Discuss about the Competitiveness of Australian Dairy Industry.
The Australian Dairy industry is 13 billion dollar industry with high scope of growth. It is a manufacturing industry as well as it export dairy products to several other countries like Middle East, China and India. The dairy industry is a vital part of Australian economy and contributes to the jobs on farms, increases the jobs in manufacturing and service sector and support the wellbeing of the Australian communities and their job growth. In the present, Australian dairy farmers produce billion liters of milk with a recent rise in supply due to the growing demand from South East Asia and the Middle East. However, in the recent years a large number of companies have ventured in the dairy industry due to its immense benefits. As a result, the companies have to constantly invest, adapt and innovate for sustainable and productive growth. It is also essential in building high reputation as a supplier of qualitative and safe dairy products (Regulations, 2013).
The Australian government is also taking a large number of initiatives to promote the dairy industry so that it can achieve its full potential. Currently, the organization has established trading partners including China, South East Asia and Middle East with the help of free trading partners. In addition to it, the government is also undertaking research and development activities as the industry is constrained by low retail milk prices and high energy cost. In this regard, the present report will highlight the competitiveness in the dairy industry. The key factors which impact the competition in the industry will be explored (Edwards, 2003). The strategic landscape of the industry will be explored with the help of Porter’s five force model. Along with it, the report also aims to identify the competitive advantage of the Australian dairy producers.
In the last few decades, the dairy industry has developed drastically all across the globe. The dairy companies and farms are increasing their production and supplying the dairy produce to other countries. It has led to significant structural change in the milk industry. In addition to it, other factors such as population increase, urbanization and adoption of western eating habits has also boosted the demand of the dairy products. The top three milk producers in the world are India, the USA and China. China has rapidly increased the milk production over the last few decades; however, the internal consumption has also increased in the same spirit. So, the dairy production increase in China has not created a significant impact on the global dairy industry (Tacken, Banse, Batowska, A., & Gardebroek, 2009). The European dairy farms give tough competition to the Australian and other companies in the dairy industry. These are basically commercial farms which specialize in high production with efficiency. These dairy farms establish contracts and commercial relationships such that the supply chains are highly developed and the milk producer can establish collective bargaining power. The dairy sector is organized and the infrastructural facilities for collection and the transportation of milk are highly developed (Blayney & Gehlhar, 2005).
Similar to the global scenario, the competition has also increased in the local context. The industry volatility has increased with the Australian dairy crisis and increase in the competition. The industrial volatility has reduced the confidence of the farmers who are hoping for reliable returns from the supply. The competitive position of Australian dairy farm producers has declined due the unstructured form of this industry in Australia (Evenson, 2001). The Australian dairy farmers work in deregulated and open industry wherein the government involvement was minimal which was to maintain the safety standards and safety assurance. The Australian Dairy Crisis was a result of the increased competitiveness in the industry and other external factors. In the situation of crisis, the prices of money reduced to one dollar per liter which impacted in a negative manner on the entire dairy industry (Graham, 2017). It was a result of cold feud between Russia and the Europe. As a result of the feud, the dairy products like cheese and processed milk, manufactured in European countries were banned in Russia. Therefore, the European companies entered the South Asian market which was a huge market for the Australian companies. It resulted in huge supply and low demand for the Australian dairy products. Large dairy farm companies were suffered significantly from the dairy crisis (Edwards, 2003).
The competitiveness in the Australian dairy industry can be identified with Porter’s five forces model. It is a common model which is used to identify the competition in a specific industrial sector. According to this model, there are five major forces which determine the competition in a particular industrial segment. In the present case, the competitiveness in the Australian dairy industry has been conducted with the help of Porter’s five forces model:
Bargaining Power of Suppliers:
The dairy processors and the companies are dependent upon the raw material of milk. It can be stated that there is no substitute for milk. As a result, the dairy processors must face the bargaining power of dairy farms. Usually, in the dairy industry, the supply chain between the farmers and the processors is based on long term contract. Although several times the vertical integration between the farm producers and the suppliers is absent as small dairy farmers process their milk and sell them at the local farmer’s market.
Bargaining Power of Customers:
The bargaining power of customers refers to the power exerted by the customers on the business organizations. If the total number of competitors in the industry is high and the switching cost of the customers is low, the customers exert a high power on the business organizations. On the other hand, if there is monopoly of a company in the market, the bargaining power of the customers is low. In the present case, there are a large number of domestic as well as international competitors who can give immense competition. Therefore, the bargaining power of the customers is high.
Threat of Substitute Products
The milk products are an essential household product. It is commonly used in a number of recipes. However, it can be replaced by unconventional alternatives such as soya milk, coconut milk or almond milk. However, these alternatives of cow or buffalo milk have only a marginal market share. The alternatives of milk are highly expensive which makes the threat of milk substitute low.
Threat of New Competition
The threat of new competition is high in the food industry as a large number of enterprises are entering the food business due to its high turnover. The industry has high asset turnover and low profit margins. However, there are significant barriers to entry in the milk industry such as laws on food and safety and the customer loyalty and attraction to the leading brands. Besides, the dairy products are perishable; therefore, the business organizations need to have high turnover, reliable supply and distribution chain for them to be profitable (Capper, Cady & Bauman, 2009). The capital requirement is also high in this industry in comparison to other companies in food industry. It is due to the fact that there are strict regulations related to processing and packaging in the industry. Capital is also required for the modernization of different kinds of milk processors. Technological equipment is also required for processing the raw materials of dairy product.
