Australian dairy’s China risk

Dec 8, 2020 | Making news | 0 comments

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The worsening relationship between the governments of Australia and China has resulted in China’s imposition of punitive tariffs and bans on some major agrifood imports from Australia, alongside a slowdown in trade activity across many other categories of trade.

The data in this article comes from Freshagenda’s Dairy Trade Simulator which uses only official customs data as its source of trade data by volume and value.

 How exposed is Australian dairy to China?

Australian dairy exporters have been heavily dependent on the Chinese market, which is by far Australia’s largest dairy export market by value. In 2019, the value of Australian exports was US$2.34bn of which China represented 45%. This slipped to 42% in the 9 months to September 2020.

Australia’s exports to China grew spectacularly between 2015 and 2019, enabled by the CHAFTA (ratified by the LNP government) which came into force in 2015.

The growth in production and trade of infant formula (IMF) products has been built through this improved access to the Chinese market, as shown on the right shows the dependence on the Chinese IMF market as a portion of Australia’s total IMF exports.

The dependence on IMF trade as a portion of dairy trade into this market is also highly significant. IMF exports were 56% of all Australian dairy exports to China by value in 2018. This slipped to 51% in 2019 and fell heavily to less than 37% in the 9 months to September 2020.

The next largest market is Japan, which took 14% of Australia’s exports by value in 2019, most of which was cheese. Combined exports to the ASEAN-6 – the biggest six economies in the South East Asian region – were almost 20% of total exports, but with a vastly different product mix and unit value than is achieved in China.

Are we essential to China?

The EU is the biggest dairy exporter, with over US$4.1bn in sales in 2019, even larger than New Zealand as shown. Australia was the 3rd largest in 2019.

The largest category of Australian exports to China is IMF. In 2019 Australia had built its trade to 14% of China’s IMF imports. The volume of IMF is probably higher as it is likely that part of the trade within the WMP HS code is actually IMF.

The EU-27 however held more than 70% of the IMF trade to China in 2019, but this dominance had been much greater back in 2015, when it exceeded 87% of Chinese imports. EU-27’s trade peaked at 262,000t worth US$2.63bn in 2018.

Reaping the benefits of a free trade deal

Australia had built its share using CHAFTA from just 1.3% in 2014, taking a little of the market from NZ but mostly from the EU. NZ struck a free trade deal with China in 2008, with much of the focus on commodity milk powders. More recently New Zealand has increasingly focussed on higher-value lines, growing its share IMF imports to China from 8% in 2014 to 12%.

The loss of high value trade

Australia’s position in the Chinese IMF market is in premium market segments (including organic), achieving a higher unit value than its competitors.  The chart on the right shows the comparison of average unit prices of IMF trade between the top four exporters to China. NZ’s unit value has lifted in the past 3 years with the growth in A2 infant products.

The most confronting statistic in this analysis for the Australian industry is the erosion of the higher unit value across all dairy exports.

The chart on the right shows the comparison of the average selling price of Australian exports expressed in the gross value of milk solids equivalents (total butterfat and protein) in the products consigned.

Chinese trade (45% of Australia’s trade) yielded a gross A$29/kgms in 2019, while all other markets (with far less IMF) averaged just A$9.94/kgms.

The Chinese trade is higher partly due to the proportion of sales of finished goods, which have a higher unit conversion and packaging cost per kg of product that would be the case in other markets.

Trade slowing since mid-2019

Dairy trade hasn’t been hit by tariffs in 2020 nor has the slowdown in trade been a factor in the current year. Trade has been slowing since mid-2019, as attitudes from local consumers and importers to Australian product has deteriorated.

The chart on the right shows the year-on-year monthly change which began in June last year. The losses are significant – in the nine months to September 2020 the value of Australian IMF trade in US dollar terms is down 41% year-on-year, while total trade to China is 16% lower.

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As shown above, the average milk solids equivalent value of Chinese trade fell to a little below A$25/kgms in the nine months to September 2020, pulling the overall average down to just A$7.61/kgms

Could things worsen?

There doesn’t seem to be any prospect of repairing a dispute that have recently been escalated again by a government official’s tweet. The increased tariffs slapped on barley and wine may not be replicated for dairy – but they don’t need to be. IMF products sold in China are heavily branded with the product source a key driver of consumer purchases. While Brand Australia has been a major selling point for Chinese consumers, but anti-Australia messaging from the Xi government is no doubt undermining the goodwill and trust that was there.

Australian dairy exporters have experienced the quick imposition of Chinese government rule changes or the deregistering of factories that can quickly scuttle a lucrative market opportunity. On the other side of that are importers and supply chains that may also seek to avoid the risk of dealing with Australian companies.

While the Australian government is urging Australian businesses to diversify away from China, in dairy as in many other sectors it is a difficult market to replace – offering both volume and value opportunities that are superior to alternatives. There are essentially no alternatives for IMF products Australian dairy companies have developed as part of their value-adding strategies.

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