five percent, although international markets experienced a larger price decline. As the Australian domestic market consumes around 60 percent of milk production, it helped bolster the industry through a period of lower international dairy prices over 2015 and into the following year.

The dairy industry is largely located in high rainfall regions along the coast of southern and eastern mainland Australia, the south-west corner of Western Australia and Tasmania. Dairy farming is generally pasture-based but grain feed supplements are often used to increase milk yield. Victoria accounts for two thirds of milk production because of its temperate climate, good pastures and established irrigation systems. Around half of dairy product manufacturing is located in Victoria. The industry consists of a large number of small dairy farms, many of which are family owned and operated. Around ten percent of dairy farms have milking herds of over 600 cows.

Rainfall is a key input for pasture-fed dairy farms. Seasonal forecasts of the Australian Bureau of Meteorology (BOM) are for average rainfall in the three months to December, which should support a gradual increase in milk yield per cow. The volume of milk allocated for domestic consumption and factory have been slightly adjusted to account for rising Australian exports of liquid milk and value added products such as cheese, butter and milk powder.

Raw milk from dairy farms is processed into drinking milk or dairy products. Around ten percent of milk produced in Victoria and Tasmania is used for drinking milk, while the remainder is used for manufacturing products such as cheese, butter and yoghurt. Other States consume a significantly higher proportion of fluid milk, such as NSW where about half for further processing. Dairy farms and processors in NSW and Western Australia typically supply the domestic sector, while those in Victoria, South Australia and Tasmania are export-oriented.

As Australian milk production peaks in October, falls off until late-summer, and then slows in the cooler winter months, the continuation of more favorable seasonal conditions appears to be occurring at a favorable time for the industry. Milk production to July 2015 is around 2-3 percent larger than the previous year, according to Dairy Australia. Overall, better seasonal conditions in eastern Victoria and NSW and Tasmania, the major dairy States, have improved the production outlook in the major producing States. Western Australia and Queensland have experienced recent rainfall and are still recovering from earlier adverse seasonal conditions.

Productivity Developments

Milk production systems in Australia differ by region and according to climatic conditions, market requirements and the cost of inputs such as land, feed grains and irrigation water. The most common system is seasonal production, where cows calve during the peak period of pasture availability. This system is normally used by two-thirds of Australian dairy farms, especially in Tasmania, Victoria and South Australia. The other production system is year round production, in which calving is spread throughout the year making milk production stable over the year. This production system is used especially in areas which supply fresh milk for domestic production.

A recent ABARES survey reported that dairy farmers adopted a range of new technologies and management practices as farm size has increased and dairy production become more intensive. Improved milking shed layouts have contributed to productivity growth by reducing milking time and labor needs. Milking shed technology has moved toward automatic cup removers, automatic drafting, and automated cleaning. Some dairy farmers use unmanned aerial vehicles to provide precision maps of their soil and water resources. This can allow targeted use of inputs such as grain feed, irrigated water and fertilizers. Increased technology usually needs larger farm scale to be feasible.

Over the last decade, Australian milk yields have increased as a result of improved herd genetics, technology innovations and advances in pasture management. In the past decade to 2014, yields rose by 10 percent to reach 5,400 liters a cow. Average yield per cow is expected to reach 5,600 liters in 2015 due to better seasonal conditions, supporting the production forecast.

Consumption

Overall consumption of fluid milk increased from 104 liters per capita in 2010 to 107 liters in 2013 and is expected to reach 110 liters in 2015. Over time, Australian milk consumption has shifted from regular full cream milk to modified milks, such as reduced and low-fat milks although the full cream milk still accounts for almost half of domestic sales. Modified milk account for one third of the market, while; fresh flavored milk and UHT milk have a ten percent share by volume.

