As the Australian dollar remains high and supermarket price wars continue to beckon, Australian dairy farmers have been urged to shift their focus away from the domestic market and look towards the opportunities being offered by China and other growing Asian countries.
Confidence in local dairy farmers has significantly decreased over recent times, as prices for their products have been forced down to unsustainable levels by retailers such as Woolworths (ASX: WOW) and Wesfarmers (ASX: WES), which has seen the average income for farms fall 33% in the last year to just $95,300 from $143,000.
Ralph Norris – a board member of New Zealand's dairy giant Fonterra (ASX: FSF) – has urged other dairy farmers and processors to avert their focus from the domestic market to instead explore the opportunities on offer from overseas markets.
Whilst dairy products were largely unheard of in China as recently as 10 years ago, its rapid economic surge in prosperity has seen it become the world's largest dairy importer. Fonterra's chief executive Theo Spierings has predicted that by 2020, "the Chinese population will be consuming about double what's currently consumed today".
Meanwhile, Chinese trust in locally produced products has heavily declined after a series of food and safety incidents — such as the 2008 melamine contamination, with an estimated 300,000 victims — that have greatly contributed towards demand for imported products.
Despite New Zealand's dominance in the world's dairy sector, Rabobank's Hayley Moynihan has stated that "there is not nearly enough Kiwi supply to meet China's demand", which opens up opportunities for Australian producers. As confidence remains low however, Australian farmers should be reminded that they need to back their businesses and invest heavily to capitalise on the opportunity.
Although it is not expecting to become a major player due to the sheer size of the market, Bega Cheese (ASX: BGA) is one such company that wishes to shift focus towards opportunities in China, whilst 50% of Warrnambool Cheese and Butter Factory (ASX: WCB) sales volume already comes from exports – particularly to Asian markets.
Warrnambool Cheese and Bega Cheese – currently valued at $4.05 and $2.88 respectively – have gained 21.6% and 94.6% since July, whilst shares in Fonterra have gained 28.7% since the company's initial listing on the stock exchange. Should these companies further capitalise on international opportunities, we can expect those values to climb higher.
Foolish takeaway
The annual National Dairy Farmers' survey shows that the number of farmers intending on investing in their farming operations has dropped from 38% to 28%. As the value of the Australian dollar begins to lose ground and more and more opportunities presenting themselves overseas, those farmers not considering throwing in the towel could prove to be real winners.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
