Cheese, butter and milk powder manufacturing has been picked in the top five of 200 New Zealand industries to perform well this year, according to global business intelligence company IBISWorld.
But when global dairy trade is discussed it’s all about whole and skim milk powder. In contrast, cheese is like a middle child -- kept in the background, often neglected and very overlooked.
Recently retail cheese market dynamics and imports have had limited coverage, mostly aimed at provoking outrage about supermarket goings-on. But cheese has an important place in the Australian and global dairy industries, so it deserves greater mention.
In 2015-16 cheese manufacture accounted for 30% of Australia’s milk production – still ahead of drinking milk at 26%. As most cheese is made in the southern region it is even more important for returns in Victoria and Tasmania, accounting for 42% of milk intake versus only 12% for drinking.
The domestic ought retail cheese market is tough, its value capture being eroded by the everyday pricing strategies of the major retailers and the increasing share of private label products. Cheese is the less-visible battleground for branded product, but it is no less important than drinking milk. Brand innovation that attracts shoppers is a big challenge for local dairy companies.
Unlike drinking milk, cheese is highly exposed to global dairy trade. Of the 340,000 tonnes produced each year in Australia, 40-50% is exported and is directly influenced by global supply and demand. Just under half the cheese eaten in homes is on pizzas and in burgers, much of it bought via fast-food outlets whose chains have the clout to purchase ingredients worldwide.
Local cheese makers compete with overseas suppliers for these contracts, and about 36% of Australia’s cheese is imported, mostly from New Zealand and the US who get their goods in through free trade agreements.
Despite the volatility of the global dairy trade, cheese supply, demand and pricing is somewhat stable. Much of the trade is based on longer term supply contracts to customer specifications, for domestic supply and for export. Spot trading in cheese is limited and minimal volumes are traded in the fortnightly Global Dairy Trade online auctions.
This is important in any discussion of Australia versus NZ farmgate price comparisons. In NZ, cheese accounts for only 12-14% of annual milk production; most of their supply goes into whole milk powder (WMP) where the dynamics are vastly different.
As the NZ 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 NZ payout.
The limited focus on cheese is just another reason why our Kiwi bros are a little bit different. In the big 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 1.5-2.5% over the past 12 months, as onfarm profit margins have been favourable. This has reflected historically low feed costs and farmgate prices that were protected from the downturn in global commodity prices by a healthy domestic cheese market. And during the past 12-18 months, an improving economy has helped buoy foodservice demand, especially cheese consumption, which has absorbed much of the growth in US milk.
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 going into making cheese – eaten mostly in homes -- 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 much of the 16 billion litres of extra milk the global dairy industry has produced – two-thirds in fact.
Cheese, no matter where it is made or consumed, has a hefty impact on global dairy trade balance and on returns to farmers. It is a domestic staple in most major dairy producing regions, and so greatly affects the availability of milk for export and the balance of global trade.
• Joanne Bills is a director of Fresh Agenda, an Australian food industry consultancy.