Strategic Plan 2013/ /16

Transcription

1 Strategic Plan 2013/ /16

2 Dairy at a Glance National Dairy Herd (end 2012/13 forecast) Average Herd Size Milk Annual Production Average Annual Milk Production Per Cow Dairy - Australia s 3rd Largest Rural Industry Australian Per Capita Consumption 1.61 million cows 240 cows 9,350 million litres 5,818 litres $4 billion value at farmgate $9 billion at wholesale & export pricing Drinking milk 106 litres Cheese 13 kgs Dairy Industry Workforce Direct employment of 45,000 Milk Utilisation Dairy - Major Export Industry Cheese 34 per cent SMP/butter 28 per cent Drinking milk 25 per cent WMP 11 per cent Casein/butter 1 per cent Other 1 per cent 38% of milk production is exported Value = $2.76 billion 7 per cent of world dairy trade 5th largest exporter Major Markets For Australian Dairy Products (Tonnes) Production Of Main Commodities (tonnes) Australia 2,825,700 t (incl. 2,385,000 of drinking milk) Japan 115,000 t Greater China 109,000 t Singapore 90,000 t Indonesia 48,000 t Malaysia 47,000 t Milk Powders 371,000 t Cheese 340,000 t Butter (CBE) 120,000 t Glossary Acronym Description Acronym Description ABV Australian Breeding Values NCDEA National Centre for Dairy Education Australia ADF Australian Dairy Farmers NFF National Farmers Federation ADIC Australian Dairy Industry Council NGO Non Government Organisation ADPF Australian Dairy Products Federation NPV Net Present Value AOP Annual Operating Plan NRM National Resource Management BCR Benefit Cost Ratio OH&S Occupational Health and Safety BMCC Bulk Milk Cell Counts PAG Policy Advisory Group CRC Cooperative Research Centre PKMS Project and KPI Management System CSIRO Commonwealth Scientific & Industrial Research Organisation POS Probability of success DA Dairy Australia R&D Research and Development DAFF Department of Agriculture, Fisheries and Forestry RD&E Research, Development and Extension DIAL Dairy Innovation Australia Ltd RDC Research and Development Corporation DM Dry matter RDP Regional Development Program FBM Farm Business Management RO Research Organisation FTA Free Trade Agreement SDFO State Dairy Farmer Organisation GGF Geoffrey Gardiner Foundation SMP Skim Milk Powder H1 Horizon 1 SP1 Strategic Priority 1 H2 Horizon 2 SP2 Strategic Priority 2 H3 Horizon 3 SP3 Strategic Priority 3 HR Human Resources SFA Statutory Funding Agreement H&N Health & Nutrition TRG Trade Reference Group ITC Information, Technology & Communications UHT Ultra High Temperature KPI Key Performance Indicator VET Vocational Education and Training LRS Levies Revenue Service WMP Whole Milk Powder 1 Dairy at a Glance/Glossary

3 Managing Director s Foreword It is my pleasure to present Dairy Australia s Strategic Plan for the period 2013/14 to 2015/16. Dairy Australia remains committed to its vision of delivering the world s best services in order to grow an internationally competitive, innovative and sustainable dairy industry. The 2012/13 season has challenged the Australian dairy industry, as lower farm gate prices have combined with increased input costs, and difficult seasonal conditions in key dairying regions have seriously tested the resilience of farm businesses and families. These conditions have constrained production, which will finish at approximately 9.3 billion litres, a little lower than 2011/12. As the season draws to a close, tightening international supplies are seeing a rapid increase in commodity prices. This combined with a weakening Australian dollar should translate to higher farm gate price during 2013/14. Our industry remains in a favourable position. Our opportunities include the increased demand from Asia for dairy produce, product innovations and the achievement of greater production efficiencies. Like any industry, however, we will not be without challenges. These are likely to include currency volatility, rises in input costs, protection offered to competitor exporters, animal and food activism, changes in consumer preferences and the ongoing demand for a skilled workforce. This Strategic Plan focuses on building the foundations to support resilience and growth. Our priorities are clear and concise: making farm businesses more profitable and competitive; protecting and promoting our industry, and growing skills and capability. I am excited by the opportunities the future holds and have every confidence that we will achieve meaningful outcomes through ongoing collaboration across the industry and through the implementation of this Strategic Plan. Ian Halliday Managing Director Dairy Australia Strategic Plan 2

