I thank the Chairman and committee members for the invitation to address them today regarding developments in the global dairy market and the impact on exporters.
The imminent removal of dairy quotas and the forecast 2 billion litre increase in Irish milk production by 2020, albeit at a time of short-term market weakness, represents a major and long-term opportunity for the sector. It comes also at a time when the sector has already been making a significant contribution towards the growth in our overall food and drink exports, which recorded their fifth consecutive year of growth in 2014. Dairy exports increased by 3% last year, leaving trade some 56% higher than five years earlier. When dairy-based enriched powders - which are an integral part of the industry but are typically classed as a prepared food - are included, the value of dairy exports was almost €3.8 billion, or 36% of total food and drink exports.
Over the past decade, the value of Irish dairy exports has more than doubled. As the dairy sector begins to realise the opportunities now opening up, it is set to dominate and drive total export revenues by the end of this decade. The dairy sector is well positioned to do so, in that it has an international marketing footprint that is truly global. While as much as 40% of our total food and drink exports are destined for the UK market, just 32% of our dairy exports go there. And while almost 40% of dairy exports go to international markets, only 29% of total exports are destined for markets outside the European Union. The growth in exports in recent years has focused on Asia, Africa and the Middle East, which now account for 80% of dairy exports to international markets. Irish dairy products were exported to 138 countries in 2014.
The most striking trend of all is the sustained growth in exports to China, which is now our dairy industry’s second largest market after the UK, driven largely by the growth in infant formula exports. The progress made is highlighted by the fact that in 2008, China ranked 13th in terms of export markets.
In terms of our emerging branded presence and our pursuit of new opportunities in the market, the role of China in determining the fortunes of our dairy industry, both directly and indirectly, can hardly be overstated. China is now the world’s leading dairy importer and has a per capita dairy consumption level that is less than one third of the global average, so there is significant scope for growth in the future.
With up to 45% of dairy exports destined for international markets which predominantly trade in US dollars, and a further 27% destined for the sterling area, any change in exchange rates has the potential to impact on the competitiveness of Irish food and drink exports. In January 2015, the euro was 14% weaker against the US dollar and 7% weaker against sterling. These developments are helping to boost the competitiveness of Irish exports and should help to offset some of the decline in global dairy prices. If all other factors were equal, it could help boost the value of Irish dairy exports to the tune of 8%. However, a number of factors, such as availability, demand developments and the level of competition from other suppliers, will influence potential returns. It is also likely to take some time before any such currency-related benefit may be fully realised. The fact that the euro is weakening against other leading export regions such as the United States, New Zealand and Australia is helping to drive the relative competitiveness of European dairy products on world markets.
The drivers of growth in the demand for food are relentless - I will return to this in a moment - yet they are being met by new supply challenges that did not exist before, such as falling rates of growth in productivity, climate change, unpredictable weather events - identified by the FAO and the OECD as the single biggest contributor to volatility - a world facing water scarcity when agriculture requires 70% of it for irrigation, a fixed land supply, and the competing use of it for fuel as well as for food. These factors will work to Ireland's favour in the future.
Favourable weather conditions and strong producer prices have led to a strong increase in production in many of the world’s largest dairy export regions over the past year. The chart shows that during the 11 months to last November, combined production in New Zealand, Australia, the EU and US increased by almost 4%, or 9 billion litres of milk. The rate of growth slowed towards the end of the year as farmers responded to falling dairy prices. Volatility is not a new phenomenon within the dairy sector. Since 2007, weather-related supply shocks, disease issues, trade restrictions and so on have led to significant movements in international dairy commodity prices and resultant dairy farm prices. The global dairy market entered 2014 at strong price levels, but international commodity prices started to ease in spring, with declines accelerating throughout the summer period. Excess supply, combined with a slowdown in Chinese import demand, a Russian ban on the import of dairy products from the EU, Ebola in west Africa and falling oil prices, placed downward pressure on markets in the latter half of the year in particular. The average global price of whole milk powder in US dollar terms fell by 42% in December 2014.
