Australia / Analyst Insights
Milking it: Rising exports have supported dairy companies

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by Matthew Barry
Oct 04 2018

The Australian dairy sector has experienced extraordinary growth over recent years as a result of increased global demand for Australian dairy products. Demand from China and other Asian economies has fuelled much of the sector’s growth, with exports of milk and cream up 12.5% in 2018. Recently, Australia has seen an expansion in free trade, which has supported growth in revenue and exports of dairy products. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is a free trade agreement that was signed in March 2018, and is expected to benefit the dairy sector’s revenue and exports.

China, Australia’s number one trading partner, is displaying a rise in wealth in the middle class, which has put upward pressure on demand for higher quality dairy products and infant formula. Furthermore, China has been lowering trade barriers and has reduced quarantine times, which has made exporting fresh dairy products from Australia more viable. As a result of these key growth drivers, the Australian dairy sector, and certain dairy exporters in particular, have benefited from a stronger competitive position in the Chinese market.

One such exporter is the a2 Milk Company Limited (A2M), which processes and sells A2 milk and premium infant formula. Recently, A2M has seen increased demand for its products both in domestic and international markets due to the potential health benefits and the premium nature of the product it produces. As a result, the company’s sales revenue has grown by 67.9% to $922.3 million in 2018. A2M has also gained a strong foothold in Asian markets. The company’s revenue from sales in Asia has grown 162.9%, with China being the most significant contributor. The company has built brand awareness through investment in marketing, and has used a variety of channels for distribution into China. Servicing the growing middle class in China represents a major opportunity to expand distribution of A2M’s premium infant formula, as these consumers have more disposable income to spend on premium products.  A2M has also benefited from lower Chinese trade barriers as the company was approved by the China Food and Drug Administration (CFDA) in September 2017.

Similar to A2M, Bellamy’s Australia Limited processes and sells infant formula domestically and to the Chinese market, with sales revenue growing by 36.9% to $328.7 million in 2018.  Bellamy’s has recorded consistent export sales growth up until the second half of the 2018 financial year when the CFDA undertook a restructure, resulting in a delay of Bellamy’s approval and a slowdown in Chinese cross-border trade growth. However, this as a transitory period and once Bellamy’s gains CFDA approval (expected imminently), it stands to benefit from lower trade barriers and cross-border distribution channels, and to resume strong international growth.

Australian dairy industries have been experiencing strong growth over recent years, and companies such as a2 Milk and Bellamy’s have already started tapping into the Asian markets. As trade barriers and regulations become less restrictive, and as more Chinese consumers gain purchasing power, China will continue to have a powerful positive effect on demand for Australian dairy products.

Companies mentioned in this report:

The a2 Milk Company Limited

Bellamy's Australia Limited

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