Overall consumption of liquid milk has increased due to a number of factors such as lower supermarket prices, a move away from sugar-based drinks on health grounds and the expansion of 'coffee culture' in Australia. Around half of Australia's milk production is consumed in the domestic market. The major supermarkets in Australia reportedly account for 80 percent of total retail sales and half of dairy product sales. In 2015, private labels of supermarkets accounted for over half of drinking milk sales.

Demand for fluid milk is shifting from regular milk to modified milk types such as reduced and low-fat milks. In addition, 'A2 drinking milk' (without A1 beta-casein protein) has increased its market share to around 8 percent in 2015. Consumers shifted to this brand because they expected it to be more easily digestible, although this has been disputed by other processors. Liquid milk products also compete with a range of milk substitutes, including almond milk, soy milk, high-fiber milk and coconut milk. There has been a small shift in consumption of these products because of consumer concerns over allergies, fat content and due to lifestyle choices. Plastic milk bottles account for 80 percent of all milk sales in supermarkets, with the other categories being gable-top cartons (8 percent) and UHT cartons (13 percent). The two-liter plastic bottle is the most popular size, with a market share of 45 percent while one liter cartons and plastic bottles together have around one fifth of the market.

Trade

Fresh milk has been considered unsuitable for export due to its short shelf life but from 2014, a number of Australian dairy companies began to airfreight liquid milk to China, for a premium price. It is expected that around 120,000 liters of fluid milk could be exported in 2015. This development followed changes to Chinese import clearance procedures now allow export milk from farms in Australia to reach the supermarket shelf in China in eight days. The opportunity to airfreight milk to this market is a positive development for geographically stranded dairy farmers and processors which normally supply only the domestic market. Processors are also seeking to expand exports of UHT to China.

Dairy,

Milk, Fluid

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Australia

USDA Official

New post

USDA Official

New post

USDA Official

New post

Cows In Milk

1,700

1,700

1,705

1,705

0

1,705

Cows Milk Production

9,700

9,700

9,800

9,800

0

9,800

Other Milk Production

0

0

0

0

0

0

Total Production

9,700

9,700

9,800

9,800

0

9,800

Other Imports

6

6

5

5

0

5

Total Imports

6

6

5

5

0

5

Total Supply

9,706

9,706

9,805

9,805

0

9,805

Other Exports

96

96

124

130

0

130

Total Exports

96

96

124

130

0

130

Fluid Use Dom. Consum.

2,600

2,600

2,670

2,650

0

2,650

Factory Use Consum.

7,010

7,010

7,011

7,025

0

7,025

Feed Use Dom. Consum.

0

0

0

0

0

0

Total Dom. Consumption

9,610

9,610

9,681

9,675

0

9,675

Total Distribution

9,706

9,706

9,805

9,805

0

9,805

1000 HEAD, 1000 MT

CHEESE

Production

Cheese is a major product of the Australian dairy industry. In 2016, production of cheese is forecast at 340,000 metric tonnes, up slightly due to higher milk production and growing export demand. Over 70 percent of cheese production occurs in Victoria where rainfall and temperature conditions have been moderate for grass-fed dairy production. Stocks of cheese are expected to increase pending a further expansion of exports.

Consumption

Demand for cheese in Australia is comparatively mature and sales are expected to be stable or slightly increasing in 2015. Cheese consumption has stabilized in recent years at about 13.5 kg per person, of which cheddar varieties account for 55 percent. Within this market, consumers are gradually switching to more packaged hard cheeses and away from processed cheese. Demand for lower fat cheese varieties has increased. Dairy Australia has identified five main cheese varieties: cheddar, semi-hard and stretch cheese such as mozzarella, fresh types such as goat's cheese and feta, hard-grating types including parmesan, and eye cheese and mould-ripened cheeses like blue vein and brie.

Almost half of Australian cheese sales are made by major supermarket chains, with specialty cheeses mainly sold by independent specialty stores. There has been a consistent trend towards sliced cheese in preference to block cheese for reasons of consumer convenience. Major domestic buyers of dairy products include retailers, cafes, restaurants, fast food companies and food manufacturers.

