Fears Over ASEAN Trade Liberalisation Overplayed
BMI View: We believe that Thailand dairy farmers' fears of the impending trade libealisation with ASEAN countries are relatively overplayed as farmers already are relatively efficient by regional standards. However, thailand will face stiff competition from Australia and New Zealand given the competitiveness of their products.
Thailand's dairy sector should maintain its strong production growth in 2012/13, with milk production exeeding 1.0mn tonnes for the first time. The country enjoyed sound growth in the past years, with production expanding 4.5% annually on average in the past ten years. Thailand's dairy sector successful growth story has been largely on account of high tariff barriers used by the government to shield the industry from foreign competition. However, the ASEAN Economic Community (AEC)'s impending import liberalization in 2015 along with the implantation of the ASEAN-Australia-New Zealand free trade agreement that same year is causing considerable anxiety among the sector.
|Vietnam Still A Minor Player|
|Liquid Milk - Vietnam Production, Thailand Production & Consumption ('000 tonnes)|
Thai milk farmers and processors fear losing market share both domestically and abroad, especially to China and Vietnam, according to industry sources. Vietnam's dairy sector, although still lagging being Thailand's, is developing rapidly, with milk production increasing by 18.3% on average in the past ten years and forecast to soar by 25.7% to 416,000 tonnes to 2016/17 compared to 2011/12 levels. Vietnam has been trying to upstage Thailand through massive dairy cow imports and rapid expansion of milk-processing facilities and dairy operations. Vietnam's state-owned dairy company Vinamilk now has a capacity that is three times that of Dutch mill, Thailand's leading milk producer. In Cambodia, where Thai milk used to dominate the market, cheaper Vietnamese dairy products have been gaining market share recently.
We believe that Thailand dairy farmers' fears of the impending trade libealisation with ASEAN countries are relatively overplayed as farmers already are relatively efficient by regional standards. Vietnam still imports 75% of its dairy products needs, compared to Thailand, which is 75% self-sufficient. Moreover, Thailand has higher dairy cow efficiency than Vietnam and China, as dairy cows yield 3,380kg/head/year of milk compared to 2,060kf/head/year in China and 2,170kg/head/year in Vietnam.
|High Productivity In Thailand|
|Select Countries - Dairy Cows Yields (Kg/head/year)|
However, Thailand still lags behind dairy powerhouses such as Australia and New Zealand in terms of productivity, as New Zealand's cows produce 3,840kg/head/year of milk. More worrying is Thailand's high production costs and extremely high producer prices. Thai producer prices have been on average 1.3x higher than in New Zealand in the past five years. Such a high price could easily push processors to turn to cheaper imported milk once trade liberalization is implemented. Higher competitiveness could be achieved by reducing production costs. Given the fragmentation of milk collection (the average herd size is of 20 heads, compared to 386 in New Zealand), significant cost reductions can be achieved by increasing the scale of co-operatives.
|Thailand's High Prices|
|Select Countries - Milk Producer Prices (US$/tonne)|
In preparation for increased competition from foreign milk brands, local dairy producers are working to improve the quality of domestic dairy products as well as increasing brand awareness among consumers. The sector is also witnessing a wave of investment aimed at reaping the benefits from the AEC. State-run Dairy Farming Promotion Organisation (DPO), Thailand's main player in the country's raw milk production, is strengthening distribution channels and expanding its dairy products towards sales of UHT (ultra-high temperature) and chilled milk products. Danone is also reviving its factories in Thailand after closing them due to 2011 massive floods. The company also aims at promoting the yogurt culture in the region and is currently revamping its yogurt manufacturing factory in Rojana Industrial Park. The Foreign Trade Department even decided to launch its own Smile Milk brand of soft ice cream and milk in October in order to create its own trademark and brand and to encourage dairy farmers to upgrade their products and boost milk prices.
|Notes: f BMI forecasts. Sources: 1 FAPRI, BMI.|
|Milk Production, '000 tonnes 1||927.8||981.6||f||1,030.0||f||1,100.0||f||1,159.6||f||1,209.4||f|
|Liquid Milk Consumption, '000 tonnes 1||839.1||881.2||f||923.6||f||962.1||f||999.7||f||1,024.7||f|
|Notes: f BMI forecasts. Sources: 1 FAPRI.|
|Whole Milk Powder Consumption, '000 tonnes 1||48.3||50.3||f||52.0||f||55.4||f||58.8||f||62.3||f|