Report Of The Australian Diary Industry †Myassignmenthelp.Com

Question: Discuss About The Report Of The Australian Diary Industry? Answer: Introduction Dairy farming has been one of the largest agricultural activities in Australia since the 1850s after the first attempt to engage in dairy farming in 1788 failed to materialize as the first batch of dairy animals, or cows disappeared. However, despite the challenging conditions the activities have grown with advancement in technology to become the major Australian Agricultural Intensive industries. It is the third largest agricultural sector characterized with more than 1.6 million dairy cows which are kept under 7500 dairy farms and have a milk production capacity of over 9000 million liters. The rapid change and increase in innovation due to advanced technology have resulted in increased competition in the dairy industry, and the Australian dairy industry has been established as the third largest dairy trader in the world behind New Zealand and the EU (Jiang Sharp2014, P. 408,). This report, therefore, will provide an overview of the Australian dairy industry and its competition wi th other international firms specializing in liquid and desiccated products as well as analyze the competitive industry environment in a bid to understand the industry competitive advantage or disadvantage. In history, Milk production has been one of Australians most important farming practices. The industry started with many players or participants ranging from 13000 to 14000 in the 1970s, but following the deregulation of the industry, the numbers decreased to below 13000 by 2001. The reduction was due to the decrease or withdrawal or government support to the industry and the consequent exposure to various market forces which have made the industry more competitive through large scale operations (Couillard and Turkina 2015, p. 1020). The Australian dairy industry well as the New Zealand dairy industry dominates the world market in milk production (MacDonald et al. 2014, p. 1452). Although their production only accounts for 4 percent of the total worlds milk production, the two industries together export nearly half of the internationally traded dairy products. The industry has a total value of over $13 billion and is estimated to have over 6400 dairy farmers producing around 9.2 bill ion liters of milk each year with a potential to grow to meet the growing international demand. The competitive industry environment The Australian dairy industry due to increased economies of scale has continued to face great competition from her main export competitor New Zealand, whose production growth has expanded significantly compared to the slow growth been experienced in the Australian Dairy Industry. This has occurred as a result of the dry conditions and the prevailing market prices for milk products internationally (Meihami et al. 2014, p. 83). For example, in the production year 2011/2012, the industry recorded the highest milk production growth of 4 percent which was followed by a decrease of 2 percent in the year 2012/2013. However, it is believed that with favorable conditions and prices the production is however expected to grow to a range of between 9.8 to 10.2 billion liters by the end of 2017. The industry is however characterized by a diverse number of players including farmers owned cooperatives, public and private companies as well as multinational firms whereby; the farmer owned cooperatives account for 35 percent of the Australian milk production, but they no longer dominate the industry. The largest of these cooperatives been Murray Goulburn which accounts for at least 33 percent of the national milk output while the other companies specialize or cover a diverse range of products and markets. Contrary to the industry' international share in dairy trade, none of the Australias dairy companies appear in the list of top 20 manufacturers regarding processed milk and turn over a situation. It has thus called for further rationalization of the larger Australian dairy processors within the Australian dairy processing landscape to compete with international giants such as Friesland Camping and Fonterra. Figure 1: Dairy production progression in Australia (Adopted from Montoya et al. 2014, p. 850) From the graphical data above, New Zealand has a much higher production as compared to the Australia dairy industry which has a more progressive production growth as compared to a declining production of the Australian industry. To make the industry more competitive, the Australian Dairy Industry believes that the government should focus on trade development by improving market access through the establishment of partnerships with trading partners such as China and other emerging Potential markets in the Middle East as well as in the South East Asia. This would not only mean that the government should remove restrictive tariffs and quotas but also invest in solving trade barriers related to technical market access. The industry also believes that the government should also invest and focus on research, development, and extension which may also be the function of the industry, as well as the service providers through collaboration and maximum utilization of available resources and funding (Van Oosterzee et al. 2014, p.310). There is also a greater need to focus on access to overseas labor since the future of the Australian dairy industry only depends on the ability of the industry to attract, train and retain the next generation of farmers, service providers, scientists as well as the processing workers. The government should also focus on on-farm capital investment as a way of increasing the industry efficiency and productive capacity. Table 1: The prevailing industry milk cost of production (Adopted from Montoya et al. 2014, p. 850) Country Milk Production (Liters) Netherlands 0.74 New South Wales 0.56 Poland 0.54 Upper Midwest 0.50 California 0.48 China 0.47 New Zealand 0.45 Victoria 0.42 Argentina 0.39 United Kingdom 0.40 Figure 2: The prevailing industry milk cost of production (Adopted from Montoya et al. 2014, p. 850) The production cost is relatively higher in Australia as compared to the cost of production in New Zealand, US, and the UK. The cost differences may, however, be driven by factors such as climate, natural resource, and labor endowment as well as competition for resources resulting from other sectors. The responsiveness of Australian farmers to price changes also affects production costs as it is driven by projected returns (Montoya et al. 2014, p. 850). If the returns are sufficient, then the volume of production of industry milk supply will also adjust to meet the manufacturers preferences. The industry faces relatively higher costs for labor and energy. For instance, the cost of labor was much higher in Australia than they