You could be forgiven for mistaking the website of takeover target Warrnambool Cheese and Butter Factory with a travel agent advertorial: “Salty ocean air. Lush green pastures and cliff-top rest-stops. The Great Ocean Road is a pretty special place. It's the perfect area for dairy farms because of a unique mix of volcanic soil, undulating hills and about 28 to 35 inches of rainfall each year. So the grass is lush and green and there's plenty of it,” the site says.
That sounds a long way from urban Beijing. But it is the growing sprawl of China and other Asian neighbours, and the corresponding rise in incomes, that has three bidders vying from as far away as Canada for this unassuming dairy maker and its protein-packed produce.
Developing nations have contributed 83 per cent to global whole milk consumption growth over the past three years; 97 per cent to skim milk powder; and 82 per cent to butter growth, according to research by the Commonwealth Bank.
“Trade in dairy products continues to surge on the back of the Chinese dragon,” says Commonwealth Bank analyst Luke Mathews. “Chinese per capita consumption of dairy products is rising rapidly, and there is much more growth to come. Exporters such as New Zealand and Australia will continue to benefit as Chinese per capita dairy consumption rises toward developed-Asian standards.“
In China, the infant food industry is in rapid development. Higher incomes correspond with higher intake of milk, cheese and meat, and this is expected to lift Chinese demand for infant formula milk powder by 15 per cent per year. With an entire family focused on the fortunes of a single child, status obsessed parents will spare no expense in ensuring the best possible start in life for a 'little emperor'. In Shanghai's upscale supermarket CityShop for instance, a 900 gram can of Bellamy's Organic Infant formula which hails from Tasmania and retails in Australia for $21.99, will set a Chinese family back $75.
China’s population is 1.4 billion and Huidian Research predicts the number of newborns every year will exceed 17 million, and that there will be about 50 million Chinese children under three years old in the next few years. By 2015, the value of China's infant food market is estimated to jump by 50 per cent to 90 billion yuan.
Supporting this is talk that China’s one-child policy, in place since 1978, is on the verge of reform.
“China may significantly relax its one-child policy at end-2013 or early-2014 by allowing families to have two children if at least one parent is from a one-child family,” said an August note to clients from BofA Merrill Lynch economist Ting Lu. “A plan for allowing all families to have two children after 2015 is also being reviewed.”
China’s high-end milk powder market has been dominated by foreign brands. The market share of foreign milk powder brands Mead Johnson, Dumex, Wyeth, Nestle and Abbott has grown to almost 60 per cent of the infant food market share across China, and a higher rate in the major cities. Market share has increased after the 2008 adulteration of local milk and infant formula with melamine which killed six infants and saw over 50,000 hospitalised.
Warrnambool exports almost all the milk powder it produces – used in infant formula as well as baked goods and desserts – to the Middle East, Japan and China, as well as Europe, South East Asia and South America.
China’s per capita skim milk powder demand is rising by 25 per cent a year while milk, butter and whole milk powder demand has grown 5 per cent a year since 2010. China’s whole milk powder imports contributed 78 per cent of global growth in whole milk powder trade since 2010.
And China is still a laggard. If China’s rate of per capita dairy consumption matched the developed Asia average, Chinese cheese consumption would create a 16 per cent uplift in global demand, Mathews calculates.
A scarcity of land, fresh water and feed grain will ensure that future growth in Chinese dairy consumption will be largely satisfied by imports.
For more on the battle for Australian dairy supremacy read How Australia can win the milk war, by Robert Gottliebsen.