Danger high prices could mean long-term damage to world demand by encouraging buyers to explore alternatives

Danger high prices could mean long-term damage to world demand by encouraging buyers to explore alternatives

There is a danger lurking behind the high prices being achieved for our dairy products.

They are driving some buyers to replace milk-based fats with alternatives derived from oilseed plants.

The danger in this, according to Dairy Australia, is the long-term damage to world demand by encouraging buyers to explore alternatives.

The pressures on buyers are likely to remain after they suffered under a 42% rise in prices recorded in the NZ-based GlobalDairy Trade auctions during 2013.

"Ongoing strength in dairy commodity prices means substitution of dairy remains a concern."

"The risk of longer term demand reduction grows over time as commodity prices remain too high and thus unaffordable for large populations in developing markets," Dairy Australia said in February update on the dairy situation and outlook.

The increased use claim is borne out by AAK, the Swedish based producer of vegetable-based fats, which recently announced record profits for the final quarter of 2013.

Profits were up by 12% after sales of its dairy replacement products increased significantly, according to CEO Arne Frank.

China demand

"As many as 1m to2m dairy cows are believed to have been culled in China in the past year," according to Dairy Australia.

China’s policy of encouraging larger enterprises, at the expense of smaller operators, large numbers of which had left dairy often in favour of the increasingly profitable beef industry, was seeing dairy undermined.

“As long as China remains short of dairy product, either via demand growth or struggling local milk production dairy commodity prices should remain elevated.”

Milk output in China is reportedly tracking as much as 20% below recent years.

New Zealand had captured a significant proportion of the increased demand (a 30% increase in the first nine months of 2013 compared to the previous year) for produce as a result of its free trade agreement with China.

Improved returns

Ongoing dairy demand was now translating into improved returns to farmers with export-focused New Zealand farmers benefiting to more than 40%.

Production here was forecast to finish the current season up 6% at 2 billion litres. EU-28 milk production is expected to lift 1% to 147 billion litres.

The total value in trade last year increased 15%. Whole milk powder and skim milk powder were down 18% and 1% respectively but total values were up 17% and 37% respectively.

Caution urged

Dairy Australia said when considering “where to from here”, as long as China remained short of dairy product (either via demand growth or struggling local production) commodity prices should remain elevated.

Debt loadings and challenging conditions were expected to constrain dairy production growth from the US, parts of Europe would prosper while others would continue to struggle.

Despite strong production growth from New Zealand, world demand was unlikely to be met.

Concerns over China’s financial stability were heightening.

"However, some measure of caution still needs to be applied given a fragile economic recovery and that no one really knows the extent of possible shadow-banking issues in China.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9 Comments

We couldn't figure out what was going on in the Oz industry either...
 

check out the CH Dairy ......
PRC laws and regulations also require foreign-invested enterprises to set aside part of their net profit as statutory reserves. These statutory reserves are not available for distribution as cash dividends
we wish........
http://www.huishandairy.com/EN/Investor/?Class=5#
 
page 58 of 490 ex IPO doc....
We are a holding company incorporated in the Cayman Islands and operate our core  businesses through our operating subsidiaries in the PRC. Therefore, the availability of funds to pay dividends to our Shareholders depends upon dividends received from these subsidiaries. If our subsidiaries incur debts or losses, such indebtedness or loss may impair their ability to pay dividends or other distributions to us. As a result, our ability to pay dividends will be restricted.
The PRC laws and regulations require that dividends be paid only out of the net profit calculated according to the PRC accounting principles, which differ in many aspects from generally accepted accounting principles in other jurisdictions, including Hong Kong Financial Reporting Standards (“HKFRS”) and International Financial Reporting Standards.
The PRC laws and regulations also require foreign-invested enterprises to set aside part of their net profit as statutory reserves. These statutory reserves are not available for distribution as cash dividends.
In addition, restrictive covenants in bank credit facilities or other agreements that we or our subsidiaries may enter into in the future may also restrict the ability of our subsidiaries to provide capital or declare dividends to us and our ability to receive distributions.
Therefore, these restrictions on the availability and usage of our major source of funding may impact our ability to pay dividends to our Shareholders.
 

China is now the U.S.’s leading destination for agriculture exports, with shipments risingto nearly $26 billion in 2012 from $5 billion in 2003, according to the US Department of Agriculture.

http://blogs.wsj.com/chinarealtime/2014/02/27/american-ag-firms-china-is...

 

http://www.ers.usda.gov/amber-waves/2013-october/us-exports-surge-as-chi...

 

IRISH EXPORTS OF ITS AGRICULTURAL PRODUCTION TO CHINA INCREASES BY 40%
http://www.chinairelandresearch.com/irish-exports-of-its-agricultural-pr...
 

Brazilian farm exports to China expected to still rise
http://usa.chinadaily.com.cn/world/2014-02/17/content_17285675.htm
 
China is one of the biggest drivers of growth in Spanish agri-food exports. Sales of Spanish food and beverages there have been expanding at a year-on-year pace of 124% in the last few years, generating 602 million euros in 2013, compared with 532 million in 2012 and 97 million in 2008, before the economic crisis battered Spain.
General exports amounted to 4.524 billion euros in 2013, up from 3.674 billion euros in 2008.
http://www.wikispanishfood.com/v_portal/informacion/informacionver.asp?c...

 

"They want to manage the risk that comes from having their whole supply coming from New Zealand. They recognise that New Zealand can't grow at the same rate that demand is projected to grow in China."
http://www.theaustralian.com.au/business/companies/chinese-vying-for-new...
 
SEVERAL Chinese state-owned enterprises and private companies are in negotiations to bankroll construction of several new milk powder plants in NSW as the state's dairy industry looks at ways to supplement its supply contracts with the big supermarket chains.
Over the past six months Chinese executives have been visiting locations in the state's Hunter Region, the Central West and the Southern Highlands where the plants would be constructed to supply milk powder to the Chinese market.
The plan is being brokered by Dairy Connect, a not-for-profit organisation that represents the NSW dairy industry, including dairy producers, milk vendors, processors, manufacturers and industry stakeholders.
"We have had conversations where these groups are prepared individually to put $200 million on the table," says Dairy Connect chief executive Mike Logan.
 

Henry, we have had great rain in California. Its rained for over two weeks and they say its going on for at least another week. We must have had over 8" by now and mountains are white.  Going to be a great start to spring.
 I head back to NZ for a few weeks tomorrow, expecting dry. Another good grape vintage coming up.

That would be normal practice for the Chinese
Western thinking pushes towards solid supply chains that work for most of the parties and can be relied on.
Chinese bureaucracy thinking says create multiple relationships and then play them off against each to force down supply prices, and theoretically build redundancy through multiple supply lines.  Never works but that's the way things are done there...must "improve" production on yesterday always.

The problem of alternate technology because of price is why it's always better to clean up ones' sustainable act (which, yes, includes working towards deleveraging).   Set the goal to reduce costs over time, and then you'll stay in the market.

Keep adding costs, increasing wages, bringing in new higher standards, you keep pushing the costs up.    If factory style productive increase were actually cheaper then it would pay off at the low rate, so if mass production is required to make ends meet on a basic product (eg todays milk vs yesterdays milk.  still milk)   proves that the model is flawed.

The continual increase allows other obviously less successful products, to become viable.
Only option is to see that costs reduce to keep margins up.

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