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 new report.
In its report, Global Cheese Trade Dynamics, Rabobank said strong demand prospects for cheese in emerging markets, particularly Asia, would drive export market expansion.
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But, the report warned it would 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 said cheese had established itself as an important driver of dairy export returns, with 11 percent of cheese produced now traded on the global market.
"Traded cheese volumes have grown by around 3 percent per year since the turn of the decade,with 70 percent of trade coming out of the EU, US, Australia, New Zealand and Argentina," he said.
Harvey said cheese exports made up around 11 percent of New Zealand's total dairy export volumes and exports of cheese would 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," said Harvey.
"And over coming years, we expect to see cheese playing an increasing role in New Zealand's dairy production profile."
He said 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 online globally, and, while that growth has been necessary, we are entering a period with potential excess capacity.
"This, together with intensifying competition - particularly in Asia - will create some challenges for all export regions, despite the strong demand fundamentals."
"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."
The report cautioned it would not 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."
In particular,Harvey said exporters were 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".