Trade

Around half of Australian cheese production is exported. Export volumes are expected to rise to 155,000 metric tonnes in 2015, encouraged by increasing demand in Asia and the weaker Australian dollar. Around 60 percent of cheese by volume is exported in bulk. Japan is the major market for Australian cheese exporters and the Japan-Australia Economic Partnership Agreement (JAEPA) will increase market opportunities. The agreement will halve the 40 percent Japanese tariff for processed cheese over ten years, while tariff reductions will occur on grated and powdered cheese. There will be a 20 percent tariff reduction on blue vein cheese with no volume restrictions and the elimination of tariffs on milk protein concentrates and lactose.

Australia's most significant dairy imports are cheese (75,000 tonnes or 25 percent of domestic cheese consumption), milk powders and butter (each about 20,000 tonnes or 20 percent). Around half of Australia's total dairy imports are from New Zealand. Imports from the European Union are typically specialty cheeses including parmesan and feta, while those from New Zealand and the United States are mainly cheddar cheese. Imports of mozzarella cheese from the United States have also been increasing for the Australian pizza industry. Demand for imported premium cheeses has declined.

Dairy,

Cheese

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Australia

USDA Official

New post

USDA Official

New post

USDA Official

New post

Beginning Stocks

24

24

34

34

0

42

Production

320

320

330

330

0

340

Other Imports

80

80

82

82

0

82

Total Imports

80

80

82

82

0

82

Total Supply

424

424

446

446

0

464

Other Exports

151

151

160

160

0

160

Total Exports

151

151

160

160

0

160

Human Dom. Consumption

239

239

244

244

0

244

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

239

239

244

244

0

244

Total Use

390

390

404

404

0

404

Ending Stocks

34

34

42

42

0

60

Total Distribution

424

424

446

446

0

464

1000 MT

Australian cheese exports by country, 2010-2015 (MT)

Country

2011

2012

2013

2014

2015 (a)

Japan

49,163

49,302

43,998

33,362

16,059

China

3,930

5,113

5,610

6,508

3,810

Singapore

4,863

4,047

3,936

4,168

2,178

Malaysia

6,099

3,358

3,470

3,858

2,573

Saudi Arabia

5,880

1,880

3,821

3,240

1,165

Philippines

2,557

2,196

2,908

2,841

1,220

South Korea

3,410

4,058

3,586

2,736

1,776

Thailand

2,443

1,838

2,139

2,477

1,024

United States

559

1,623

2,268

2,391

3,209

Other

27,808

22,794

27,253

20,722

9,290

Total

106,712

96,209

98,989

82,303

42,304

Note: Calendar years (a) first six months of 2015

BUTTER

Production

In 2016, production of butter in Australia is expected to be stable at 122,000 metric tons. While milk supplies have increased, markets for butter are constrained by mature domestic consumption and the closure of the Russian export market. As a result, stocks are forecast to increase from 2015 until export markets for Australian butter recover.

Butter is a dairy product that must contain over eighty percent milk fat, according to Food Standards Australia and New Zealand. It is typically produced jointly, with either skim milk powder or casein as co-products. Adjustment has been made for Australian AMF and butter oil production, which is included in the total. Dairy blends are spreads in which edible (plant) oils, such as canola, are added to a content of 60 percent butter to make the spread softer and easier to spread.

Consumption

Demand for butter in Australia has been gradually increasing in recent years. Annual per capita consumption of butter in Australia is around 3.9 kilograms and is forecast to approach four kilograms per capita in 2015. Consumers reportedly continue are interested in the 'naturalness' of butter, together with its superior taste and cooking functionality. Consumer preferences have also been driven by greater concerns about the healthiness of butter alternatives such as margarine. In 2014, private labels of supermarkets accounted for one third of butter sales.

