The Competitive Environment in the Dairy Industry - Case Study Example

AUSTRALIA DAIRY INDUSTRY Quantitative Literacy Case Study Student's Name University Affiliation Instructor Date Introduction Background Information Australian dairy industry is a leading organization which produces a significant amount of the primary products for domestic and foreign consumption. It is best in milk production and processing with a gross income accounting for about 9% of milk produced. Moreover, the farmers engage in calves' sale which is meant for meat production annually. Most of the dairy herd dominates in the eastern Victoria while others located in Tasmania, Queensland, and New South Wales. Milk activity demands for access to irrigation or availability of rainfall, and productive soil capable of high carrying capacity (Beever and Doyle 2007, p.653). The cattle feed on highly nutritious pastures and supplementary feeds such as grains which increase the protein amount in milk. Animals, since European settlement in Australia, were to supply milk yield to the settlers and act as a future stock. At first poor pastures and soil were major problems and this led to wandering in search for an essential feed (Anderies, Ryan, and Walker 2006, p.871). Later, the number of herds increased but was not effective due to drought, famine, and lack of skills. The illiteracy made the cows is used for meat rather than milk purposes. The herd further spread as an exploration of more land took place extending southwards to Victoria and Tasmania. Sales of dairy products such as cheese and butter increased and demand resulted leading to the development of dairying. The growth led to other factors which were necessary for proper storage to prevent spoilage and better infrastructure for distribution of this products. The introduction of new technology included the use of refrigerators, milking machine, and replacement of poor pasture with better ones that opened a way for factory establishment all of which led to the expansion of the industry. Farmers started to increase yields, and their profit rose. Pastures supported butterfat increment annually that increased butter manufacturing in factories (Bellon and Lamine 2009 p.659). Pasteurized milk aided in health improvement giving way to the dairy market expansion where after storing, was transported to retailers and wholesalers who sold other products such as groceries and bread to farmers. The government during the early days controlled the prices of fresh milk by establishing regulations that ensured quality control productions. After deregulation, a decline of the industry resulted. The number of facilities dropped due to reduction of State assistance and market forces exposure that made it competitive (McDowell and Nash 2012.p.678). The research aims at investigating the resultant drop in prices of Australia dairy industry and the position of the competition with international companies. Methodology Porter's five forces The important aspect of Porter's model is to show the attractiveness of the industry. Therefore an organization is regarded to be attractive if the forces of this type arranged in a way that it results in profitability level. Alternatively, the industry is unattractive when all the troops in the model interlink in a manner that leads to a drop in the company's profit. The strongest competition exists where companies share the same customers. The company with the highest dealer network has an advantage of bargaining power. A lot of alternative products exist in the rival firm thus profitability is low since the customers move away from the company. Porter's five force model for Australian dairy industry High High Low medium Findings and Discussion The model shows that the five forces play a role in the company in that they affect the competitors in the firm. Bargaining power of suppliers With the high continuous price cut, the farmers switch to slaughter houses rather than have less and less income, or they decide to diversify their firm or leave the industry. An organization with little bargaining power means it has no tension to any different power and therefore it is profitable. On the other hand, limited supply makes the company have supply threat which may ruin the company since it is not making the profit. In this financial year, milk production has dropped for the firm, nationally and in exporting regions. Prediction shows that over one year there is likelihood of dairy drop unless the company addresses the issue (Dorling, Scottand and Deakins 2006, p.177) Bargaining power of buyers There is a contraction of Chinese imports and Russian banned trade with many western countries. The more the retailers and the intermediaries the more profit is lost between the chains making bargaining power smaller. The industrial retailers will have more power which is a challenge when establishing a business. Similarly, customers can have the ability to bargain over their suppliers. The industry makes the unprofitable move to outdo the problem. According to (Shadbolt 2008, p.213) Australian dairy, the net export earning is reducing per the milk produced, and some clients turn to other products which are cheaper hence the bargaining power is moderate. Substitute threats Customers are switching from fat dairy products to full cream milk which is cheaper in substitutes. In the coming years, Australia customers will have to change their milk product into the imported one since Australia is producing less and less milk. An industry with the highest substitute threat is likely to worry about the products killing the business and the competition involved within it. The less the substitutes, the higher the success. Consideration of the needs and preferences of the customers help reduce the threat (Spicka 2013, p.89). Ensuring that the alternative products will be higher than the price of the industry is necessary to overcome this problem. Threat of new entrants Include negligence of the government to exercise authority on the policy they provide. The plant's closure is already occurring, meaning the processors will operate on a weak and incapable facility that will pay less to the farmers than they produce. Based on Curran and Thorpe (2015) the latest information Queensland has increased sales over Victoria which has reduced earnings of the industry forcing the farmers to quit and cull their herds. A substantial barrier exists where a government policy is an exercise thus a firm will receive less challenge from a new entry thus increase productivity. The industry has to increase brand identity and sales. According to the prediction set milk production demand is high despite the small produce hence Australia will face little threat after enhancement of better policies. Cost of Production versus Return of Dairy Products in Australia, 2013/17 Year Milk production cost (c/l) Milk return (c/l) 2013 15 17 2014 14 15 2015 17 28 2016 15 14 Competitive Position of Australia versus Competitor Year Net profit of milk products in Australia (c/l) Net profit of milk products in Canada (c/l) 2013 4 5 2014 2 7 2015 7 9 2016 2 4 Following the consecutive price drop in the last years, 2017 is worse. Working capital requires covering after settling the debt, but the average return is negative making many farmers