were at the United Kingdom, the United States, as well as in the New Zealand. The prices for energy are also high in Australia increasing the cost of production per unit of milk production. The energy and fuel costs also affect the transportation of the milk outp ut and distribution to consumers or internationally. Such costs relating to the prices, labor cost, energy and fuel costs as well as the cost of employing of employing modern technology in the industry has greatly affected the growth of the Australian dairy industry and increase its competitive advantage in the international market. Table 2: Key facts of the dairy Australia (Adopted from Montoya et al. 2014) Key Fact Unit National Dairy Herd 1.67 million cows Average size of the herd 230 cows Milk production nationally 9 billion litres of milk Dairy workforce 45000 with a multiplier of 2.5 Figure 3: Comparison with other sectors (Adopted from Montoya et al. 2014, p. 850) Based on the data above the Australian Dairy Industry is currently trading at a lower competitive advantage compared to her main competitor the New Zealand dairy industry since its operating at higher costs which have increased its production costs and reduced the expected returns. There are higher energy and fuel costs in the industry relative to her main offshore competitors. Effect of porters five forces on the Australian Dairy Industry The Porter's five forces is a tool that is employed to analyze the level of competition within an industry. The main forces in this model which bear much effect to the dairy industry include the threat of substitute products. In this case, the Australian dairy industry has not diversified their products which have led to the firm receiving great competition from other companies such as Fonterra (Mashruwala et al. 2014, p. 880). There is also the threat of established rivals such as the New Zealand industry which has continued to be the main industry competitor as well as the dairy industry in the UK and the United States. Another major force is the threat of new entrants in the market or industry who may tap into the local market and offer stiff competition to the industry. The other Porter's two forces have affected the industry regarding prices relativity in the international market and include the bargaining power of the suppliers as well as that of the customers which may affect the cost of production as well as the expected industry returns. To enhance competition and for the Australian Dairy industry to gain competitive advantage, Porters offers some competitive strategies which when employed can improve the efficiency and productivity of the industry. In his argument, he argues that an industry relative position within the larger industry determines the level of profitability of the industry as to whether is below or above the industry average. The industry can, therefore, have a competitive advantage if it operates under low cost or through product differentiation and the most effective strategies for achieving competitive advantage are therefore cost leadership, differentiation, and focus. Under the cost leadership strategy, it would require that the Australian dairy industry should set to become the low-cost producer in its industry. This is because if a firm can achieve and sustain an overall cost leadership, it becomes the average performer in its industry as long as the industry is able to command prices at or near the industry average (Smith Pritchard 2014, p. 58). The differentiation strategy also provides that the industry should seek to become unique in a long term dimension valued by its buyers. In this way, it will limit the threats posed by new entrants into the industry as well as the challenge of substitute products. Lastly, the adoption of a focus strategy requires that the industry should choose a certain narrow competitive scope within the industry whereby cost focus seeks to provide the industry with cost advantage while differentiation focus seeks in a certain industry target segments. Such a strategy provides the industry an opportunity to specializ e in a certain production line as compared to incurring great costs in operating many production lines which do not give an equal return turnover. Analyzing the competitive advantage or disadvantage of the Australian Dairy Industry Based on the data provided above in production cost of the industry, it is notable that the Australian dairy industry has a competitive disadvantage over the New Zealand dairy industry. The New Zealand industry is susceptible to price volatility due to cost leadership. The Australian Industry is operating relatively at a higher cost of production for their products as compared to other competitors such as the New Zealand industry or the United Kingdom dairy industry which puts the industry at a competitive disadvantage. The labor costs are also relatively higher increasing the cost of production of the industry as compared to those of her competitors. Lastly, the energy and fuel costs are also higher increasing the costs of production as well as the transportation costs for every unit of milk products exported (Hunt et al. 2014, p. 132). Such increases in costs of production as compared to the low costs from their competitors has provided the competitors to dominate the market due to cost leadership and therefore controlled a greater market share and have the ability to attract and retain new customers. The high cost of production decreases the competitive advantage of the industry and increases the competitive disadvantage of the industry as well. The Australian dairy industry has therefore to apply Porter's competitive strategies of cost leadership, differentiation as well as the focus strategy to have a competitive advantage over her competitors (Hanslow et al. 2013, p. 65). Conclusion Diversification of products will only increase the operating costs and reduce the expected returns however if the industry has a competitive advantage it becomes easier for the company to diversify their activities or products as a growth strategy. Such strategies will ensure that the industry will focus on certain market segments where it has a comparative advantage over her competitors which will then increase competition in the market. It can also seek to reduce the huge operational cost by using more of capital intensive technology to reduce the costs of labor which is too high in production. The application of the most effective strategy will ensure that the industry gains a competitive advantage over her main competitors the New Zealand dairy industry. List of References Banker, R, Mashruwala, R. Tripathy, A, 2014, Does a differentiation strategy lead to more sustainable financial performance than a cost leadership strategy?.Management Decision, 52(5), pp.872-896. 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