Australian dairy industry feels volatile

The dairy produce wholesaling industry in Australia has benefited from increases in world dairy prices over the past five years, but has been adversely affected by the volatility in industry production, according to a report from IBIS World. Declines in milk production have occurred because of drought conditions, and dairy production in Australia and New Zealand has subsequently decreased. The industry’s performance has also been constrained by the effect of wholesale bypass, and strong increases in oil prices have affected profitability. Industry revenue is projected to increase at an annualised 2.3% over the five years through 2013-14, with revenue of AS$988 million (€639.4m).

IBISWorld industry analyst Ryan Lin states, “The increasing market power of supermarkets over the past five years has led to the rise of wholesale bypass, with large retailers buying directly from the manufacturer. The increasing instances of wholesale bypass have also driven the increased consolidation and vertical integration of dairy product manufacturers.” As large supermarket chains such as Woolworths and Coles grow in market power, they are increasingly able to bargain with industry wholesalers and manufacturers. As a result, in 2013-14, industry revenue is expected to increase by only 0.6%.

The growing powers of grocery wholesalers such as Metcash will also weigh against the industry, as they compete with dairy wholesalers. The future of the industry will be contingent on a variety of downstream demand conditions, and the changing landscape of commodity prices. According to Lin, “Domestic dairy product prices are forecast to stabilise as the economic recovery becomes more pronounced.” Milk production in Australia is forecast to grow at a strong rate per annum over the next five years, assuming a return to average seasonal conditions. The industry will also face increased competition from supermarkets pushing their private-label dairy products, particularly as they have the size and clout to bargain for cheaper wholesale prices or bypass wholesalers altogether.

The dairy sector has undergone a major restructure in response to deregulation of milk prices, reduced government assistance to the dairy industry and increased exposure to both domestic and international market forces. As a result, dairy farms have generally become larger and more efficient, with the merger of several large dairy cooperatives and manufacturing companies, IBISWorld says. For more information, please visit www.ibisworld.com.au