Looking ahead to 2015, the sector is facing some challenges. However, as we progress into February, the outlook seems set to improve. There have been some signs of a stabilisation or uplift in global dairy prices in recent weeks. Dry weather in Oceania is accelerating the seasonal decline in Australian and New Zealand milk production. Recently, the New Zealand dairy co-op, Fonterra, has reduced its milk volume forecast for the 2014 to 2015 season by 3%, reflecting the impact of dry weather on production. Its previous forecast in December had suggested that output would be similar to last season. This will have an impact on the availability of dairy exports in international markets. Recent currency movements, with the euro now hitting a nine-year low against the dollar, as already noted, has made European dairy exports more competitive on international markets.
Looking at the medium to long-term prospects for dairy, there are significant growth opportunities for the industry. Population growth is certainly a key factor in driving the global demand for food, with the world population growing by a little over 75 million people a year, to reach just over 8 billion by 2025. It is a population that is urbanising as it is growing. Today, 54% of the population live in cities, and in ten years that figure will rise to 58%, driven almost entirely by Asia and Africa. It will grow to 66% by 2050, when the world’s population is set to reach 9.6 billion people. That urbanisation, associated with the growth in the middle classes, changing lifestyles and shifting dietary habits toward more protein-based foods and dairy products, is what is really driving growth in the global demand for food. According to an OECD working paper, some 3 billion people will join the middle classes over this and the next decade. It can be seen from the chart that this market will be located predominantly in Asia.
Part of the reason the population is growing, and a major feature of demographic change in the developed world, is that people are living longer. As they live longer, they recognise the link between diet and health. They want to feel better, to look better and to lead an active and healthy lifestyle. Health and wellness is undoubtedly the single biggest long-term driver of change in food markets today, and those who can leverage it effectively through nutrition are those who will ultimately prevail in the marketplace.
This will be a key driver for value added dairy ingredients going forward
In the meantime, that surge in demand finds expression in the latest ten year rolling forecasts from the FAO and OECD, projecting the growth in the global demand for protein, here in the form of livestock and fish products in the period to 2023. The red bars rising highest on that chart represent the exceptional growth projected for the developing countries, or emerging markets; the dark green represent the more sedate growth projected for the developed countries, namely, those in the OECD area; and the lighter green is the average, namely, world demand. It is notable how among the highest growth categories, representing the bars rising highest, are those representing the growth in dairy products.
The scale of growth comes into perhaps sharper relief when expressed in terms of the total growth expected over the period, with total global consumption set to increase by 27% but increasing to 34% in China and more than 40% in Africa and India in the ten years ahead of us. The FAO-OECD projections to 2023 were released in the middle of 2014 when prices were still high, albeit they correctly anticipated the subsequent decline which we have been recently experiencing. As we can see from this chart, they are nevertheless projecting that dairy product prices will continue to remain well above historic levels over the ten year forecast period. They similarly acknowledge that price outcomes are likely to exhibit variations around the projection trend, unsurprisingly, whether due to weather, or other changing conditions. By any measure one might take, the medium-term prospects for dairy remain positive and Ireland, with its international focus and presence in the regions of the world where demand is growing fastest, is well positioned to benefit. Markets will remain keenly competitive and it is a matter for each and every individual enterprise to pursue every competitive edge one can leverage in the global marketplace.
It was with this in mind that in 2014 Bord Bia, in association with the industry, undertook an evaluation among key customers in three target regions - the EU, China and Saudi Arabia as a proxy for the Middle East - to assess buyer priorities, perceptions about the positioning of Ireland and our industry, and the role of sustainability in light of the earlier launch of Origin Green and the sustainable dairy assurance scheme. A common thread running throughout our research was the emphasis placed on security of supply, with some referring to the need to move towards long-term agreements and extending to the search for acquisitions and alliances in China. In this context, the growth potential opening up in Ireland has been a source of keen interest by customers. Similarly, the perception of cost competitiveness and the potential of Ireland based on its grass-based production systems were seen as clear strengths. In Europe, price and quality are not surprisingly perhaps the primary drivers of choice, yet managing volatility is an issue frequently cited as a concern for buyers. The emphasis on price and quality – Ireland is perceived to be strong on quality – does not provide a basis for differentiation and the creation of value according to our research but sustainability does and Ireland is well placed to capitalise on our sustainable, grass based dairy production and the opportunities arising in the global marketplace.