4 Contents Dairy At A Glance 1 Glossary 1 Managing Directors Forward 2 1 Executive Summary 4 2 Introduction Purpose Context: Supporting Policy and Studies Context: Industry Support Structure Context: Role of Dairy Australia Vision and Mission 14 3 Industry Context / Trends / Outlook Overview Domestic Environment Commercial Environment Farm Operation & Profitability People Other Key Issues International Markets Key Issues 28 4 DA Strategy Overview Investment Strategy Investment Structure and Allocation Expenditure and Allocation 35 5 Detailed Initiatives SP1: Increasing Farm Profitability and Competitiveness Overview Farm Margin Improvement Manufacturing Margin Improvement Market Support and Insights SP2: Protecting and Promoting our Industry Overview Industry Promotion Industry Protection SP3: Grow and Capability Overview Capability Development Workplace Strategy, Planning and Coordination DA Supporting Activity DA Operations 52 6 Expenditure Allocations & Returns Alternate Views of Expenditure Allocation Planned Returns Project Portfolio Balance Risk Return Spread Time Horizon Risk Profile Government R&D Priorities Collaborative Expenditure 59 7 DA Operational Strategy Budget Planning Delivery and Overhead Costs Planned Reserves Dynamic Budget/Funding Flexibility Organisation Structure & People About Dairy Australia s People Organisation Structure Governance, Compliance and Risk Management Governance Framework Board Governance and Compliance Reporting Risk Management Corporate Communication IT, Systems & Processes Performance Management and Evaluation 73 References 74 Attachments 76 A SWOT Analysis/Strategy Response 77 B Project Listing 81 C Strategic Program Key Performance Indications 85 3 Section title

5 1 Executive Summary The Australian dairy industry is facing a range of challenges at both local and international levels. Dairy Australia (DA) is in the process of making directional and project level changes to its program of work to best support the long term sustainability of the industry. This document outlines the strategy for investment over the years 2013/14 to 2015/16. Role / Constraints: DA s role is to fund and manage precompetitive activities that are important to the future of the dairy industry but would not occur effectively or efficiently if the market was left to its own resources. These are typically in the areas of R&D, extension, capability, trade and regulatory support, central data collection and pre-competitive promotion. Scope / Objective: DA receives almost $34 million annually from levy payers and $19 million in matching research and development funds from the Australian Government. State Governments, universities, research organisations and other dairy support organisations, contribute approximately a further $30 million to DA funded projects. As such, it is the objective of DA to responsibly invest these funds in a way that best addresses stakeholder needs and supports the future sustainability of the industry. Strategic Issues: The key current and longer term issues facing the industry are as follows: Increasing herd productivity offset by declining fertility and animal health/ milk quality issues Farm performance High dollar and global instability resulting in increased commodity pricing pressure & volatility Global Economics Lack of investment in processing infrastructure over the last decade has undermined Australia s cost competitiveness globally, especially with regard to NZ Industry underinvestment Increases in farm input costs including the costs of fuel, fertiliser, purchased feeds and electricity Input costs Dairy Supply Chain Market concentration Leverage of large retailers dominates supply chain and impacts milk pricing Access to and availability of new technologies including genomics, automation, ITC Access to technology Climate change Decline in service funding Emerging social trends Social/regulatory pressures in the areas of health, ethical and environmental, are emerging that are not generally positive to dairy Generally less favourable climate for dairy farming in some geographical areas; access to water in irrigation zones A decline in capacity of services to dairy farmers, including a winding back of state government-based extension services Dairy Australia Strategic Plan 4

6 Investment Strategy: DA s strategy addresses the key on-going and emerging issues facing the industry that are within DA s remit. While the current program of work remains appropriate in general, DA will make changes to internal structures and investment priorities to better address these emerging issues, especially those identified by the Horizon 2020 study. While farm profitability remains the highest priority, the revised strategy places an increased emphasis on the issues of sustainability and reputation management as part of the industry s licence to operate. The objective will be to impact existing negative industry sentiment, improve farmer confidence and encourage investment in both financial and human capital. The Legendairy promotional program is a new and important element of this approach with the target audience including dairy farmers, consumers and the key influencers of our society. In this regard, Sustainability is the key harmonising theme improved profit, environmental and social outcomes are at the core of strategy for a successful industry. The approach is to have a cohesive strategy that places the right level of investment/effort into each of these areas. The following diagram summarises the new strategy as focused on 3 Strategic Priorities: 5 Executive Summary

7 Key Drivers Domestic Dairy Landscape Global Dairy Landscape Strategy Farm profitability impacted by: > > increasing input costs and seasonal variability > > managing volatility in milk price > > greater complexity in farming systems > > increasing public scrutiny on farmers Demand for dairy products in increasing but competitiveness impacted by: > > strong Australian dollar > > global volatility > > adverse trade arrangements % of Project Expenditure 59% 20% 18% 3% DA supporting Strategic Priority SP1. Profitable & Competitive Dairy Farms SP2. Protect & Promote our Industry SP3. Grow Capability & Skills Investment Focus 1. Farm margin improvement > > Animal performance and fertility > > Feedbase and nutrient use efficiency > > Resource management > > Farm business management 2. Post-farm margin improvement > > Processor productivity and innovation 3. Access to profitable international markets 4. Providing market information and insights > > Supporting industry decision making 1. Demand enhancement > > Promoting the benefits of dairy to consumers 2. Encourage a positive industry culture 3. Industry reputation management > > Maintaining dairy s licence to operate 4. Risk management > > Identify, monitor and help manage issues impacting the industry > > Contribution to industry policy 5. Understand, measure and support industry sustainability 1. Workforce planning and action > > Providing the dairy industry with the people it needs 2. Skills and knowledge > > Supporting training and education 3. Career pathways development 4. Leadership > > Development of industry leaders 5. Extension > > Transfer of technology, skills and resources to farmers Investment Theme Creating industry prosperity Enhancing livelihoods Supporting communities Investing in dairy people Industry Sustainability Ensuring health and safety Improving wellbeing Maximising nutrition Caring for our animals Reducing environmental impact Reducing environmental footprint Dairy Australia Strategic Plan 6