The introduction of spreadable butters and vegetable oil-based dairy blends (which are easier to spread and lower in saturated fat) stabilized domestic market sales after a significant period of decline in preceding decades. The market share of dairy spreads of all table spreads has increased from 30 percent in 2000 to approach 45 percent in 2015. Sales of dairy spreads have increased faster than other major dairy categories in both volume and value terms. Dairy Australia estimates that two thirds of domestic sales of dairy spreads occur through supermarkets.

Trade

In 2016, exports of butter are expected to be stable at 40,000 tonnes. In 2014, Russia accounted for 40 percent of butter exports and the closure of this market has impacted on overall exports. Over time, the greater competitiveness of butter exports due to the lower Australian dollar is expected to increase exports. Imports of butter have been very stable since 2014, but Post expects the lower dollar to lead to a decline in imports to 21,000 tonnes in 2016.

Dairy,

Butter

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Australia

USDA Official

New post

USDA Official

New post

USDA Official

New post

Beginning Stocks

49

49

55

66

0

76

Production

117

125

122

122

0

122

Other Imports

23

23

21

23

0

21

Total Imports

23

23

21

23

0

21

Total Supply

189

197

198

211

0

219

Other Exports

45

42

40

40

0

40

Total Exports

45

42

40

40

0

40

Domestic Consumption

89

89

95

95

0

95

Total Use

134

131

135

135

0

135

Ending Stocks

55

66

63

76

0

84

Total Distribution

189

197

198

211

0

219

1000 MT

Australian butter exports by country, 2010-2015 (MT)

Country

2011

2012

2013

2014

2015 (a)

Russia

1,616

5,635

13,999

8,281

0 (b)

Singapore

4,902

3,865

4,866

5,930

2,700

Thailand

3,332

2,316

2,809

2,551

1,882

Hong Kong

2,540

2,197

2,696

2,512

1,110

Malaysia

3,246

2,724

2,375

3,177

1,903

Turkey

406

2,343

2,140

1,356

12

United States

754

2,269

1,949

1,175

1,639

Indonesia

1,238

1,196

1,932

677

599

Iran

2,658

4,006

1,848

0

0

China

869

1,990

1,719

1,465

1,461

Taiwan

1,345

2,014

1,605

1,530

1,282

Mexico

1,311

1,264

1,297

959

353

Other

14,342

19,246

8,816

12,513

6,953

Total

38,559

51,065

48,051

42,126

19,894

Note: Calendar years (a) First six months of 2015; (b) Russia imposed an embargo on imports of most food, including butter

MILK POWDER

Production

In 2016, production of whole milk powder (WMP) is expected to decline from the official forecast to be 95,000 metric tons. Declining domestic and export demand for this form of milk powder are key factors. Another influence is a build-up in stocks in major markets such as China. By contrast, production of skim milk powder (SMP) is expected to increase significantly in 2016, to 240,000 MT. Rising exports are forecast to reduce stocks in the short term as this demand is met.

Trade

Exported milk powder is used in overseas markets where fresh milk supplies are not readily available, due to either limited local production, or restricted access to cold storage facilities. In 2016, skim milk powder exports are expected to reach 150,000 tonnes, slightly above the official forecast of 145,000 tons because of greater milk supplies and export demand. Exports of whole milk powder are forecast to fall slightly from official forecasts because of a preference for skim milk powder especially for infant formula. Around three quarters of Australian milk powder is exported and the remainder sold on the domestic market. Major markets for milk powder and infant formula are China, Indonesia, Singapore and Malaysia.

Consumption

Milk powder is categorized as either of skim milk powder (SMP) or whole milk powder (WMP) depending on the fat content. Both products have a variety of uses, such as in bakery products, confectionery and milk chocolates, processed meats, ready-to-cook meals, baby foods, ice-cream, yogurt, health foods and reduced-fat milks. Industrial grade milk powder is used for animal fodder. In Australia, milk powder is mainly used as a food ingredient and to manufacture infant formula. Skim milk powder accounts for 60 percent of local production of milk powder and this share is rising. Many whole milk powder producers are switching to cheese, butter and skim milk powder for higher returns.

