As in the farm sector, the milk processing sector is undergoing continuing rationalisation. This has resulted in improved factory capacity, as larger operations have improved their efficiency and economies of scale. The lack of growth in milk production over the past decade or so relieved the pressure on Australian dairy companies to invest in increasing processing capacity – at least in the short to medium term. Instead, the challenge had been to remove surplus capacity and to utilise the existing capacity as profitably as possible. Nevertheless, there has been on-going investment by local manufacturers focused on meeting demand from key export markets.
The Australian dairy manufacturing sector is diverse and includes farmer-owned co-operatives, public, private and multinational companies.
Farmer-owned cooperatives no longer dominate the industry and now account for less than 40% of Australia’s milk production. The largest co-operative is Murray Goulburn (MG) accounting for nearly 37% of national milk output.
Murray Goulburn opened ‘greenfield’ fresh milk processing plants in Melbourne and Sydney during the year to service major supermarket private label contracts in Victoria and New South Wales – the first such investments in the industry in nearly two decades.
In early-July 2015 Murray Goulburn also successfully completed the implementation of a new capital structure, with the listing of an MG Unit Trust on the ASX. The initial public offering attracted Australian and international investors, at both the retail and institutional level. Unitholders will have an economic exposure to MG’s business but will not have voting rights in relation to MG or its operations. The proceeds of around $500 million will reportedly be spent on three major projects; producing higher margin infant formulas at MG’s Koroit facility, investing in the Cobram plant to take bulk cheese into consumer and food service markets, and developing a new fully automated UHT beverage plant.
Large multinational companies have operated in the Australian dairy industry for many years and currently include Fonterra (New Zealand), Kirin (Japan) and Lactalis (France).
Lion Dairy & Drinks (owned by Kirin) upgraded their specialty cheese plant, The Heritage, at Burnie, Tasmania. It is now the largest specialty cheese factory in the southern hemisphere and will allow Lion to increase market penetration of their specialty cheese ranges within Australia and into Asian markets.
Parmalat (owned by Lactalis) continued its recent expansion when it purchased Gippsland-based Longwarry Food Park (LFP) in late-2014 giving Parmalat additional milk supply and a manufacturing facility in Victoria with bolt-on export capabilities in ingredients including milk powder (WMP), cream cheese, fresh and UHT products.
Other Australian dairy companies cover a diverse range of markets and products, from the publicly listed Bega Cheese Limited and Warrnambool Cheese & Butter WCB (88% controlled by Canadian dairy company Saputo since early-2014) to the privately owned Regal Cream (Bulla Dairy Foods), Burra Foods and Australian Consolidated Milk to name just a few, together with many highly specialised cheese manufacturers.
Warrnambool Cheese & Butter bolstered its presence in consumer branded cheese by acquiring the ‘everyday cheese business’ (EDC business) of Lion Dairy & Drinks. Situated adjacent to WCB’s plant at Allansford (on property leased from WCB), the EDC business cuts and wraps cheese manufactured by WCB that is sold under ‘everyday cheese’ brands including Coon, Mil Lel, Cracker Barrel and Fred Walker.
A flurry of renewed interest in export opportunities followed the signing of three key Free Trade Agreements during the 2014/15 season with Korea, Japan and China. Consequently, the three themes that emerged within the manufacturing sector this season were changing ownership rather than increasing (ownership) concentration; developing export-focused infant formula capacity; and growing export-focused liquid UHT milk capacity.
Fonterra agreed to purchase a share in Chinese company Beingmate; with the companies forming a joint venture focused on Fonterra’s Darnum site (in Victoria).
There was a range of announcements regarding investment in infant formula capacity from Bega‘s northern Victorian subsidiary Tatura; Burra Foods in Gippsland; and ViPlus in east Gippsland.
There were also plans announced to establish vertically integrated operations spanning on-farm milk production through to post-farmgate manufacturing and export marketing of milk and nutritional powders more generally from Camperdown Dairy International (CDI) in Camperdown, western Victoria; and a Midfield Meats’ proposal to establish two milk powder plants in Penola in south-eastern South Australia and Warrnambool, western Victoria.
Beston Global Food Company purchased UDP (out of receivership) and its two cheese plants at Murray Bridge and Jervois. The Adelaide-based company plans to invest to upgrade the two factories, raise production capacity, and introduce new products for Asian markets. Beston’s other dairy interests cover a number of dairy farms in South Australia and a stake in niche processor B-D Paris Creek.
A Sino-Australian dairy farming and milk processing consortium, Australian Fresh Milk Holdings (AFMH), comprising New Hope Dairy Holdings, Leppington Pastoral Company and Freedom Foods Group purchased the Moxey Farms business during the year. Moxey Farms is one of Australia’s largest single-site dairy operations in the Lachlan Valley in central NSW. The Moxey family picked up a strategic stake in AFMH as part of the deal. The agreement allows AFMH to leverage Freedom Foods’ processing capabilities and New Hope Dairy’s Asian footprint to access export markets in China and south-east Asia.
The major manufactured product streams are:
››drinking milk – fresh and UHT long-life;
››skim milk powder (SMP)/buttermilk powder (BMP)/butter;
››whole milk powder (WMP);
››other consumer products, such as yoghurts, custards and dairy desserts; and
››specialised ingredients, such as whey proteins, nutraceuticals, etc.
Cheese is consistently the major product stream, utilising just under a third of Australia’s milk production in 2014/15 and has remained around this level for a number of years.
Drinking milk and skim milk powder / butter production were the two next largest users of milk, each taking around a quarter of the total milk produced in Australia.
Around 65% of manufactured product (in milk equivalent terms) was exported and the remaining 35% sold on the Australian market in the 2014/15 season. This contrasts with drinking milk, where some 94% is consumed in the domestic market.
Australian production of dairy products (tonnes)
*Includes butter blends as CBE
**Includes infant powder
Source: Dairy manufacturers