8 Funding Allocation: In total, DA is budgeting to spend $181 million over the 3 year period with expenditure anticipated to exceed income during this period, which will drive reserves towards approved minimum levels by end of the 2015/ The $114 million of available project investment funds over 3 years has been structured against three strategic priorities with a clear focus on SP1 (Increasing farm profitability and competitiveness) with 59% of the 3 year expenditure, driven by the direct needs of dairy farmers. The SP2 activities of protect and promote (risk management and demand encouragement) account for approximately 20% of spend and SP3 (growing capability and skills) with 18%. Project expenditure directed towards DA s communication with stakeholders and its statutory requirements accounts for 3%. This distribution of funds is seen as a responsible balance between short-medium term stakeholder objectives and longer term sustainability issues. The following table summarises the changes and focus of investment: 2 Dairy Australia s Investment Strategy 1 Strategic Priority 1 (59%) 2 Strategic Priority 2 (20%) 3 Strategic Priority 3 (18%) 4 Dairy Australia (3%) 1 DA Strategy SP1: Increasing farm profitability and competitiveness > Continue to invest in innovation and productivity improvement at farm and processor level to support improved industry profitability and long term sustainability, with a strong emphasis on extension activities to drive adoption. > Continue to support activities that assist in maintaining or improving access to international markets. > Continue to provide a central source of useful information to help support decision making about future direction. SP2: Protecting and promoting our industry > Invest more into Legendairy activities to foster a positive culture within the industry and positive community sentiment towards the industry to protect dairy s licence to operate. > The Dairy Industry Sustainability Framework reporting will provide transparent credible evidence to support the Legendairy key messages. > Define the health and nutrition benefits of dairy consumption and communicate these messages to consumers and key community influencers. SP3: Growing capability and skills > Continue to invest in activities that build industry capability (farm, processor, R&D) and help maintain or attract people to the industry. > Ramp-up of leadership educational initiatives. > Maintain and build extension services, despite reductions in co-funding, to fully capitalise on investment in other program areas. 7 Executive Summary

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11 Introduction 2.1 Purpose Context: Supporting Policy and Studies Context: Industry Support Structure Context: Role of Dairy Australia Vision and Mission 14 Dairy Australia Strategic Plan 10

12 2.1 Purpose This Strategic Plan covers the financial periods 2013/14 to 2015/16. In the past, DA has produced a rolling five year strategic plan and financial forecast but following an external review (GHD, October 2011), DA has now moved to a three year planning cycle as recommended. This will allow more agile responses to immediate and medium term investment priorities. Having a more focussed strategic planning period will also drive a more balanced portfolio of investments. DA will continue to scan the external operating environment for longer term macro-trends and events that present both challenges and opportunities for the industry. The Strategic Plan is the primary document in a suite of documents that describe DA s strategic direction and annual activities (see Figure 1). It deliberately contains sufficient detail to be self contained and form the basis for the other documents. DA has reviewed its strategic priorities against achievements to date, the operating environment, the priorities of government and the needs of industry. This plan focuses on three enduring strategic priorities: > SP1. To help dairy farmers become more profitable and competitive. > SP2. To protect and promote our industry. > SP3. To grow skills and capability. DA continues to engage in a wide breadth of activities across the supply chain, including natural resource management, climate change, international trade and market development, policy and regulatory analysis and issues management. In particular, sustainability - in its fullest definition - is a key focus for the organisation. Whether it is enhancing livelihoods, improving wellbeing or reducing our environmental impact, the tenets of sustainability are drivers of DA s investment activities. Sustainability is a vital component of realising our strategic objectives. All of DA s investment decisions are designed to contribute towards the growth of an internationally competitive, innovative and sustainable dairy industry. Summary Presentation DA Strategic Plan 2013/14 15/16 Summary Document Annual Operating Plan (AOP) 2013/14 Strategic Program Summaries 2013/14 Project Listing 2013/14 Figure 1: Strategic Planning Documentation 11 Introduction

