Optimising milk production is predominantly driven by yield improvements or increased cow numbers or both. The investment required to increase Australia's productive output to 15 billion litres is estimated at $A8.6 billion over the next 10 years.
Given the increasing age of dairy farmers over the next decade and considering the natural exit of farmers, thought needs to be given to how Australia can increase productivity per farm and per cow.
Encouraging profitable and proven farming enterprises to grow herd size through acquisition will only benefit the productivity play. On the basis of ANZ modelling, to produce 15 billion litres, the average herd size will need to be in the range of 730 to 825, against a current herd size of 275 cows.
If we look back to the year 2000, when the average herd size was 168, the notion of growing herd size by 60 per cent to today's average of 275 would have looked almost unattainable. Growing herd size to 730 in a planned and sustained fashion is not out of the question.
While Australia currently only accounts for around 2 per cent of the world's milk production, there is the potential for dairy exports as a whole, including liquid milk, powered milk, cheese and yoghurt, to lift due to the rapid growth of the Asian middle class.
Most of Australia's dairy exports are already destined for Asian countries. Key markets include China, Japan and Indonesia, which account for approximately 75 per cent of total exports. Greater China is now the most important export market, accounting for 19 per cent of exports in volume and value.
There is also the added impact of the China-Australia Free Trade Agreement, especially when China's milk demand for imports is already larger than Australia's total production. This means Australia is now even better positioned to capitalise on meeting China's increased demand.
After decades of a one child policy, China's Communist Party will now allow couples to have two children. Although this impacts 100 million families, small family size is ingrained in Chinese culture and the full impacts of this policy easing will take time to be seen.
While the growth predictions and numbers in China look enormous, other Asian markets offer significant growth potential and value to Australia. Over the next 10 years, predicted growth in dairy imports of Indonesia and Vietnam are 3.3 per cent and 3.2 per cent respectively. Imports of Australian cheese are expected to almost double between by 2023 to 13,000 tonnes.
As Australia benefit from Asia's growing population and expanding middle class, it needs a renewed focus on agriculture and the dairy sector in particular, to help underpin a stronger and more profitable regional Australia.
KEY CHALLENGES FOR AUSTRALIAN DAIRY
There are, however, key issues that confront the industry, such as a fragmented dairy supply chain, milk supply constraints, ageing farmer population and a reluctance to invest capital. Also of significance is the live heifer trade, where farmers are paid a premium for heifers, providing a welcome source of non-milk income.
Milk supply constraints indirectly result in under-investment in technology and scale in dairy manufacturing. This in turn impacts the Australian dairy supply chain in terms of cost competitiveness by global standards.
Once milk is produced there needs to be a high level of integration across the supply chain: farmers cannot operate without processing capacity, nor can processors survive without milk supply. This integration is critical due to the perishable nature of milk.
Looking past current farm gate prices is difficult for both processors and farmers but it is something that needs to be done, if we believe in the long term prospects for dairy. Our willingness to innovate and embrace new approaches is critical to this.
The seasonality of Australian farming, the expertise of herd and grazing management, along with volatile weather conditions, have meant Australian capital holders have been reluctant to invest in the dairy sector.
THE RIGHT SIGNALS
The recent wave of acquisitions and large scale investments from multinationals has shown institutions are recognising Australia as a reliable and profitable destination for dairy investment.
There are many constraints and challenges ahead but good dairy businesses are finding a way through. These businesses will be critical in leading the industry not just in long term viability but towards prosperity. It seems this opportunity before Australia is too good to miss – if it does, global competitors won't.
Let's hope that there is enough price signal and profit at the production level – without this, the milk may not come and opportunity will be someone else's. Only investment today will capitalise fully on the generational demand opportunity that lies ahead.
Mark Bennett is Head of Agribusiness, Australia at ANZ