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The China/Australia Free Trade Agreement, or “CHAfta” as it is being called, gives Australian dairy farmers much better access to the Chinese infant formula market, which they have been beaten out of by the New Zealanders in recent years. Agricultural sector writer Alan Emerson recently noted that in 2009 New Zealand and Australia produced approximately the same amount of milk. Today Australia produces about 9bn litres of milk per year, whilst New Zealand, with its significant Chinese market penetration, produces more than double that amount, at 19bn litres per annum. The Australian’s will be looking to close the gap with New Zealand in coming years, though ideally it will happen because they grow faster in exporting product, rather than New Zealand sees its own market volume eroded by Australian producers.
Market growth forecasts should allow for both countries to continue doing very well. Fonterra’s current milk production is running at 18bn litres per annum, of which 1,5bn is actually produced in Australia. The company’s current growth plan has that number rising to 30bn litres by 2025. Effectively the battle therefore should be for the additional market share that is expected to come on line, rather than being a war for existing contracts, though no doubt the competition there will be very good for Chinese consumers.
One thing that the Kiwi’s will want to speedily rectify however is that fact the new agreement signed with the Australian’s is in some ways superior to the existing one that China has with New Zealand. The deal that New Zealand struck in 2008 was one in which all dairy tariffs on NZ export product were eliminated by 2019. The deal struck by the Australian’s yesterday applies the same 11 year full finalisation timetable, but it does not apply provisions around the use of what are known as “special safeguards” which apply strict quotas on foreign imports.
These safeguards were designed to protect Chinese dairy farmers from large import supply surges. They are currently being applied to New Zealand dairy powder exports, and result in tariffs of about 10% being applied to export product. The wording of the deal with Australia appears to suggest that it’s exports will be largely exempt from these safeguards, except in the case of Whole Milk Powder which will face only a discretionary safeguard that is not expected to be applied.
The Australian’s made much yesterday of the fact that their dairy agreement was superior to the one reached with New Zealand. New Zealand’s own Trade Minister Tim Groser noted today that he would be looking closely at the Chinese agreement on dairy with Australia, and that fresh talks would be held with the Chinese if there were clearly differences in the way export product would be treated.
Groser noted however that New Zealand’s agreement with China mean that if China signs a more preferential deal with another country then it must offer the same conditions to New Zealand. As such Australia’s Most Favoured Nation status should not immediately weaken New Zealand’s export position in the dairy sector.
Finance Minister Bill English noted that whilst Australia’s export mix to China will likely develop just as New Zealand’s has, it will take them some time to catch up with New Zealand producers already operating in the Chinese market. He estimated that it would take Australia’s agricultural sector 6 or 7 years to reach the stage that New Zealand is currently at in developing and penetrating the Chinese market. The Australian’s of course will be looking for something much faster than that.
Sean Keane of Triple T Consulting