13 2.2 Context: Support Policies and Studies The Strategic Plan draws upon a range of resources and consultations to inform the operating environment and establish industry priorities. These resources include: > Horizon 2020 > Situation and Outlook > Stakeholder tracking > Dairy Moving Forward (Guide much of our SP1 farm related programs) > Rural Research and Development Policy Statement > Australia in the Asian Century > Australian Dietary Guidelines > National Food Plan > Murray Darling Basin Plan > Industry organisations: Australian Dairy Farmers (ADF), Australian Dairy Industry Council (ADIC), Australian Dairy Products Federation (ADPF), Regional Development Programs (RDP), the National Farmers Federation (NFF) > Correspondence from the Minister for Agriculture, Fisheries and Forestry to DA. Of these, the Horizon 2020 study has been specifically aimed to assist in raising the sights above short term issues which have affected industry priorities in recent years. Undertaken by a working group that included a range of industry stakeholders including farmers, the Horizon 2020 work highlighted the need for the industry to actively position itself for the challenges and opportunities of the future, and identified areas for industry investment and collaboration. DA Strategy Horizon 2020 Stakeholder Tracking Dairy Moving Forward Sustainability Framework Situation & Outlook In Focus Australia in the Asian Century National Primary Industries Research, Development and Extension Framework National Dietary Guidelines Australian Dietary Guidelines Murray Darling Basin Plan ADIC ADIC ADPF RDPs NFF Rural Research and Development Policy Statement Figure 2: Supporting Policies, Documents and Studies Dairy Australia Strategic Plan 12

14 2.3 Context: Industry Support Structure 2.4 Context: Role of Dairy Australia DA is one of a number of organisations that support the dairy industry and it is important that these organisations work in concert. The industry vision cannot be achieved in isolation and DA is committed to working closely with organisations such as ADF, State Dairy Farmer Organisations (SDFOs), ADPF, the Geoffrey Gardiner Foundation (GGF), the RDPs, as well as other Research and Development Corporations (RDC). As such, formal consultation about strategic priorities and on-going communication with regard to the strategic plan has been undertaken, including: > ADF and farmer representative attendance at DA s Strategy Forum in October 2012 > ADF National Council review of draft Strategic Plan in April 2013 > Regular liaising with ADF and ADPF > Feedback from the RDPs and larger supplier programs. DA is constituted under the Dairy Industry Service Reform Act 2003, and is the national services body for dairy farmers and the industry. The remit of the organisation is to fund and manage central pre-competitive activities that are important to the future of the industry but would not occur effectively or efficiently if the market was left to its own resources. This would typically be in the areas of RD&E, capability, trade and regulatory support and pre-competitive promotion. In essence, DA s role is to help farmers adapt to a changing operating environment, and achieve a profitable, sustainable dairy industry. This includes: > Supporting productivity initiatives and facilitating innovation on farm to improve profitability. > Gaining market intelligence and analysis to help farmers prepare and plan for the future. > Creating and maintaining access to preferred high value export markets. > Facilitating innovation across the supply chain to improve efficiency and profitability. > Encouraging consumption of dairy products through protecting and promoting our industry and implementing health and nutrition programs. > Protecting the reputation of the dairy industry and encouraging demand for its products. Figure 3: Diagram of support organisations in the dairy industry 13 Introduction

15 2.5 Vision & Mission The Australian Dairy Industry s vision: Grow an internationally competitive, innovative and sustainable dairy industry Dairy Australia s Vision: To deliver the world s best services towards achieving the industry vision Dairy Australia s Mission: To develop and drive industry services and innovation for the ultimate benefit of levy payers Dairy Australia Strategic Plan 14

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17 The Industry: Context / Trends / Outlook 3.1 Overview Domestic Environment International Markets Key Issues 28 Dairy Australia Strategic Plan 16