Whole milk powder is mainly used in food manufacturing and for infant formula for younger infants. Skim milk powder is mainly used for infant formula for infants over two years in age. In the domestic market, demand for whole milk powder has been falling compared to skim milk powder as Australians seek to reduce the fat content of milk products.

Dairy,

Dry Whole Milk Powder

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Australia

USDA Official

New post

USDA Official

New post

USDA Official

New post

Beginning Stocks

10

10

19

19

0

20

Production

122

122

105

105

0

95

Other Imports

10

10

10

10

0

10

Total Imports

10

10

10

10

0

10

Total Supply

142

142

134

134

0

125

Other Exports

81

81

70

70

0

70

Total Exports

81

81

70

70

0

70

Human Dom. Consumption

42

42

44

44

0

44

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

42

42

44

44

0

44

Total Use

123

123

114

114

0

114

Ending Stocks

19

19

20

20

0

11

Total Distribution

142

142

134

134

0

125

1000 MT

Dairy,

Milk, Nonfat Dry

2014

2015

2016

Market Begin Year

Jan 2014

Jan 2015

Jan 2016

Australia

USDA Official

New post

USDA Official

New post

USDA Official

New post

Beginning Stocks

96

96

57

57

0

30

Production

205

205

220

230

0

240

Other Imports

5

5

8

8

0

8

Total Imports

5

5

8

8

0

8

Total Supply

306

306

285

295

0

278

Other Exports

164

164

150

180

0

190

Total Exports

164

164

150

180

0

190

Human Dom. Consumption

85

85

85

85

0

85

Other Use, Losses

0

0

0

0

0

0

Total Dom. Consumption

85

85

85

85

0

85

Total Use

249

249

235

265

0

275

Ending Stocks

57

57

50

30

0

3

Total Distribution

306

306

285

295

0

278

1000 MT

Australian skim milk powder (SMP) exports by country, 2010-2015 (MT)

Country

2011

2012

2013

2014

2015 (a)

Indonesia

24,182

22,687

20,929

33,464

20,807

China

12,706

12,163

15,391

15,735

11,521

Singapore

17,192

20,267

13,370

14,338

8,990

Malaysia

7,792

15,860

9,716

14,975

8,736

Thailand

9,611

13,836

8,839

8,313

7,914

Kuwait

5,849

6,176

8,519

10,639

3,934

Philippines

7,914

14,287

6,793

9,721

9,000

Yemen

5,756

7,378

5,795

7,424

1,992

South Korea

7,661

6,258

5,702

5,710

3,687

Other

41,235

48,723

24,257

43,236

29,199

Total

139,898

167,635

119,311

163,555

105,780

Note: Calendar years (a) first six months of 2015.

Australian whole milk powder (WMP) exports by country, 2010-2015 (MT)

Country

2011

2012

2013

2014

2015 (a)

Singapore

17,458

16,096

13,959

15,244

6,398

Sri Lanka

11,905

11,045

11,807

12,882

6,904

China

6,695

7,895

23,784

13,059

2,506

Bangladesh

4,100

3,907

6,627

7,986

5,610

Malaysia

1,797

6,395

3,768

3,529

945

Indonesia

10,065

7,748

7,228

3,083

1,465

Oman

14,204

6,519

725

3,151

1,576

El Salvador

3,298

3,488

3,534

3,124

1,629

Mauritius

2,862

2,357

1,647

2,223

91

United Arab Emirates

4,113

4,500

2,311

1,515

701

Taiwan

2,700

3,207

3,422

1,810

929

Thailand

3,093

2,133

3,102

1,486

1,451

Other

33,859

33,806

14,187

11,668

6,155

Total

116,149

109,096

96,101

80,760

36,360

Note: Calendar years (a) first six months of 2015