It must also be evident to us all that just as a large and expanding segment of our dairy exports are destined for markets in Asia and Africa, an understanding and insight into the use of our dairy ingredients and products by consumers in different cultural contexts is critical if we are to add value and differentiate the Irish dairy offering and support our customers in these markets. Our consumer insight team in Bord Bia, in agreement with the wider dairy industry, has been working with industry to build these insights through ethnographic consumer research, which involves our researchers visiting and staying in the homes of consumers, shopping and eating with them and looking in their fridges, to better understand consumer attitudes and behaviour. All the faces members see in this and subsequent images are people and families that participated with our team in this research. The research advances our understanding in these markets, supports the industry’s customers, while identifying product and messaging opportunities around dairy products among different demographic cohorts.
We have most recently extended this work to the Chinese market where our researchers spent 300 hours over recent months, visiting and staying in the homes of consumers in Beijing, Shanghai and Chengdu, studying their attitudes and behaviours, conducting brand clinics, and exploring how Ireland can uniquely position itself in order that working with Irish suppliers, including global infant formula players with a presence in Ireland and their Chinese partners, we can build an awareness and preference for our dairy products among premium Chinese consumers.
On 26 March next, Bord Bia is organising Marketplace International where we will bring almost 450 buyers to meet more than 170 Irish food and drink manufacturers. Up to 300 of these buyers will come from overseas markets and on the day there will be approximately 4,500 pre-scheduled meetings.
The sustainable dairy assurance scheme, SDAS, which is an integral part of Bord Bia’s Origin Green initiative, was formally launched by the Minister for Agriculture, Food and the Marine in December, 2013. The scheme is a unique dairy farm standard in that it is a national programme that incorporates both quality assurance and sustainability criteria, and includes the routine carbon footprinting of all farms.
This standard was developed in consultation with all industry stakeholders. It has created a new challenge for competitors, just as it is winning the respect of customers. The aim of the scheme is to demonstrate to our international customers at a business-to-business level that our dairy is produced in a sustainable manner and uniquely we can prove it. The SDAS is currently being rolled out at farm level with 8,454 applications received to date, and a smaller number have been released for audit. We have conducted 4,667 audits. Some 3,793 of those farms are certified and we are on track to have most Irish farmers participating in the scheme by the end of 2015.
The Irish dairy industry - through the Irish Dairy Board and the Kerry Group - is funding a Bord Bia campaign to the tune of €1 million annually to promote the scheme and Origin Green to global customers, with a focus on China, the Middle East and Europe. Bord Bia has developed an Origin Green ambassador programme involving ten talented, experienced and motivated graduates. Their role is to raise the profile and understanding of the Irish food and drink industry’s Origin Green initiative among key audiences internationally; to provide the Irish food and drink industry with a comprehensive insight into global best practice in sustainability; and to be a cohort of executive talent to lead the Irish food and drink industry in its ambition to become recognised as one of the most sustainable in the world.
As part of this programme, the individual Origin Green ambassadors have already undertaken a series of six-month placements in leading international accounts such as Abbott in Colombus, Ohio; Coca-Cola in Atlanta; Fair Oaks Farms in Indiana; McDonalds, currently in Chicago; Marks & Spencer; Metro; PepsiCo; Subway; Tesco; Walmart in Bentonville; Subway; Unilever; and Nestlé. Each one of these accounts is involved in the dairy industry. Some of these individuals have been involved in dairy procurement and sustainability projects within these global leaders, which has had a direct and positive impact on these companies' attitudes towards Ireland as a leading global supplier of sustainable dairy.
This is a world in which reputation is everything. In a competitive dairy marketplace where countries compete with countries, reputation is critical. This chart shows how some 30 years ago, 80% of the value of companies that made up the Standard & Poor's 500 was made up of tangible, physical assets. Today 80% of their value is made up of intangible assets, like reputation. If reputation is so important to the valuation of businesses on the Standard & Poor's 500, it is also important for industries and countries.
While we acknowledge that the dairy sector will experience periods of volatility due to a range of external market factors - in particular, weather - the medium to long-term trend is positive. An industry focussed on market diversification, innovation and adding value, while seeking ways to differentiate itself in an ever-competitive market environment will help to insulate the sector from the worst effects of market volatility.
I would like to thank the Chairman and other members for affording me the opportunity of addressing the joint committee this afternoon. My colleagues and I will be happy to address any questions that members of the joint committee may wish to ask at this time.
