Running head: ANALYSIS OF THE AUSTRALIAN DAIRY

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Analysis of the Australian Dairy Industry

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Analysis of the Australian Dairy Industry

Introduction

The Australian Dairy industry has experienced exponential growth over time. The growth

has been compounded with a variance in the cost of milk products with respect to the associated

inputs. According to Australian Dairy Industry Conference annual report (2016), the industry is

the third largest in total agricultural output, and is on a constant growth. The dairy industry

accounts for up to 8% of all gross agricultural output, translating to AUD$4.3 billion (ADIC,

2016). Additionally, the level of export of dairy products stands at AUD$3.0 billion, which

translates to 7.0% of the total agricultural export for Australia (Edwards, 2013). The last three

decades have seen a lot of dynamics in the Australian dairy industry due to the changing global

economic environment and security situations (ADIC, 2016). The annual report (2016) states that

the causes of these changes include drought that defines the demand and supply of commodities,

dynamics in the global markets, and termination of regulated pricing and outsourcing

mechanisms of milk and dairy products starting the year 2000. A decrease in domestic aid for

dairy farmers and reduced support for processing of milk commodities has also been associated

with the existing changes in the Australian dairy industry (Brennan, 2017).

It is estimated that there are close to 1.6 million dairy cows in Australia kept in over

7,000 farms across the country (Harris, 2014). The milk production capacity is estimated at 9,000

million liters (Harris, 2014). The temperate regions of the South-East are the main dairy

production zones in Australia (Brennan, 2017). However, all states produce milk and have

industries that facilitate the processing of various product. Fresh milk is also supplied to the
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neighboring towns and cities. The Australia Dairy Industry Conference (2016) observes that the

average herd per state is approximately 220 cows. Data reports indicate that close to 10% of the

dairy farms have excess of 500 cows that produce fresh milk and this accounts for 30% of the

total milk production (Edwards, 2013). The Australian Dairy Industry Conference (2016) report

that 45% of the Australian dairy farms have less than 250 cows yet account to approximately

20% of total milk production in the country. Annually, a single cow is averaged to produce 6000

liters of milk

The milk production capacity of a cow depends on the availability of pasture.

Nonetheless, the production is high when the cows are fed with mixed rations as opposed to

pasture only (Brennan, 2017). As compared to other cows from the neighboring jurisdictions,

Australian-bred dairy cows tend to have a higher milk production capacity. Of the total fresh

dairy production, 20% is consumed annually while 80% is exported (Harris, 2015). The

Australian dairy industry contributes to the national income by employing excess of 5000 people.

Competitive Environment

The report by Harris (2015) indicates that there exists a competitive advantage for the

Australian dairy industry, at least according to the quoted numerical data related to the

production cost. It is projected that the annual income for the individual dairy farms will decline

by the year 2017; therefore, a unit drop of AUS$105,000 per farm (Harris, 2014). The decline is

associated with the rigidity in adopting new farming technologies and the negative consequences

of adopting some of the new technologies. The reduction in fodder production by individual

farmers is another leading cause of decline in the milk production in Australia as compared to
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other countries like New Zealand (Brennan, 2017). The changes in the significant input factors

are also responsible for the anticipated decline in dairy production. For instance, dairy cows,

human personnel, feeds and supplements are some of the inputs that experience variance thus

consequential change in the amount of output. Data quoted by the Australian Dairy Industry

Conference (2016) shows that the cost of grain feeds and hay have been on the decline in the

recent past resulting to a high demand and supply for dairy commodities.

The Australian government has made efforts to subsidize the cost of feeds for dairy

farmers to increase production. As compared to other countries, favorable seasonal conditions

especially during Sumer and Spring increase the amount of pasture, thus overall dairy production

(Harris, 2015). Irrigation is highly practiced in the northern region and this serves as yet another

competitive advantage as it results in high internal productivity. According to Edwards (2013),

there is low income generation in the Subtropical of Western Australia and New South Wales but

due to increased irrigation, the level of income is projected to increase.

