Prepared by Western Dairy in conjunction with the Department of Agriculture WA, WAFarmers Dairy Section, Harvey Fresh, Brownes Dairy and LionAugust 2014.

Department ofAgriculture and Food

Western

DAIRY

Your Levy at Work

The Western Australian dairy industry is one that is poised and ready for change. It offers many opportunities for investment in dairy production and exporting. Since the deregulation of the state dairy marketing arrangements in 2000, the industry has undergone a period where significant rationalisation and structural changes have occurred. These changes have positioned Western Australia as a globally competitive producer of high quality, safe milk, underpinned by the strictest possible quality and safety standards - and all this is conveniently located in close proximity to the fastest growing dairy markets in the world.

The rationalisation brought with it some significant expansions in business size, to the point where Western Australia now boasts the largest herd average of all dairying states and the highest average production per cow of all dairying states. It also produces a much ‘whiter’ milk than other regions due to the high grain content in the WA dairy diet, which sets up a marketable point of difference when dealing with customers in Japan and the Middle East in particular who have a recorded preference for a whiter product.

Western Australia’s 160 dairy farm businesses recognise these advantages but to date have been constrained in their quest for profitable growth due to lack of quality, resourced and committed investment and significant offtake agreements between processors and key international markets.

The Western Australian dairy industry is now clearly saying: “Come, look at us. Look at our industry. Look at the skills of our people, their youth, their enthusiasm, their desire to grow. Grow with us so that we might all take advantage of the many business attributes that are on offer”.

Success brings success and our pathway to this is through collaboration with others. We suggest that it is largely due to our intimate business size, that we can claim a remarkable culture of collaboration that says to potential investors this is a quality State in which to do business.

The WA dairy industry benefits from a highly effective relationship with the WA State government and the Department of Agriculture and Food WA (DAFWA) in particular. DAFWA provides objective, independent and authentic project oversight and advice and it is via this relationship that we can now mount such a compelling case for future investors. It has completed a series of studies to guide potential investors into the local industry.

We invite your conversation, be it as an equity partner in a viable existing business with a will and capacity to grow; or as a stand-alone investor in an existing or a greenfields dairying vision – or any combination of the two.

A great place to start is by having a conversation. Get to know us, our industry and our people. And, then let us help you research your individual business case, drawing on the knowledge and skills that we have so that your business case will be robust and tested. The Western Australian industry has great tenacity and significant technical capacity (we wouldn’t be the highest producing dairy herd in Australia without a skill set that drives that performance). But as well, we also have a commitment to sustainable dairying practices so that our dairying country is in even better condition for the generation that will follow.

We invite your investment conversation.

Victor Rodwell Chair, Western Dairy Dairy farmer, Boyanup WA

Phil Depiazzi President, WA Farmers Dairy Council Dairy farmer, Dardanup WA

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Western Australia (WA) is a major Australian producer of rural produce of which around 70% by value is exported to Asia. Western Australia is the largest State in Australia, and only five hours by air from Singapore or Jakarta, eight hours from Hong Kong, ten hours to Tokyo and 11 hours from Dubai.

Western Australia is famous for its relaxed lifestyle, pristine beaches, beautiful forests and exceptionally fine food and wine. This is embedded in a pollution-free environment and enhanced by a reputation for safe, sustainable and healthy food production.

The majority of dairy farms are located in this south west corner, effectively co-existing with the natural environment and food tourism sectors, offering workers in our industry a unique lifestyle opportunity.

The south west experiences a Mediterranean climate with mild winters and warm summers. Recreation forms an important part of the social network in most rural communities with sport and the arts a central focus.

Another attraction to dairy industry personnel is that the region is serviced by quality public and private education systems supported by public transport facilities. Higher qualifications are available via a network of Universities and Technical colleges in the main population centres.

The State has efficient land and sea freight systems which ensure competitive freight costs.

Western Australia

3

Albany

Manjimup

Nannup

Harvey

Kojonup

Capel

Augusta

Margaret River

Dunsborough

Denmark

Pemberton

Busselton

Bunbury

MandurahRockingham

Central Midlands Region

Great SouthernRegion

Northam

Dandaragan

Perth

Katanning

NarroginBoddington

Pinjarra

Collie Wagin

Figure 1

Existing WA dairy farmsLegend:

The current WA dairy sector is mainly focused on producing fresh milk for the domestic market but there is considerable scope for increased milk supply for export markets. Growth based on export markets in Asia is a key to a more sustainable future for dairy production in WA. This will require significant investment along the supply chain including on-going innovation in farm production and manufacturing, new product development as well as market development.