18 3.1 Overview The dairy industry continues to be one of Australia s major rural industries. Based on a farmgate value of production approaching $4.0 billion in 2011/12 (approximately $9.1 billion at wholesale & export pricing), it ranks third behind the beef and wheat industries. It is estimated that approximately 45,000 people are directly employed on dairy farms and by dairy companies within Australia. Related transport and distribution activities, and research and development projects, represent further employment associated with the industry. Dairy is also one of Australia s leading rural industries in terms of adding value through further downstream processing. Much of this processing occurs close to farming areas, thereby generating significant economic activity and employment in rural and regional Australia Growth Expectations Strong growth characterised the dairy industry through the 1990s, but that growth has stalled in the last decade. In the meantime, our major export competitor New Zealand, has expanded significantly (see Figure 4). The industry has experienced a slow recovery from drought with rains returning in recent years replenishing storages and restoring irrigation levels. Milk production growth in 2011/12 of 4% was the strongest in a decade, but 2012/13 will see approximately a 2% reduction due to dry conditions in SE Australia. The outlook for 2013/14 is for modest production growth to between 9.4 and 9.6 billion litres, based on surveyed herd growth intentions, cow condition and assuming normal seasonal conditions offset limited fodder reserves. Southern exporting regions should lead growth given positive global prices. Production in domestic supply regions is likely to be flat in response to market signals and uncertainty around supply contracts. Based on production intentions for three-year growth recorded in the 2013 National Dairy Farmer Survey and assuming reasonable seasonal conditions and prices, milk production could range between 9.8 and 10.2 billion litres by 2015/ Profitability and Pricing Increasing levels of market and margin volatility of the industry (see Figure 5) in the last five to six years has served to undermine confidence in the outlook for many farmers who are seeking reliable returns on which to build a longer term future. Australian dairy farmers operate in a deregulated and open market and have done so for over a decade with the only government involvement being administration of food standards and safety assurance systems. Consequently, international markets and prices are the major factors determining the price received by farmers for their milk. At an average of just over US$40 per 100kg of milk in 2012, Australian dairy farmers generally received a price comparable to many of the major producing countries (see Figure 6). While farmers experienced approximately a 10% drop in farmgate pricing in 2012/13, the projections for 2013/14 suggest strong opening milk prices (up 15-20%) which may be tempered later in the year due to export competitive pressures. Australia s competitive position has changed over recent years. Farm cost structures have increased in response to the need to adapt to drier conditions, with rain fed pastures contributing a lower proportion of the total feed available. Despite the increased rainfall in the last couple of seasons, farm cost structures have not returned to those of a decade ago for a range of reasons. At the processor level, lack of volume growth has resulted in a lack of infrastructure expenditure leading to little or no productivity gains. Consequently, Australia s share of international trade has trended lower as local milk production has contracted over the past decade. Reversing this trend is now a major focus of DA s strategy. The following domestic and international trends, opportunities and challenges will shape the Australian dairy industry and the investment environment for DA during the three-year period of this Strategic Plan. 17 The Industry: Context / Trends / Outlooks

19 1991 = ML ( 000) New Zealand Australia (p = projection) Figure 4: Milk production - Australia and New Zealand Earnings Business Net Worth Figure 5: Annual change in dairy farm performance, Australia USD/100kg Canada Australia EU-25 EU-27 New Zealand US (p) Figure 6: International Farmgate Milk Prices 3 Dairy Australia Strategic Plan 18

20 3.2 Domestic Environment Regional challenges remain, especially where drinking milk is the focus: Significant differences exist between the industry s geographic regions (see Figure 7) from both a natural resource and economic perspective. The WA, QLD and northern NSW regions are closely tied to the fresh drinking milk market (see Figure 8), with a requirement for more expensive year round supply systems on farms. Retailer strategies (as described later) have direct impact on farmgate pricing. In other regions there is volume manufacturing capacity (cheese and powders) and farmgate pricing is much more closely linked to the international commodity prices. There has been a trend towards consolidation of manufacturing in SE Australia which is unlikely to be reversed. The only significant new investment in capacity that has occurred in recent times is in Tasmania, with $250 million invested by a number of companies resulting in a 40% increase in processing capacity in that State. Murray Goulburn Cooperative is set to invest as part of its move into the fresh milk market and is also expanding its UHT capability to meet increasing Asian demand. The recently announced arrangements between industry co-operatives and a major retailer may lead to changes for the drinking milk supply market, with new processing capacity intended in Melbourne and Sydney. The touted price premium may provide more dairy farms with improved profitability and longer term financial certainty but this is yet to be proven. In any case, addressing the diversity of needs across Australia s dairy regions is one of the key challenges in delivering appropriate research, development and extension services. DA cannot always adopt a one-size-fits-all approach when considering RD&E investment. Figure 7: Dairy Regions in Australia Per cent Drinking Milk Manufactured product QLD NSW VIC SA WA TAS Exports Figure 8: Use of milk by region and source 4 19 Section The Industry: title Context / Trends / Outlooks

