Rabobank Global dairy industry outlook good but unbalanced

Posted by AFN Staff Writers on 6th February 2012

A report by Rabobank’s global Food and Agribusiness and Advisory department on 3 February, 2012 has forecast strong but uneven growth in world dairy products.

In the report, Rabobank stated that “the global dairy market will offer strong growth prospects in the coming five years, but the uneven spread of this market expansion and an era of elevated pricing will create as many challenges as opportunities for key players along the dairy supply chain”.

Growth will be highly skewed to emerging markets, with countries such as China, India and South East Asia expected to account for more than 80 percent of market volume growth, while western markets continue to mature.

Tim Hunt, Global Dairy Strategist for Rabobank said, “Tapping into emerging market growth will present a particular challenge for many of the world’s dairy processors, most of which are domiciled in, and still focused on, the European and US markets”.

Rabobank also forecasts solid market growth, supply constraints and a structural shift in the costs of producing milk will sustain high milk and dairy commodity prices over the medium term. However, Rabobank stated “that this won’t translate to increased profits for all”.

The Rabobank report stated that a leap in farm gate milk prices in recent years had caused the position of the dairy farmer to generally improve; however, “this was less than some imagined”. The report said the volatility of profits was now far greater, the skills required to manage business  remained significantly higher, and the inflation of asset prices, particularly in pasture based regions, ensured that most milk producers still earn a modest return on assets.

The report also stated that the dairy processing sector will continue to confront high and volatile input costs, difficult economic conditions and retail power. According to the Rabobank report, the dairy processing sector had generally maintained and improved margins, through a combination of stripping costs, trading higher value-added products, and passing through cost increases to consumers.

However, experience varied within the dairy industry for different sectors, with Fast Moving Consumer Goods (FMCG) players like Nestle and Danone faring well. Cheese makers also improved their returns, but liquid milk players and major Chinese processors have seen their returns decline.