Table 1: Financial Data and projections for the Year 2014 to 2017 (Australian Dairy Industry Conference, 2016)

Performance Units 2014–2015 2015–2016 2016–2017

measure

Australia

Total cash receipts $ 786,620 766,800 706,000

Total cash costs $ 629,840 641,700 602,000

Farm cash income $ 156,780 125,100 105,000

Farm business profit $ 63,110 –10,200 –48,000

Rate of return (excl. $ 3.2 1.3 0.3

capital appreciation)
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From Table 1 above, an addition in production cost over the years is evident. This recent

data is an indication of a drop in the total dairy revenues. The data also indicates eminent loses in

the dairy industry. Nevertheless, the dairy industry has a comparative advantage when the other

sectors of the economy are considered. According to Harris (2014), the country has adequate

trained personnel in the dairy industry. Enough pasture complemented with this expert personnel

is an assurance of growth and ultimate expansion of the dairy industry. Moreover, Australia has a

suitable pricing model that encourages the growth of the industry. For example, the government

regulates pricing and subsidies to boost dairy production.

Strategic Landscape

An analysis of the Australian Dairy Industry using the Porter’s Five Forces Approach

shows a thriving industry. A study of the macro and micro environments indicates that the

industry is doing well using the locally available resources. Local pasture, feeds, supplements,

and medication are the important drivers of dairy production profitability in Australia (Brennan,

2017). The approach also reveals the instances of threats such as substitute commodities,

established rivals within the industry, and the bargaining power of consumers and suppliers.

New entrants however, pose a low threat to the industry. The Australian dairy sector has

adequate control measures to address the theat. Of particular importance, there is no substitute

for milk in the industry (Edwards, 2013). This denies close competitors a methodology to enter

milk industry. The high productivity ensures that the industry growth is exponential and,

therefore, a reduction in the level of threats. Also, the industry has a robust internal framework
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that ensures low penetration by substitute industries thus competitive advantage for Australia

(Harris, 2015). Strong government policy in milk and dairy production supports access to capital

requirements hence, overall industrial growth. Edwards (2013) also notes that the Australian

dairy industry is thriving due to the good road and rail network connectivity of major markets.

The profit proceeds realized from commerce are ploughed back to the industry to realize extra

competitive advantage.

Competitive Advantage Quantitative Analysis

An analysis of the substitutes to the dairy products shows zero cases of similar

commodities that the buyers in Australia may access. The existence of similar products provides

the consumers with alternative options, an evaluation of the Australian industry reveals no close

substitutes thus no commodity options for the consumers. There is a consensus that milk

products do not have artificial substitutes that may create industrial competition (Harris, 2014).

This lack of substitutes is associated with the robust market control measures by the government

and sustainable quality of production coupled by the professed role of dairy products control in

the market space.

Customers are important shareholders in any commercial venture since they exhibit a

strong market control capability, thus a bargaining power for the case of Australian dairy

industry. For instance, the demand for fresh milk results in the production of that specific as

opposed to other dairy products. Nonetheless, there is adequate control of demand through

effective market studies that establish the demand elasticity (Edwards, 2013). The extent of

dependence on a particular distribution channel by consumers shows that dairy production is

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controlled by various market forces. Sensitivity to price changes and buyer information that

ensure market freedom for the buyers also exists in the Australian dairy industry.

In the case industry, there the control of suppliers is limited. This limitation is due to the

fact that the Australian dairy industry is managed by both the private and public sectors

(Brennan, 2017). The existence of equilibrium between the two sectors has led to robust growth

and many opportunities for expansion of the industry.

According to Australian Dairy Industry Conference (2016), the level of competition in

the industry is minimal with the external market. The little competition is because of the high

regulation of import products, thus the country ensures rapid growth of the local dairy industry.