Western Dairy and WAFarmers, the peak dairy producer organisations in WA, have highlighted the strong interest of their members to work with Australian and overseas investors to expand milk production in joint venture arrangements. Similarly, some existing dairy processors in WA have stated a willingness to cooperate with investors to process the additional milk produced.

For new investors, milk supply can be sourced from a number of options:• Joint venture arrangements with existing dairy farmers

to increase milk production;• Purchase of existing, large dairy farms to develop

experience and presence in the local industry;• Purchase of beef or other properties in current dairy areas

of the South-West for conversion to dairy operations;• Expansion into feedlot dairies into the adjacent Great

Southern (between Boddington and Manjimup) and the Central Midlands region (around Dandaragan), where land is cheaper and grain is the primary agricultural produce.

There are currently around 160 dairy farms in the South-West region of WA, mostly located close to the coast (Figure 1), producing around 320 million litres of milk per year. The area has a Mediterranean climate with mild winters, 800-1000mm of rainfall and hot dry summers, although the climate tends to be more temperate closer to the south coast. Local topography and soil vary markedly through the region, which can affect farming practices, productivity and profitability.

The productivity of the South-West is driven by the performance of existing dairy farmers in this region who are among some of the most efficient and resilient in Australia. A reliable climate, good understanding of managing high production levels utilising grain and conserved fodder, sound capital structures and business diversity are among factors which contribute to the high productive performance of farm businesses in the South-West. Dairy farms in this region are, on average, the largest of any state in Australia. It follows then that WA has the highest average dairy herd size in the nation, but setting WA apart in terms of its skill set is the fact that its productivity per cow is also the highest in the nation.

Table 1. Average dairy farm area and cropped area on dairy farms for the period 2006-2010

State Dairy farm area (ha) Area cropped (ha)

Western Australia

460 141

Victoria 205 67

Queensland 311 63

Source: Australian Bureau of Agriculture and Resource Economics and Science

Dairying in Western Australia

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The current dairy processing sector focuses on fresh milk for the domestic market , although some $50m worth of product is exported, predominately as bulk, liquid milk. The major Western Australian processors are the Lion owned Masters Dairy, the Archer Capital owned Brownes Dairy and the Parmalat-owned Harvey Fresh, which together process around 90% of existing milk supplies.

A number of smaller processors of specialty dairy products also operate in the state including the locally owned and operated Bannister Downs on-farm processing factory, as well as the operations of Manassen Foods Australia (invested by Bright Dairy, Shanghai) under the trade names of Margaret River Cheese Company and Mundella, which are suppliers of specialty cheese and yoghurts.

The major processors have plants in Perth (Brownes/Lion), Brunswick (Brownes) and Harvey (Parmalat).

Processor Products

Brownes Fresh milk (domestic and export), flavoured milk, yoghurt , cheese

Harvey Fresh Fresh Milk (Domestic & Export), UHT Milk (Domestic & Export), cream

Lion Fresh milk and flavoured milk (domestic); and ESL export,

WA’s strengths in milk production and processing• A government supportive of expansion of the state’s

dairy industry, of regional development and of domestic and international investment;

• Competitive cost of milk production based upon Australian and international benchmarks (this is quantified via the International Farm Comparison Network);

• Reliable Mediterranean climate that allows a range of efficient milk production systems including dry-land or irrigated pasture and grain-fed systems;

• An existing dairy sector that produces around 320 million litres per year with proven export performance and that is keen to expand;

• A large rural land mass readily traded in a free market;• Abundant and geographically accessible supplies of high

quality grain and fodder;• Farm milk production of up to 10,000 litres per cow per

year using pasture and supplementary feeding;• An extremely healthy dairy herd underpinned by

stringent health protocols, a recognised excellent track record in health status and a corresponding high quality milk, both in composition and microbial status;

• A robust, science-science based regulatory framework implemented by Government, ensures high standards of food safety, biosecurity and environmental compliance;

• WA dairy farmers understand and respect best practise animal welfare and have embraced guidelines for optimal animal welfare management;

• Reliable sea and air freight to a large Asian population in the same time zone; and

• Stable government and highly supportive financial institutions that understand dairy, together with a robust economy with a strong growth outlook.

