The cheese market offers compelling global growth opportunities for the New Zealand dairy sector over the medium to longer term, despite some storm clouds brewing on the horizon, according to a recently-released report.
In its report, Global Cheese Trade Dynamics, agribusiness banking specialist Rabobank says strong demand prospects for cheese in emerging markets, particularly Asia, will drive export market expansion. But, the report warns, it will not all be smooth sailing as the global trade environment looks set for a period of heightened volatility and uncertainty, and with cheese demand likely to be vulnerable to economic shocks.
Report author, Rabobank senior dairy analyst Michael Harvey says cheese has established itself as an important driver of dairy export returns, with 11 per cent of cheese produced now traded on the global market.
“Traded cheese volumes have grown by around three per cent per year since the turn of the decade,” he says, “with 70 per cent of trade coming out of the EU, US, Australia, New Zealand and Argentina.”
Mr Harvey said cheese exports make up around 11 percent of New Zealand’s total dairy export volumes and exports of cheese will continue to lift over time.
“This increase will be largely driven by Fonterra, with $240m recently invested to expand the Mozzarella capacity of its Clandeboye plant in South Canterbury,” he said.
“And over coming years we expect to see cheese playing an increasing role in New Zealand’s dairy production profile.”
Mr Harvey says the export opportunities offered by cheese have not only driven heavy investment in cheese processing capacity in the local market, but also globally.
“Over the past five years, over one million metric tonnes of new cheese production capacity has come on line globally, and, while that growth has been necessary, we are entering a period with potential excess capacity,” he says. “And this, together with intensifying competition – particularly in Asia – will create some challenges for all export regions, despite the strong demand fundamentals.”
Mr Harvey says with New Zealand just emerging from the cycle of increased investment in cheese capacity, some of which still needs to come online, a more conservative approach to investment is warranted going forward.
“The key to success will include staying agile, maintaining access to key offshore markets, scaled manufacturing and a culture of innovation.”
Global competition in the global cheese market is also set to remain fierce, he says, “with China fueling the race to conquer the Asian cheese market”.
“But Asia will remain a key market for New Zealand cheese exports,” he says, “with New Zealand product having a good presence in the market and longstanding investment in market development putting us in good stead for the future.”
Global trade
According to the report, the global cheese trade arena is undergoing significant and structural change, characterized by sizeable swings in trade balances in key exporting regions and the strong pipeline of long-term investments in cheese capacity that is likely to see milk continue to be prioritised for cheese streams in key export markets.
“Each year we see more cheese produced around the world, with global production increasing by 1.4 per cent per year since 2010, to more than 21 million metric tonnes in 2019,” Mr Harvey says.
But cheese production is concentrated in a few key markets, he says, with nearly half the world’s cheese (10 million metric tonnes) produced in the EU – with EU cheese production up 60 per cent on the last decade. The US, meanwhile, has gone from a net importer to exporter of cheese in the past 10 years, to produce six million metric tonnes of cheese in 2019.
Mr Harvey said outside of New Zealand, growth opportunities were also significant among other key dairy exporting nations.
“In Australia recent investment cycles has favoured cheese capacity, while growth prospects are also strong in the EU and US over the next five years.”
Asia, cornerstone of demand growth
The report says trade opportunities will remain broadly favourable, underpinned by increasing cheese demand in emerging markets and deficits in those markets, as their domestic production remains limited.
“Over the past five years, Asia has emerged as the cornerstone of growth in global cheese trade as low per-capita cheese consumption, population growth, westernisation of diets and a growing preference for full-fat dairy all provide a platform for growing demand,” Mr Harvey says.
“The long-term trend towards eating out of home has also fuelled growth in the full-service Quick Service Restaurant (QSR) channel, particularly for mozzarella cheese on pizzas and processed cheese for burgers.”
Storm clouds ahead
The report cautions it will not all be smooth sailing for cheese exports going forward, with a number of risks and headwinds which have the ability to disrupt the global cheese market and present an “integration and execution” risk for cheese companies.
“These heightened risks include broad macroeconomic headwinds, with a slowing global economy, and a sluggish recovery, which could negatively impact consumer spending,” the report says.
In particular, Mr Harvey says exporters are having to contend with an increasingly volatile trade environment, “with mounting tensions between the US and China and more recently, the US and EU, as well as retaliatory tariffs and Brexit, which has the potential to disrupt over 500,000 metric tonnes of internal EU cheese exports to the UK”.
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of about 10 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 offices throughout New Zealand.
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Email: david.johnston@rabobank.com
Denise Shaw
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Email: denise.shaw@rabobank.com