with the extreme cost to close their supply (Nienaber and Hahn 2007, p.153). Farm utility lowering as a result of the dairying increased exposure. Supply is greater than the demands of the global market. Hence prices decline. About 6% trade is involved with the global dairy production meaning that there are little differences in the global production and demand effect has a huge impact on prices making international dairy cost susceptible. The last few decade the prices had a sharp increase and decreased the highest levels reached in 1970. Considering the past two years, the cost of production increased while the revenue fell lower than in fifteen years ago when Fonterra came along (Norman 2009, p.51). The continuous price fall opens up new competition with the international traders. Fonterra has lost its shares in a couple of years back despite its dominant even in the face of milk yield development. The sales of Australia's dairy products are 50% production exported as the country utilizes the present barriers to importation of milk (Richards, Bjørkhaug, and Lawrence, and Hickman 2013, p.237). The industry understands the significance of being competitive internationally despite the high cost and regulatory struggles in the areas which include poor infrastructure, energy, and labor. Fluid milk yield shows a trend of declining and so will the prices. The tremendous change will result in smaller herd and restructuring of the industry or even closure. The prediction reveals that the revenue will lower hence disrupting the industry and further causing lower limited production. Fonterra Murray Goulburn (MG) following the cut farmers is less profitable, and milk drops. Many farmers change their processor to cover the low prices. Milk supply of MG has reduced by 20% of the total milk supply. Processing plants reported for closure after the company announced the inability to support them. MG ended another effort that would increase prices to producers over the last year. Fonterra accounts for 20% of Australian milk provision while Warrnambool Cheese, Bega Cheese, and butter enhance their supplies. Variability of the prices has a significant effect on the productivity of dairy farming processes. Based on Walsh, Williams and Evans (2011, p.131) dairy cow head and farm inputs will fall in response to lower returns hence reduced milk produced and profit. The culled cows are sold to abattoirs for slaughter due to these shortcomings. Yields will decline due to low usage of grain feeds despite their cheap costs, and cash difficulties and debts are to blame. Therefore milk protein and fats will fall because of increased pasture feeds and reduced supplementary feeds. Fresh milk consumption is uniform per year with the leading utilization being cheese, yogurt, and butter and drinking milk. In this case production mix considered by the producer help to meet a variety of products required. Australia marts account for about 80% of the branded retail milk which fell later for private labels. Low-fat milk decreases its sale by 6% while cream milk rose by ten percent. 40% of milk sold in supermarkets is branded milk where by the private label is below the products. The labeled milk sold in bottles in that two-liter bottle represents half of the milk sold domestically. Sales for modified milk are continuously increasing hence bringing about higher value for manufacturers. Ultra-high temperature, pasteurized milk fell in sales last year. Fresh milk is unsuitable for market due to its perishability it again undergoes processing to other dairy products hence reducing its export. Liquid milk has its distribution to China through the air in the current years in the form of UHT products. In contrast, Canada among other international competitors warrants difficult decisions with the diverse nature of Canadian market that keep fewer cows but more aggressive to support them financially. America dairy farmers released energy drinks with milk but no caffeine with lower input cost. The processors will increase more sale access to help the farmers. Customers mind about the location their food comes from, and therefore the Canadians make their milk currency before switching to other suppliers (Dillon, Roche, Shalloo and Horan 2005, p.138). To compete with New Zealand and Australia whose milk prices are fluctuating due to some issues Canada take advantage of their favorable climate as their weapon to fight since it has no new coming market such as China, Malaysia, and Indonesia. Canadian has open opportunities within their reach such as milk powders, butterfat, and other modified items. Their partnership is better for the coming years, for example, their global alliances that would make Canada attractive to other manufacturers for its ability to produce the best class milk. Since its development many years ago the management suppliers offered Canada with a prominent legacy. Other neighbors of Canada are even better in dairy products such as Switzerland which has the highest milk cost. Conclusion New Zealand and Australian dairy industries are declining due to drought, deregulation, floods, financial crisis which send away their prospective suppliers from their industries. Production and effectiveness hence drop considerably making them gain competitive disadvantage (Cheshire and Lawrence 2005, p.441). The primary purpose of the introduction these industries was to produce quality products, ensure proper herd health and maintain better animal welfare to increase milk production and profit through employment and business expansion. For achievement of objectives, several technologies need adoption. Infrastructure improvement will support research, training and increase development and other supporting facilities such as feed mills. The biosecurity, bridge maintenance will enable accessibility to farms in case of a disaster that need elimination, milk sale, distribution and expansion will increase as a result of these improvising. Irrigation water provision will improve quality feed growth that will increase milk production and health of the animals as well as increasing food security in these countries. Development of a suitable and sustainable legacy will enhance and cater for lives of people, their well-being and ensure quality product increment. It will also reduce the harmful effects of emissions and waste materials the processing plants release to the environment thus, making it safe for all. Provided with the correct environment these two countries will improve the competition, profit, as well as management of prices to cater for the farmers. The government should develop trade programs to facilitate valuable and of larger volume exportation through good partnership creation. Through all innovative applications, Australia and New Zealand will improve extensively. References Anderies, J.M., Ryan, P. and Walker, B.H., 2006. Loss of resilience, crisis, and institutional change: lessons from an intensive agricultural system in southeastern Australia. Ecosystems, 9(6), pp.865-878. Beever, D.E., and Doyle, P.T., 2007. Feed conversion efficiency as a key determinant of dairy herd performance: a review. Australian Journal of Experimental Agriculture, 47(6), pp.645-657. Bellon, S. and Lamine, C., 2009. 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