21 3.2.1 Commercial Environment Pressure on white milk pricing: Over the past 5 years, branded milk has increased in price by an average of 1% annually. Simultaneously, private label milk has fallen towards the $1/L mark (-4% average reduction) and farmgate prices have suffered a similar decline (-4%). The strategies of the major retailers reflect the value-seeking behaviour of Australian consumers who are still spending cautiously despite recent interest rate cuts. The $1/L strategy of a major retailer is a loss leader approach aimed at improving market share in a highly concentrated but competitive food market. The recent strategies of the major retailers will help support on-going low priced house brands. These strategies will inevitably damage the sales of branded milk to the benefit of house brands, and enhance the power of the retailers in the local milk supply chain. DA has limited ability to impact retailer strategies but it can help improve farm profitability via investment in the development of new and higher margin products and on-going productivity improvements on farm and within the processor sector Farm Operation and Profitability The profitability of many dairy farm businesses is again under pressure: Post drought profitability (see Figure 10) has been undermined by rising farm input costs (fuel, fertiliser, purchased feeds and electricity) and the squeeze on farmgate milk price. Currently, farm profitability is highly variable with a range between -3% and 17%. Volatility in income has resulted in many dairy farmers taking a year-to-year perspective on farm financial performance rather than wealth creation over the longer term. International competitiveness is important for all dairy farmers regardless of whether they supply a domestic or export orientated market as no Australian market or geography is protected from high-quality, lower-cost competitors. A positive future for the Australian dairy industry involves achieving on-farm business success while operating internationally competitive farm systems. Australian feedbase competitiveness has eroded: Low cost production of home grown pastures and forages has underpinned the competitive advantage of Australian dairy farmers in global milk production. However, feed costs comprise the largest proportion of on-farm variable costs, and have increased significantly over the past 20 years. Continued productivity gains are needed in the production of home grown feeds and in the conversion of these resources and bought-in supplements, into milk protein and fat to maintain this advantage. Estimated home grown feed consumption per hectare is still low compared to potential pasture yields. There has not been a significant change in average pasture or forage consumption over the past decade and there is considerable opportunity for the majority of dairy farmers to improve profit from their existing pastures, forages and supplements. Effective natural resource management is increasingly important: The efficient use of resources and energy is an increasing issue for Australian dairy farmers both in terms of cost control and to meet community expectations for environmental performance. The sustainability of nutrient use, particularly nitrogen, is expected to escalate based on experiences in overseas dairy industries. Climate change provides added uncertainty for dairy farmers and an additional risk which erodes profitability. Managing climate variability is, and always has been, part of managing a dairy farm and the best preparation for an uncertainty is a comprehensive risk management plan. Improved on-farm efficiency is vital for farm profitability and managing climate challenges. 2.5 Total Branded Milk Total Private Label Milk Farm gate prices 2.0 $ per litre (p) Figure 9: Trends in milk retail pricing $ 000s (25) (50) (75) 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13(p) Farm business profit Farm cash income Figure 10: Australian dairy farm financial performance 6 Dairy Australia Strategic Plan 20

22 The genetics industry is evolving: Genetic improvement is a critical source of cumulative productivity gain in the Australian dairy industry (see Figure 11) and has contributed up to one-third of productivity gains over the past two decades. However, fertility has declined over the same period. Developing highly profitable and sustainable dairy cattle is a clear priority. Actual gains from genetic improvement have fallen short due to: > Fragmented industry structure. > A shortage of high quality data in key priority areas and from key sources. > A lack of integration of genetics with other elements of the production system. These shortfalls can be addressed by DA programs. The environment in which bull selection and breeding decisions are made has changed markedly in the past decade, and the introduction of genomics and genomic breeding values has added an additional dimension to this changing environment. There remains a need to further investigate support for: > Increasing the use of Artificial Insemination > Herd recording > Progeny testing and Australian Breeding Values (ABV) > Addressing obstacles to these practices on-farm. The artificial breeding industry is undergoing significant global change and this market place is rapidly evolving. Australia is a small artificial breeding market on a global scale, representing about 8% of the US domestic semen market. On the global front, there have been a number of commercial and technological developments of consequence for the Australian dairy industry, including: > Development of the Grasslands Alliance a joint venture between CRV Western Europe (Netherlands, Belgium, Germany, France), CRV Ambreed (New Zealand) and National Cattle Breeding Centre (Ireland). > Emerging technologies, e.g. genome editing, gene sequencing. > Emerging product development e.g. closed nucleus breeding programs (self contained genetic pool). > Emerging product differentiation, e.g. proprietary traits that could be used competitively in the market. It is DA s role to monitor these developments and assist in technology transfer to the Australian industry in a timely fashion. Managing animal welfare issues is an on-going requirement: Although there has been variation between breeds and countries, dairy cow fertility has declined globally since around DA s InCalf Data Project (2011) showed that the Australian 6-week in-calf rate decreased by approximately 1% per year over the decade The control of mastitis and lowering of somatic cell counts continue to be raised as important issues by dairy farmers and milk processors as improved management of this disease has direct and obvious financial and milk quality benefits. Other animal health issues such as lameness, heat stress, Bovine Johne s Disease and Pestivirus continue to be relevant to the Australian dairy industry, but vary in their importance over time and between regions. On-farm management of these animal health issues, and emerging diseases such as Theileria and Mycoplasmal infections, will continue to be supported by DA through ensuring farmers have access to practical management advice. Similarly, on-farm change in relation to animal welfare will continue to be supported by DA to promote industry recommended practices for priority animal welfare issues - tail docking, bobby calf welfare, disbudding, calf management, induction, lameness and downer cattle. Average annual milk yield per cow (L) 5,800 60% 6 week in-calf rates Milk yield per cow (L) 58% 5,600 56% 5,400 5,200 5,000 4,800 4,600 54% 52% 50% 48% 46% 44% 42% 6 week in-calf rates 4, % Figure 11: Average Output per Cow and Fertility 7 21 The Industry: Context / Trends / Outlooks

