Growth opportunities for cheese abound, despite brewing storm clouds

Rabobank

Growth opportunities for cheese abound despite brewing storm clouds

The cheese market offers compelling global growth opportunities for the Australian dairy sector over the medium to longer term, despite some storm clouds brewing on the horizon, according to a recently-released report.

In its report, Global Cheese Trade Dynamics, agribusiness banking specialist Rabobank says strong demand prospects for cheese in emerging markets, particularly Asia, will drive export market expansion. But, the report warns, it will not all be smooth sailing as the global trade environment looks set for a period of heightened volatility and uncertainty, and with cheese demand likely to be vulnerable to economic shocks.

Report author, Rabobank senior dairy analyst Michael Harvey says cheese has established itself as an important driver of dairy export returns, with 11 per cent of cheese produced now traded on the global market.

“Traded cheese volumes have grown by around three per cent per year since the turn of the decade,” he says, “with 70 per cent of trade coming out of the EU, US, Australia, New Zealand and Argentina.”

In Australia, Mr Harvey says, more than one third (around 36 per cent) of the nation’s milk is used for cheese. “And this means domestic and export cheese returns have a significant bearing on the farmgate milk price,” he says.

Mr Harvey says the export opportunities offered by cheese have not only driven heavy investment in cheese processing capacity in the local market, but also globally.

“Over the past five years, over one million metric tonnes of new cheese production capacity has come on line globally, and, while that growth has been necessary, we are entering a period with potential excess capacity,” he says.

“And this, together with intensifying competition – particularly in Asia – will create some challenges for all export regions, despite the strong demand fundamentals.”

Global trade

According to the report, the global cheese trade arena is undergoing significant and structural change, characterized by sizeable swings in trade balances in key exporting regions and the strong pipeline of long-term investments in cheese capacity that is likely to see milk continue to be prioritised for cheese streams in major export markets.

“Each year we see more cheese produced around the world, with global production increasing by 1.4 per cent per year since 2010, to more than 21 million metric tonnes in 2019,” Mr Harvey says.

But cheese production is concentrated in a few key markets, he says, with nearly half the world’s cheese (10 million metric tonnes) produced in the EU and EU cheese production up 60 per cent on the last decade. The US, meanwhile, has gone from a net importer to exporter of cheese in the past 10 years to produce six million metric tonnes of cheese in 2019.

“In Australia, the recent investment cycle has favoured cheese capacity, however future growth opportunities are currently hindered by the declining milk pool,” Mr Harvey says, “with a modest recovery in milk production expected over the next five years.” That said, Australian cheese production increased by 0.9 per cent in 2018/19, despite the six per cent drop in milk volumes.

“Meanwhile, New Zealand’s cheese export capacity continues to increase, driven by Fonterra’s large investment in Mozzarella capacity,” he says, “with growth prospects also strong in the EU and US over the next five years.”

Asia, cornerstone of demand growth

The report says trade opportunities in the cheese market will remain broadly favourable, underpinned by increasing demand in emerging markets along with deficits as their domestic production remains limited.

“Over the past five years, Asia has emerged as the cornerstone of growth in global cheese trade as low per-capita cheese consumption, population growth, westernisation of diets and a growing preference for full-fat dairy all provide a platform for growing demand,” Mr Harvey says.

“The long-term trend towards eating out of home has also fuelled growth in the full-service Quick Service Restaurant (QSR) channel, particularly for mozzarella cheese on pizzas and processed cheese for burgers.”

He says while China has emerged as a key destination for cheese, with cheese imports forecast to grow from around 150,000 metric tonnes to more than 200,000 metric tonnes by 2024, growth prospects in the broader Asian continent should not be underestimated.

“Japan is still the world’s largest cheese importer,” he says, “while South Korea also remains integral to the global cheese balance. And in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, their combined import volume of cheese is forecast to reach around 190,000 metric tonnes in the next five years.”

But this is coming off a very low base, he says, with China’s cheese consumption sitting at less than 0.2 kilograms per person and less than three kilograms per person in Japan. This is compared to per capita consumption of around 20 kilograms in a western economy.

Storm clouds ahead

The report cautions it will not all be smooth sailing for cheese exports going forward, with a number of risks and headwinds which have the ability to disrupt the global cheese market and present an “integration and execution” risk for cheese companies.

“These heightened risks include broad macroeconomic headwinds, with a slowing global economy, and a sluggish recovery, which could negatively impact consumer spending,” the report says.

In particular, Mr Harvey says exporters are having to contend with an increasingly volatile trade environment “with mounting tensions between the US and China and more recently, the US and EU, as well as retaliatory tariffs and Brexit, which have the potential to disrupt over 500,000 metric tonnes of internal EU cheese exports to the UK”.

And, he warns, Australian exporters are not immune to the heightened trade risk. “Some dairy exports have seen disruptions to the Chinese market and, while cheese trade has not been impacted as of yet, there are lingering trade tension risks that could escalate,” he says.

Australia’s way forward

Mr Harvey says with Australia – and indeed many global exporters – just emerging from the cycle of increased investment in cheese capacity, some of which still needs to come online, a more conservative approach to investment is warranted going forward.

“In Australia, investment is likely to slow of its own accord given the drop in the national milk pool,” he says, “but in other exporting nations, the key to success will include staying agile, maintaining access to key offshore markets, scaled manufacturing and a culture of innovation.”

Global competition in the global cheese market is also set to remain fierce, he says, “with China fueling the race to conquer the Asian cheese market”.

“But Asia will remain a key market for Australian cheese exports,” he says, “with Australian product having a good presence in the market and longstanding investment in market development putting us in good stead for the future.”

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