There’s always a lot of local media coverage about the price of milk and how it’s hurting farmers. When global dairy trade is discussed it’s all about whole and skim milk powder.
Cheese is like a middle child, kept in the background, often neglected and overlooked.
Recently retail cheese market dynamics and imports have had some limited coverage, mostly aimed at provoking the usual supermarket-focused outrage.
But cheese has an important and unique place in the Australian and global dairy industries, so we thought we’d give the curd it’s moment to shine this month!
In 2015/16 cheese manufacture accounted for 30% of Australia’s milk production – still ahead of drinking milk with 26%. As the bulk of cheese is manufactured in the southern region, it is even more important for returns in Victoria and Tasmania, accounting for 42% of milk intake while just 12% is used for drinking.
The domestic retail cheese market is tough, as everyday pricing strategies of the major retailers and the increasing share of private label products has eroded value capture.
It’s the less visible battleground for branded product, but it is no less important than drinking milk.
The ability for brands to innovate and attract shopper dollars that remain focussed on maximising value for staple items is a significant challenge for local dairy companies.
Unlike drinking milk, cheese is highly exposed to global dairy trade. Of the approximately 340,000 tonnes produced each year in Australia, 40% to 50% is exported and is directly influenced by global supply and demand.
Just under half of the cheese consumed at home is atop pizzas and in burgers, consumed through foodservice channels – a significant proportion in national and multinational quick service restaurant chains that have the ability to source globally.
Local manufacturers compete with overseas suppliers for these contracts, and currently around 36% of Australia’s cheese market is imported, primarily from New Zealand and the United States – both of whom have access through free trade agreements.
While we are used to talking about the volatility of the global dairy trade, cheese supply, demand and pricing tends to be more stable.
Much of the trade is based around longer term supply contracts to customer specifications - both for domestic supply and for export. There is limited spot trade in cheese and minimal volumes are traded in the fortnightly Global Dairy Trade online auctions.
This is important when it comes to the perennial discussion about Australia versus New Zealand farmgate price comparisons.
In New Zealand, cheese accounts for just 12% to 14% of annual milk production – with the bulk of their output directed towards whole milk powder manufacture – where the dynamics are vastly different.
As the New Zealand industry has grown and Australia’s has shrunk, product mix has become increasingly divergent. So the peaks and troughs in commodity returns – based on WMP’s dominance - are much more amplified for our Kiwi cousins. What that means in practice, is that for 10 of the past 15 seasons we estimate Victorian average milk prices have been ahead of the New Zealand payout.
The limited focus on cheese is just another reason why our Kiwi bros “are just a little bit different”.
In the major northern hemisphere dairy production regions, cheese is even more important to the mix, and therefore to farmer returns.
In the US cheese accounts for 56% of annual output and sets the federally regulated Class III milk prices that are the key driver of farmgate incomes – much more than fluid milk prices.
The US has maintained a milk production growth rate of between 1.5% and 2.5% over the past 12 months or so, as on-farm profit margins have been favourable. This has reflected not only historically low feed costs, but also farmgate prices that were protected from the downturn in global commodity prices by a healthy domestic cheese market.
Throughout the past 12 to 18 months, improved economic conditions have helped buoy foodservice demand and, in particular, cheese consumption which has absorbed a large proportion of US milk growth.
In the EU, cheese also accounts for well over 50% of annual milk output. Over the past year when the EU put the brakes on milk output, the volume of milk directed toward cheese manufacture – which is primarily consumed at home - was prioritised at the expense of powder production.
This was important in rebalancing global trade in milk powders, as the EU’s export availability was disproportionately reduced in favour of supplying a growing domestic cheese market.
In fact, the US and EU cheese markets combined have grown at a healthy 2.7% per annum between 2013 and 2016, absorbing a significant proportion of the 16 billion litres of additional milk that the global dairy industry has produced – around two-thirds in fact.
Cheese, no matter where it is consumed or produced has a significant impact on global dairy trade balance, and on returns to farmers.
It is a key product for domestic consumption in most major dairy producing regions, and as such has a significant bearing on the availability of milk for export, and the balance of global trade. So now that you have had the word on curd, it is clear where all our duties lie – eat more cheese!
Jo Bills is a director of Fresh Agenda (www.freshagenda.com.au)