Australian dairy industry shifts its focus from China to Southeast Asia

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Michael Harvey, Rabobank senior dairy analyst
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As trade tensions with China increase, Australian industries as diverse as cotton, barley, coal and meat are being forced to reassess their export strategies. Now a new report highlights how the dairy industry plans to become less reliant on the Chinese market by focusing on ASEAN-6 countries.

After prioritizing the Chinese market for the past decade, the dairy industry not only faces geopolitical tensions with our largest trading partner, but also slowing growth in China’s demand for its products.

Although the Australian dairy sector has not been largely impacted by the recent deterioration in relations with China, the industry’s exposure is identified in Rabobank’s new report, Dairy export boom beckons in ASEAN-6 with a push and pull.

Co-author of the report, Rabobank senior dairy analyst, Michael Harvey, says, “As a result of China’s exceptional dairy market growth, many dairy companies now have a high degree of exposure to the Chinese market and are more sensitive to trade tensions.

“And, trade tensions aside, China’s dairy demand is also expected to ease over the next decade as the rate of growth in per capita demand in that country slows. This slowdown should further compel dairy exporters to reassess their export growth strategies to consider increasing investment in the ASEAN-6 region. Dairy companies will need to evaluate their export portfolios to determine if they are overweight in China and/or underweight in Southeast Asia.” 

ASEAN-6 is a growing market

The report identifies the combined dairy import deficit of the ASEAN-6 nations (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam) is one of the largest in the world and growing. 

The bank forecasts the combined annual milk deficit of the ASEAN-6 countries to reach close to 19 billion litres (liquid milk equivalent) by 2030 – up from an estimated 12.9 billion litres in 2020. 

This would see growth in demand for dairy imports in the region eclipsing that of China – currently the world’s single-largest dairy importer – where the annual milk deficit is forecast to reach 15 billion litres in 2030 (from an estimated 10.2 billion in 2020). 

And Michael says that with the ASEAN-6 representing a growing opportunity, these markets are expected to be an increased focus for dairy exporters around the world, including Australia, over the coming decade. 

Australia’s dairy sector has a high level of exposure to China in terms of export revenue, Michael says, but also enjoys long-standing markets in the ASEAN-6 countries. 

“However, Australia’s market share in the ASEAN-6 dairy markets have fallen over the past decade as milk production has dropped and other export markets, such as China, have been prioritised,” he says. 

In 2019, approximately 35 per cent of Australian dairy exports went to China, with 30 per cent to Southeast Asia. 

“Given milk production here is growing again and a key goal outlined in the Australian Dairy Plan is to grow production over the medium term to utilise in export markets, now is a good time for the sector to be having discussions about its long-term role in the global market,” Michael says. 

“The critical question is what markets should we invest in for the long term and how that then shapes the direction of the local supply chain.” 

Indonesia and Vietnam are standout markets

While dairy demand growth may be slowing in the massive Chinese market, there is “significant headroom for growth in per capita consumption” in Southeast Asia, the report says, underpinned by socio-economic developments and local initiatives that support consumption growth and as incomes rise. 

Factors supporting growth in these markets include: 

  • large populations, increasing urbanisation and a growing middle-class with purchasing power 
  • the continuing development of integrated supply chains 
  • current low per capita dairy consumption rates 
  • private and public investment to boost consumer awareness about the nutritional benefits of dairy and 
  • government initiatives to expand local food processing. 

Indonesia and Vietnam remain standout markets for growth in the region, Michael says, with their economies having the strongest mix of positive macro-economic and demographic factors. 

While dairy sales volumes had been severely hampered by the impacts of COVID-19 through Q2 2020 in the ASEAN-6 markets, the report says, Rabobank forecasts retail dairy consumption in the region to return to growth in 2021. 

Competitive battleground 

While the ASEAN-6 market offers good export growth and diversification opportunities for dairy exporters, the report warns it is a highly competitive battleground. 

“Jostling for position in this market are a mix of strong local players with large and growing market share, established global dairy companies, other international dairy players seeking to broaden their scope into the region and also major Chinese dairy interests,” Michael says. 

“Winning in these markets will require targeting the right investments and fine-tuning business models.” 

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