23 3.2.3 People Skill requirements are changing: The industry has been experiencing consolidation for some time (see Figure 12) and on-farm skills are changing to meet the demands of larger, more commercially oriented farming. Larger farm scale has meant that many farms now employ people other than family. Turnover is relatively high in the industry and many dairy businesses report that they have difficulty in attracting and retaining skilled people, and that this is a constraint to business growth and wealth creation. Investing in programs and activities that attract, retain and develop people in the dairy industry is vital to its success. Farmer confidence is a critical issue: The combination of market conditions has led to a general decline in farmer confidence over the last 2 years (see Figure 13). Nonetheless, farmers on average have longer term growth intentions. Part of DA s role is to help foster a more positive culture in the industry to underpin future growth Other Key Issues Innovation in processing remains important: As in the farm sector, the milk processing sector is undergoing continuing rationalisation. Initially, this resulted in improved factory capacity, larger operations and economies of scale. However, over the last decade, milk supply constraints have resulted in under-investment in technology and scale in Australian dairy factories resulting in reduced unit cost competitiveness when compared to New Zealand and other international competitors. On-going investment in manufacturing productivity via Dairy Innovation Australia Ltd (DIAL), will be an element of DA s strategy to improve industry profitability. Ownership: Farmer-owned co-operatives account for one third of Australia s milk production and it is unlikely that foreign ownership at the processor level will increase during the next few years. However, it is anticipated that foreign ownership (especially Asian) at farm level may increase over the forecast period. Relevant policy issues must be riskmanaged: There are a range of policy areas with the potential to impact operations and costs of Australian dairy producers (animal health and welfare, bio-security, food safety, environment, climate change, natural disaster relief, genetically modified foods, health & nutrition & labelling, labour, trade policy, R&D, infrastructure, fuel & energy, taxation, etc). The key areas of government policy affecting the dairy industry have been in the areas of water reform and carbon pricing: > Water Reform: A draft Murray Darling Basin Plan was delivered in late 2012 and will affect water availability and affordability, particularly for farmers in shared irrigation districts. This represents a significant but not insurmountable productivity challenge if dairy farmers are to maintain and grow their production in these regions. DA has a key role to provide information and findings that support robust and well informed debate on this issue. 14, No. of registered dairy farms Average herd size 12, , No. of farms 8,000 6, No. of cows 4, , / /02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 12/13 (p) Figure 12: No. of farms and average herd size % positive about future Investment intentions next 12M 80 Production intentions more in 3Y 250 Per cent Figure 13: Trends in Farmer Confidence 9 Dairy Australia Strategic Plan 22

24 > Carbon Tax: This new tax was implemented in mid-2012 and directly impacts larger dairy companies. While agriculture is not covered by the tax, farmers are being affected through higher electricity costs. Milk companies with limited ability to pass on costs are likely to pass back the carbon price to farmers. Funding partnerships are changing: State government-based extension services have been winding down over the past decade and this decline is now accelerating. Individual States are at different stages on this continuum but the South Australian government has already completely exited provision of dairy extension services. At the same time, extension roles and responsibilities within the public, private, collective (levy) and vocational education and training (VET) sectors are changing. DA foreshadows a growing impact of the private and VET sectors on the extension and change management agenda in Australia and investment must be aligned and supportive of this emerging change. For extension to be effective it must be well coordinated, and partnering amongst providers (public, private, collective and VET) is critical to achieving the impact that is required. Increasingly the challenge for extension is to be responsive to the opportunities of individual dairy farmers, but also to be clear in its role in driving and enabling change to focus on and meet clear outcomes and targets. Under the National Primary Industry Research, Development & Extension Framework, the outcomes of Dairy Moving Forward provide DA with a guide to effective investment across RD&E. Collaboration with research organisations locally and internationally also provides DA with the ability to stretch its funding as far as possible. Nevertheless, this reduction in available State Government funding means that DA must shoulder greater funding contribution to extension if the same level of services is to be provided. During the forecast period it is likely that DA may be forced to further prioritise investment in this area. 23 The Industry: Context / Trends / Outlooks

25 3.3 International Markets While Australia accounts for only 2% of the world s milk production, it is a significant exporter of dairy products. With export value of $2.76 billion (7% of global exports), Australia ranks fifth behind New Zealand, the European Union (EU) as a bloc, the United States (US) and Belarus. Over recent years Australia has exported 40-45% of its milk production, the lowest proportion since the mid-1990s, due to the reduced availability of product over these years Australia s export markets are concentrated in Asia, which represented 74% of the total Australian dairy export value in 2011/12. Japan is the single most important dairy export market for Australia, accounting for 19% of exports by value, followed by China (14%), Singapore (9%), Indonesia and Malaysia (6%). This concentration of Australian dairy exports to Asia is both a function of Australia s close proximity to Asian markets and the extent to which Australia is excluded from other export markets through direct and indirect trade barriers. Asian markets have considerable potential for dairy consumption growth as economies and diets become more westernised and Australian dairy companies have proven track records in supplying these markets over a number of decades. The Middle East and the Americas are also becoming increasingly important markets for many Australian exporters. 3 Export sales by region 1 Japan (19%) 2 China (14%) 3 South East Asia (30%) 4 Other Asia (11%) 5 Middle East (12%) 6 Americas (4%) 7 Europe (2%) 8 Africa (2%) 9 Other (6%) Figure 15: Export Sales by Region 11 Sth East Asia Other Asia Europe Middle East Africa Americas Other Total $m $m $m $m $m $m $m $m Butter/AMF Cheese Milk SMP WMP* Other ** Total 816 1, ,757 Figure 15: Australian dairy exports by product by region 2011/12 10 * Also includes infant powder ** Includes consumer products such as icecream, custards etc and mixtures but excludes industrial/ingredients usage. Dairy Australia Strategic Plan 24

