Is Australia’s organic dairy industry better at weathering the storm?

Posted by AFN Staff Writers on 24th August 2011

With the New Zealand-based dairy multinational Fonterra announcing a drop in profits from its organic dairy operations in New Zealand this week, Australian Food News has been investigating the current state of Australia’s organic dairy industry.

Dr. Andrew Monk, convenor of the Biological Farmers of Australia (BFA) Standards Advisory Group says Australia’s organic dairy industry is a “small but growing industry”.

“It faces a challenge in meeting the consistently growing demand for the product while remaining within a sustainable price range – both for producers and consumers.

Australia’s “growing and under-supplied” organic dairy market

“Supply of Australian organic dairy has continued to struggle to keep up with demand and in fact has even been importing New Zealand organic dairy to supplement local supply in Australia. In the short term, this remains good news for Australian organic dairy producers to continue to supply into a growing and under supplied market,” Dr Monk said.

He continued, “However, organic dairy involves an intensive production system requiring organic feed inputs and other higher costs of slower growth or production (due to the organic standard requirements of natural production systems). These mean a significant price imposition for organic milk, greater than for most other organic product lines.”

Retail opportunities for Australia’s organic dairy producers

According to Dr. Monk, “Australia’s major supermarket chains, Coles and Woolworths, are starting to scale up their involvement in organic offerings, despite current financial instability in the general economy.

“The irony of Fonterra’s cutback of organic dairy in New Zealand is that countries like Australia are starting to see an increase in mainstream [supermarket] demand for organic products.”

Companies under pressure for shorter term returns to shareholders
Dr. Monk acknowledged that the large dairy groups are under greater pressure to maintain high shorter term returns for their owners. Combined with projected high world prices for non-organic dairy products in the coming period, companies like Fonterra may be considering their organic dairy operations are simply not a business priority.

“Even if organic dairy rises to 5% of the total Australian or New Zealand dairy product market in the coming decade, the likes of Fonterra may still view this as too “niche” for such a large company,” Dr. Monk said. “Organic is about a long term project – particularly for dairy – not something to dip in or out of without care and effort. As I understand it, Fonterra certainly isn’t backing away from support for its existing organic producers in New Zealand.”

Sustainable floor price sought for organic produce

Dr. Monk said, “Organic dairy producers in Australia have worked hard and well to establish a credible niche with a sustainable premium in the Australian market.

“There is clearly an identifiable and growing, albeit certainly niche, market segment for discerning consumers who “get” the organic package. Organic producers have had to convey the message to consumers about the added expenses in the supply chain. Organic production involves real costs of production and this must be managed in the face of relentless pressure from the retailers to drop prices to a point where it might then be not sustainable. This has been an important element of the success story of Australian organic dairy to date and arguably something possibly less evident in New Zealand.

“It is unclear where the market will settle out in the coming years ahead for organic dairy, but the issues will remain that without a sustainable floor price for organic produce, it will become more difficult for organic farmers to meet demand.”