Dairying in Western Australia WA Dairy Milk Processing

The WA industry maintains that the most critical success factor in achieving a quality return on investment, is to combine strong business acumen with excellence in dairy farm production. Current research projects conducted by the DAFWA in collaboration with industry confirm that farm location or farm feeding systems while important, are not alone the deciding factors on profit. Rather, it is the management of the system that will drive the business capacity to optimise return on investment.

And, it is this that provides the greatest opportunity for investment. The WA dairy industry is rich in technical skills and expertise in all aspects of the dairy production system. When quality business acumen is added to this skill set, then return on investment in dairy can be exceptional, as the top 15% of dairy farm businesses in this State will report.

Investors in the WA dairy industry must aspire to perform equal to or better than the top 15% of dairy farm businesses

in the State. A useful benchmark then is to consider an investment against the performance of a selection of 13 dairy businesses participating in a DAFWA/industry partnership research program.

These businesses are not necessarily considered the state’s top performers, rather, they represent a cross section of farming systems and geographic location. Each has been subject to a national farm performance analysis program called RedSky. The analysis showed that the top 15% of the group realised a 7.7% return on investment and a 9.3% return on equity in the financial year of 12/13, while the group as a whole produced a 7.1% ROI and a 5.6% ROE over that period.

Another way to explore the performance of this group, is to compare the average price of milk against the average cost of production for these participating farms, over an extended period of time, as per Figure 2 below.

The Return Analysis

Figure 2: Analysis of 13 WA dairy farms participating in a DAFWA farm performance project

WA Farm Financial Trends

42.88

47.75

40.26

44.62

43.33

45.02

35.40 35.50

34.40

40.20

36.40

34.50

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

WA Dairy - Milk Price vs Cost of Production (c/L)

Average Milk Price Cost of Production

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Working Government

7

The WA state government has trade and investment offices throughout the world, with 75% of these based in Asia, the world’s fastest growing dairy demand zone. Asia’s dairy demand is growing rapidly, making the WA government a logical and readily available partner for interested parties to start their discussions.

For investors contemplating greenfield developments in WA (as in any other Australian State), regulatory approvals require a detailed project proposal, with the applicant clearly articulating their investment intent. Potential investors will require regulatory approval from a number of government agencies – local government, environment, transport and water – for which an integrated application can be utilised to attain concurrent approvals. This process can take three to six months from the date of submission. In addition, international investors may also need to consider the requirements of the Australian Government’s Foreign Investment Review Board (www.firb.gov.au).

The WA state government, through DAFWA, is available to assist interested parties in gaining a better understanding of the WA dairy industry and to provide expertise in development applications, to ensure a streamlined process and a successful outcome.

Department ofAgriculture and Food

Western

DAIRY

Your Levy at Work

DisclaimerThis document is to used only as preliminary and indicative information, to be considered by prospective investors in the Western Australian dairy industry in conjunction with other information and appropriate financial, legal, industry and other expert advice tailored to their individual circumstances and intentions. Prospective investors should conduct (or engage appropriate professional advisers to conduct) their own analysis and due diligence on any proposed investments, including the process for obtaining approvals. No part of this business case or any additional information or documents that Western Dairy may supply constitutes or should be relied on as financial, investment, legal or other advice.

Western Dairy accepts no liability whatsoever by reason of negligence or otherwise arising from any use or release of material (which in this disclaimer includes this business case, any information in it or other part of it, and any other information, advice or material, oral or written, Western Dairy may supply in relation to any aspect of the Western Australian dairy industry, regulation of it or investment in it) or any error, inaccuracy or omission in the material. Although reasonable care is taken to make the material accurate, Western Dairy does not make any representations or warranties about its accuracy, reliability, completeness or suitability for any particular purpose.

Those considering investment in WA dairying regions are encouraged to source a range of technical documents and business cases that offer a deep exploration of the financial performance and possible returns on investments. This document is considered a starting point only.

Talk to our industry members about the benefits and opportunities:

Terry Burnage, DAFWA terry.burnage@agric.wa.gov.au

Vic Rodwell, Western Dairy esther@westerndairy.com.au

Phil Depiazzi, WA Farmers Stephanietarlinton@wafarmers.org.au

The WA dairy processing community