26 Exchanges rate position is improving: Substantial appreciation in the AUD exchange rate over the last decade has damaged export competitiveness, impacted export volumes, returns to exporters and subsequently returns to producers (see Figure 16). The slowdown in the mining sector and reserve bank monetary policy is now putting downward pressure on the dollar, which should have benefits for exporters. Nevertheless, Australian dairy industry s long-term growth and profitability is linked closely to its status as a world competitive producer and productivity gains must remain a key focus across the supply chain. In a small open economy policy responses are limited so it is even more important the dairy industry actively pursues wide-ranging improvements in productivity. EU issues not yet impacting SE Asia: While global economic uncertainty remains an important factor determining the demand for dairy products in the short to medium term, key emerging markets have so far been relatively unaffected by the global economic slowdown (see Figure 17). With a slightly improved economic outlook, demand from these regions is expected to remain strong into the foreseeable future. Commodity prices: International commodity prices have improved significantly since late 2012 driven by tight global supply and accentuated by drought on the North Island of New Zealand. With Australian product sold forward into the global market, the full impact of these prices was not fully reflected in 2012/13. However, these prices will influence where markets open in the 2013/14 season. Depending on weather patterns, the window of opportunity in which Australian dairy exports can recapture a significant global market share without a negative impact on market pricing could be available at least until late 2013 assuming New Zealand s milk production recovers with a strong season peak. Demand projected to exceed supply: Demand for dairy products will continue to grow with the expanding middle class in developing economies, changes in diet and increasing urbanisation, together with a rising global population. A large portion of this growth is occurring on Australia s doorstep ranging in an arc from the Indian sub-continent to North Asia. This provides a significant opportunity for Australian dairy producers. AUD AUD/USD Figure16: AUD/USD and Australian powder exports 12 Per cent Figure 17: Actual and projected GDP in Asia and Europe 13 USD/t /01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11 11/12 SMP WMP p Asia Developing Asia ASEAN Europe Cheddar WMP SMP Butter Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul kt Figure 18: Surveyed spot prices of Australian exporters ($US/t) The Industry: Context / Trends / Outlooks

27 In the second to last column in Figure 19, Unmet demand represents the estimated gap between projected global dairy demand and supply by 2021 (Horizon 2020). The expectation is that supply of dairy products will be unable to keep up with demand over the next decade. Australia will be one of a range of dairy exporters (EU, US and New Zealand) that will be competing for this additional demand. While Australia is geographically well positioned, price will be a key driver as the Asian market has low capacity to pay a premium. While Australia s geographic positioning (freight time and cost) and counterseasonality to the northern hemisphere offers some strategic advantage, it is likely that export success will relate more closely to: > Product quality > Green credentials > Production flexibility > Product specific differences. Commodity and value-added products: World milk powder demand grew on average by 6% over the last 5 years with whole milk powder and skim powder growing at around 4.4% and 9.9% respectively. Over this period Australian dairy export returns grew on average by only 1.7% annually. While growth in the demand for dairy commodities is expected to outstrip supply, realisable returns appear to be low. Hence, Australian exporters should also pursue product quality advantages or specialised products to preserve and improve average margins. Not a level playing field: Dairy is one of the most protected industry sectors globally with high tariffs and quotas and/or non-tariff barriers to trade. There is also the issue of subsidisation of competitor s exports by government programs. Such protection of dairy markets has become even more entrenched on the back of global food security concerns that have escalated since the global food price spike of 2007/08. Food price inflation is expected to continue to push up the price of food for the foreseeable future. EU and US policy reforms will also play a role in shaping future dairy trade flows as the removal of EU production quotas and the likely development of a new US Farm Bill signal a new type of engagement with the international market. DA s role is to monitor and understand the consequences of global market changes and assist the industry to protect or enhance market access. ML milk equivalent 70,000 60,000 50,000 40,000 30,000 20,000 10, EU NZ + AUS US Other Latin trio Unmet 2021 Figure 19: Estimate of Future Export Demand 15 ML Infant powder SMP Whey powder WMP Export returns ($/L) p Figure 20: Growth in global powder demand and Australian dairy export returns $/L Dairy Australia Strategic Plan 26