Markets

Australian milk production continues to slide, while global markets present opportunities

By Sofia Omstedt

THE 2018–19 season will most certainly be remembered as an exceptionally challenging season for the Australian dairy industry.

Universally high feed costs, record high temporary irrigation water costs and widespread dry seasonal conditions have weighed heavily on milk production. Whilst some regions had the buffer of a favourable spring, others endured a long stretch of dry weather, exacerbating farmers’ exposure to purchased feed markets.

Dairy Australia’s recently released Situation and Outlook report reveals how farmers have responded to these challenges and shows how international markets continue to impact the Australian industry.

Season positives

Notwithstanding the fact that for most farmers the 2018–19 season has been one to forget, some things are going right.

Global commodity markets have recovered and remain well balanced.

The impact of the Northern Hemisphere spring has been pleasantly benign, with European and US milk production growing slowly.

At the same time, New Zealand’s milk flows have dropped faster than usual through the Southern Hemisphere autumn.

While supply of dairy is growing at a slower rate, demand for dairy remains robust.

Dairy exports to Greater China (China, Macau and Hong Kong) grew 4.7 per cent to 2.9 million tonnes at the same time as dairy exports into South-East Asia expanded even faster, up 10.5 per cent to 2.1 million tonnes.

The ongoing trade dispute between the US and China has created some disruption to ongoing market balances. It has resulted in US exports into China contracting, while the US has redirected products to South-East Asia. This has seen export competition in the market increase substantially. Despite this, and the disruption brought on by the African swine flu, dairy demand has proven resilient and continues to support pricing.

National outlook

Nationally, a timely autumn break has provided a kickstart for south-west Victoria, South Australia and parts of Gippsland, somewhat buffering the impact of high purchased feed costs. Cash flow remains an issue for many farmers, and milk production has slipped in year-to-date terms as culling continues in response.

Other parts of Gippsland have struggled, as have northern Victoria and southern NSW, where water prices and availability dominate sentiment.

Queensland and NSW have benefited from good rainfall across most areas from March, although high feed prices continue to strain cash flow.

Tasmania has experienced slowing milk production due to the pressures of a dry season and increasing grain prices, though some areas recently saw this flip to wet conditions and waterlogging.

Western Australia has followed a relatively consistent milk production track following a challenging start to the season, and pressure on feed prices from east coast demand.

Drop in production

Overall, milk production is well below 2017–18 levels and has continued to decline in year-on-year terms over the course of the year. Dairy Australia’s 2018–19 forecast for a decrease of between seven and nine per cent relative to 2017–18, is unchanged, implying a total of between 8.45 and 8.65 billion litres.

Despite positive developments in recent weeks, a significantly smaller national herd, reduced farmer confidence, and ongoing cost pressures will continue to weigh on production in the short term. Hence, Dairy Australia’s initial forecast for 2019–20 anticipates a further drop of between three and five per cent, to a total of 8.1 to 8.3 billion litres.

Supermarket price point

The removal of the $1/litre price point for private label fresh milk, has boosted optimism for many in the industry.

Following the example set by Woolworths, competitors Coles and Aldi added 10¢/ litre to their two and three litre private label lines, promising distribution of the additional funds to supplying dairy farmers.

Together with stronger global markets and a weaker Australian dollar, this positive domestic market development, has supported a higher farm gate pricing in 2018–19, and looks set to deliver further increases in 2019–20.

Nonetheless, with surging costs having outweighed farm gate price increases this season, Australia’s milk production will likely remain under pressure. Substantial rainfall into spring will be crucial to improving the current outlook and is, no doubt, on top of most wish lists.