Dec 06 2019
China-backed Mengniu Dairy’s recent acquisition of baby formula giant Bellamy’s Australia Limited, and pending acquisition of dairy processor Lion Pty Ltd, present new opportunities for the struggling agricultural sector. However, these acquisitions also renew debate over foreign ownership of Australian businesses. While the acquisition would likely ease the entry of Australian dairy products into the Chinese consumer market, it could also threaten the supply of dairy products to Australian households.
According to industry research firm IBISWorld, Australian suppliers in the agricultural sector have found it difficult to enter the Chinese market due to issues of trust and reliability with Chinese regulators and distributors. Bellamy’s inability to obtain approval from China’s State Administration for Market Regulation cost the company significant sales in the 2018-19 financial year. Through the acquisition by Mengniu, Bellamy’s and Lion will likely avoid these challenges in the future, which would be a major boost to the Baby Food Manufacturing and Milk and Cream Processing industries.
The Lion acquisition will be Mengniu Dairy’s third Australian acquisition, following its acquisition of Bellamy’s in September 2019 and Burra Foods in May 2016. Lion produces iconic Australian brands, such as Pura and Big M, and processes over 825 million litres of milk each year.
‘Despite rising costs due to drought, Australian dairy producers remain attractive acquisition targets for Chinese firms. Water and livestock feed shortages in Inner Mongolia have increased Chinese reliance on imported dairy products. Companies such as Mengniu find it more cost-effective to buy dairy processing facilities overseas and transport products back to China,’ said IBISWorld Senior Industry Analyst, Matthew Reeves.
Future acquisitions of Australian companies by foreign firms may be obstructed by regulatory and political hurdles. For example, foreign ownership of domestic dairy enterprises could redirect supply of dairy products to export markets, increasing prices and threatening supply for Australian households. These concerns have drawn the ire of prominent politicians, such as Independent MP Andrew Wilkie and Greens Senator Peter Whish-Wilson.
Another major concern for the dairy sector is farmgate milk prices, which remain low. The drought affecting key dairy regions in Victoria, New South Wales and Queensland has significantly influenced profitability in the Dairy Cattle Farming industry.
‘Difficult operating conditions and low prices have pushed many farms out of the market, with industry enterprise numbers expected to fall at an annualised 2.2% over the five years through 2019-20,’ said Mr Reeves.
Falling domestic milk consumption is also a major threat to dairy farmers. Australia is a mature market, with milk consumption anticipated to decline at an annualised 0.4% over the five years through 2019-20.
‘Milk consumption per capita is forecast to continue declining as plant-based milk alternatives become increasingly popular. In contrast, China is a growing market, with demand for milk-based products such as infant formula expanding in line with the country’s growing middle class. The main challenge facing Australian dairy farmers and processors is falling milk consumption due to rising health consciousness,’ said Mr Reeves.
The issues facing businesses in the dairy sector have been significant enough that the Federal Government is driving towards introducing a Dairy Industry Code of Conduct. This code, which would give dairy farmers more negotiating power with milk processors, is set to come into effect in January 2020. If the Dairy Code of Conduct is successful in its aim, then farmgate milk prices will likely increase.
‘Higher farmgate prices are anticipated to be passed on to consumers through higher milk prices in supermarkets. While higher prices could place some downward pressure on demand, Australians have shown a willingness to pay higher prices to support farmers,’ said Mr Reeves.
IBISWorld reports used to develop this release:
- Dairy Cattle Farming in Australia
- Baby Food Manufacturing in Australia
- Milk and Cream Processing in Australia
- Bellamy’s Australia Limited
- Lion Pty Ltd
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647