Table 2: Export of selected dairy products (ADIC, 2016)

1989-90 1994-95 1999-2000 2000-01 2001-02

QuantityValue QuantityValue QuantityValue QuantityValue QuantityValue

Units '000 $m '000 $m '000 $m '000 $m '000 $m

Milk andliters 27.5 18.1 64.8 51.8 86.1 81.4 83.1 82.1 86.9 98.2
cream
Milk andtons 55.3 152.0 120.7 296.3 224.9 577.8 241.7 798.9 256.3 879.0
cream, in
powder,
granules or
other solid
form (excl.
skimmed
milk)
Skim milktons 83.7 196.0 166.0 373.7 210.0 466.7 190.2 673.8 198.7 673.8
powder
Butter andtons 47.9 116.0 76.8 159.4 123.6 290.5 107.5 291.0 107.5 297.5
other fats
and oils
Cheese andtons 53.3 184.4 116.4 401.9 219.9 807.1 219.0 951.0 218.3 1,034.4
curd
Yoghurt tons 1.6 2.9 3.0 7.6 2.8 7.0 3.0 8.1 2.6 8.3
Whey tons 14.4 10.0 35.2 36.2 45.8 67.3 41.3 83.1 45.8 84.5
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Casein tons 4.0 22.8 5.0 35.2 13.6 80.7 10.0 89.5 8.5 76.9
Other dairytons 10.5 23.2 21.7 46.0 19.2 38.1 13.8 44.5 15.1 39,.7
products

Table 2 provides a comparison on the export level between the local Australian market

and the external markets to draw the existing competitive advantage. From the analysis, it can be

concluded that cream and milk have been traditional export in the dairy industry. This also shows

that there is high local production of the two commodities enough to serve the local consumption

and surplus for export. Consequently, the high production results in high income for the farmers

(Brennan, 2017). More so, the export of milk powder and skim milk is showing a rising trend

suggesting surplus production over the years. This rising trend shows that the costs of external

production of dairy products are higher than the costs of internal production. For example, if

production in the foreign countries was low, the demand would be high. Nonetheless, this is not

an observation that can be deduced from Table 2. The result is low production cost at the local

level, making the industry a thriving investment venture.

Conclusion

This quantitative analysis shows that the Australian dairy industry is dynamic. The

changing nature of the industry is a consequence of the global market variations. Notably, the

country is experiencing a significant growth level and many opportunities for improving dairy

production. The growth is associated with favorable local and national aspect that enhance high

output. Market micro and macro factors also contribute to the success of the Australian dairy

industry. Strategic factors such as robust government policies, control of demand and supply, and

pricing also assist in the growth of the industry. As illustrated by the quoted studies, external
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production and consumption costs are high as compared to the internal environment. Therefore,

farmers are encouraged to engage in internal production as it has been proven to be cost

effective. However, there should be established a robust system of ensuring that the local farmers

are empowered to increase their production. These farmers should also be shielded from cartels

who shroud the local dairy industry to take advantage of the vulnerable famers. Through such

mechanisms, the Australian dairy industry will realize extra production for export as the local

market is already satisfied. This will result in increased revenues for the country necessary for

development and high standards of living for the farmers.

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References

Australian Dairy Industry Conference. (2016). Annual Report 2016

Brennan, I. (2017). ACCC Dairy Inquiry to hear from Farmers about Milk Processing Companies

dictating Unfair Prices. ABC News, retrieved August 27, 2017 from

http://www.abc.net.au/news/2017-01-25/dairy-farmers-to-share-industry-concerns-with-

accc/8210374

Edwards, G. (2013). The story of deregulation in the dairy industry. Australian Journal of

Agricultural and Resource Economics, 47(1), pp.75-98.

Harris, D.N. (2015). Industry Adjustment to Policy Reform: A Case Study of the Australian Dairy

Industry: A report for the Rural Industries Research and Development Corporation. Rural

Industries Research and Development Corporation.

Harris, D. (2014). Industry plans and dairy support policies in Australia. Paper presented at the

FAO Workshop: Designing Effective Country‐Level Dairy Development Strategies,

Bangkok, Thailand.