Industrial Rivalry
The industrial rivalry is high in the dairy industry. Recently, a large number of large companies have entered in the dairy industry due to the high returns. In addition to it, there are several small companies which operate locally. Therefore, the industrial rivalry is high in this industry (Knips, 2005).
The competitive advantage refers to the advantage that one company has over its competitors which compel the customers to buy its products. It is necessary to attain ad sustain competitive advantage if the organization wants to become successful in the long run. The competitive advantage can be attained through various methods. A business organization can provide superior quality, customer services or cheap products or a combination of all these factors to attain competitive advantage. Moreover, in the present competitive era, the business organizations need to provide high quality products at the minimum rate. Therefore, various methods of cost optimization should be implemented within the organization. In the dairy industry, the end product is perishable; therefore, it is important that the organization implements proper methods for the cost optimization.
Figure: Cost of Production of Dairy Products
(Source: https://www.pc.gov.au/inquiries/completed/dairy-manufacturing/report/dairy-manufacturing.pdf)
The above cost structure is associated with the Australian dairy industry. The cost structure includes the raw material (milk), labor cost, operating surplus, plastic and paper product and the transportation cost.
Figure: Country comparison of the Overall cost structure of the dairy products
(Source: Australian Government: Productivity Commission, 2014)
The above graph shows the differences in the cost structure of countries. The graph shows that the labor cost and the raw material cost is higher in Australia. It can be critiqued that the Australian organizations use raw milk for the production process which increases the raw material cost of the industry. On the other hand, the dairy organizations in other countries use other raw materials like ice-cream, curd or condensed milk.
Although Australia is a small producer of milk products, it is considered as third largest dairy exporter as almost half of the production is exported. It can be assessed that there are several competitive advantages of the Australian dairy industry. The country is placed at a favorable position and has access to large number of importing countries. It also has strong production lines and has established a name for itself in foreign countries.
Figure: Export Share of Trade
(Source: PWC, 2016)
One of the primary competitive advantage of Australian dairy industry is the strategic location if the country. As a result of its location, the company has attained the position of third largest exporter of dairy items behind EU and New Zealand. Currently, Australia has covered 10% market in the dairy industry. The major export destinations of the country are Japan, Singapore, China, Indonesia and Malaysia. In Australia, the most popular dairy product is milk which is followed by Cheese, yoghurt and butter (More, 2009; PWC, 2016).
Another competitive advantage of the Australian Dairy is that research and development department. The government is focused on fostering on research and development in the industry. Several strategies have been designed to distribute fresh produce to the retail centers. In addition, the government is also encouraging research for more efficient and productive ways of food processing. Several free trade agreements have been established between the government of Australia and other governments to facilitate trade and commerce. It also encourages market development and opening markets in the foreign countries.
The dairy industry also has immense opportunity in the international market due to the rising demand. Currently, the South-East market is the largest export market for the Australian dairy industry. The middle-east is another potential market for the country. The increased oil prices in the recent years will potentially result in income growth and drive the demand in the market. The African market is currently a small market; however, with the income growth it can also become a potential market for the Australian dairy industry (ADIC, 2014).
Conclusion
It can be concluded that the Australian dairy industry is currently has immense potential in the international market. However, with the high profitability of this industry, high competition has arisen. The European countries have a completely developed and structured dairy industry. Currently, it has the largest market share in the international market. The rising competition has adversely impacted on the Australian dairy industry which has led to its crisis
References
Australian Government: Productivity Commission. (2014). Relative Costs of Doing Business in Australia: Dairy Product Manufacturing. [Online]. Available at: https://www.pc.gov.au/inquiries/completed/dairy-manufacturing/report/dairy-manufacturing.pdf [Accessed on: 13 August 2017].
PWC. (2016). The Australian Dairy Industry. [Online]. Available at: https://www.pwc.com.au/industry/agribusiness/assets/australian-dairy-industry-nov11.pdf [Accessed on: 13 August 2017].
Graham, D. (2017). What $1 milk means for the dairy industry. Choice. [Online]. Available at: https://www.choice.com.au/food-and-drink/dairy/milk/articles/one-dollar-milk-and-the-australian-dairy-industry [Accessed on: 13 August 2017].
Regulations, P. (2013). Australian Dairy Industry.
Edwards, G. (2003). The story of deregulation in the dairy industry. Australian Journal of Agricultural and Resource Economics, 47(1), 75-98.
ADIC. (2014). Australian Dairy Industry Council Inc. and Dairy Australia. [Online]. Available at: https://www.australiandairyfarmers.com.au/pdf/submissions/2014/ADIC-Agricultural-Competitiveness-Issues-Paper-April-2014.pdf [Accessed on: 13 August 2017].
More, S. J. (2009). Global trends in milk quality: implications for the Irish dairy industry. Irish Veterinary Journal, 62(4), S5.
Knips, V. (2005). Developing countries and the global dairy sector part I global overview. FAO, Pro-Poor Livestock Policy Inniciative.
Capper, J. L., Cady, R. A., & Bauman, D. E. (2009). The environmental impact of dairy production: 1944 compared with 2007. Journal of animal science, 87(6), 2160-2167.
Blayney, D. P., & Gehlhar, M. J. (2005). US dairy at a new crossroads in a global setting. Amber Waves, 3(5), 32.
Evenson, R. E. (2001). Economic impacts of agricultural research and extension. Handbook of agricultural economics, 1, 573-628.
Edwards, G. (2003). The story of deregulation in the dairy industry. Australian Journal of Agricultural and Resource Economics, 47(1), 75-98.
Tacken, G. M. L., Banse, M. A. H., Batowska, A., & Gardebroek, C. (2009). Competitiveness of the EU dairy industry. LEI Wageningen UR
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