Australia and NZ will be drowning in milk by 2027 unless China laps it up

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International demand — particularly from China — will bolster the Australian dairy formula industry as modest growth forecasts are predicted for the US markets.

A recent report from research firm McKinsey and Co said US dairy executives would need to “seek new opportunities” in the face of “modest growth forecasts, shifting consumer tastes and increased competition”.

But Gennadi Koutchin, director at XEC Partners, says Australia will be immune to such pitfalls thanks to its relationship with China and in particular its export of dairy formula products to that country.

<<<  Scroll down for a list of ASX small caps in the dairy formula game  >>>

One of the key concerns of the McKinsey report was that developed regions, including Australia, New Zealand, the European Union and the United States, will be producing significant surpluses of dairy by 2027, comfortably outstripping demand in their own countries.

Australia and New Zealand are expected to be producing the equivalent of 19 million tons of milk more than needed in 2027.

But, Koutchin says, it won’t go to waste, thanks to China’s enthusiasm for Australian products.

“International demand for from developing countries is set to remain strong going forward,” he told Stockhead.

“For Australia and New Zealand the international market is of more relevance than trends happening domestically, we are much more export-driven, whereas in the US and the EU the domestic markets are obviously much larger.”

The “shifting consumer tastes” named in the report relate to consumers seeking healthier, more green alternatives to traditional products, which Koutchin says is another feather in the cap of the Australian dairy industry.

“There is definitely a big trend for healthier products and there is a natural perception in international markets like China that Australian and New Zealand products are green and trustworthy,” he says.

“And so for competing in international markets, that’s of great benefit.”

McKinsey noted that Australian companies are “better positioned” to serve African and Asian demand for dairy products, with those regions expected to be producing dairy at a deficit to requirements — China alone is expected to produce 26 millions tons of milk equivalent less than it needs to satisfy its consumers.

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“The advantage goes beyond geographical proximity,” the report says. “Australia and New Zealand have secured 11 agreements with Asia (excluding China and India).”

It also speaks to an “exploding” middle class, a common theme in dairy markets, as well as the predicted rise in demand for dairy products from “emerging economies”.

Koutchin said Australian companies would need to ensure they are following best practices to capture the market opportunities over the next decade.

“It is important to get the product and taste right and be acceptable for the markets where a company is operating,” he says.

“Getting partnerships with the right local groups, the ones with inside knowledge who can help drive product sales on the ground, is also very important. You can’t just do it remotely.

“The same trends that we have been seeing are continuing: the growing middle class population, an increased focus on health and wellness, and general growth drivers remaining unchanged.

“China remains one of the largest export markets and trade disputes between it and the US are benefitting Australia, so all signs point to exports continuing to grow.”

* AN1’s listing date is up in the air after ASIC raised concerns.

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