High input costs create strain

30 Aug, 2018 04:00 AM
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Trucks have been a common sight on all main highways, delivering feed to regions in need.

With dairy commodity markets relatively stable and farm inputs markets across the country under sustained pressure, farm costs are the most uncertain element in the profitability equation for the months ahead. As spring approaches, the short-term challenge in covering feed requirements is giving to the longer-term seasonal balancing act of growing, buying and using feed through spring and into next winter.

Rainfall for the year to date has been well below average in most of southern and eastern Australia and across the country in July. The Murray Darling Basin has experienced the driest January-June in 32 years and all of New South Wales is declared in drought. Some rainfall across the south in August provided some relief, however, soil moisture is below average across most of mainland Australia. The dry weather continues to make access to feed difficult and expensive, putting a serious strain on balance sheets as the season unfolds.

Following an exceptionally dry autumn, demand for hay increased. Since the start of winter, continued dry conditions have resulted in a surge in demand and hay prices have consistently been ticking upwards all across the country. Inventories of hay from previous seasons are all but sold out and fodder has been freighted increasingly large distances to satisfy demand. Trucks have been a common sight on all main highways, delivering feed to regions in need.

The price impact has been dramatic. In southeast South Australia, hay prices have increased 218 per cent in the past two months, in the Goulburn/Murray Valley 158 per cent, Gippsland 139 per cent and central South Australia 126 per cent. Compared with the five-year average, prices are elevated in all regions except for northwest Tasmania.

As winter continues, pasture growth is slow, hay demand is forecast to remain strong and supply remains difficult to source. This may add further pressure to already constrained cash balances this season.

At the same time as hay demand surged, grain prices continued to edge upwards. Dry conditions in major exporting countries have resulted in downward revisions for this year's wheat crop, which in turn led to global price growth. The United States Department of Agriculture revised its global production forecast downwards in the middle of August, partially due to dry conditions in Europe, Black Sea region and production concerns in the US.

Global wheat consumption has increased and wheat stocks are set to decrease for the first time in six years. Trade tension between the United States and China remains a pressing issue for grain trade and is making many nervous.

Meanwhile, in Australia, many growers are holding onto grain due to the lack of rainfall. The current weather outlook remains grim; and if realised prices are expected to end the year higher.

After six months of limited rain and high feed prices, culling rates have increased while cull cow prices fell below the five-year average. In the first six months of 2018, culling rates increased 2.1 per cent compared with last year. Although it is difficult to determine exactly how many dairy cows have been culled this year, data from the National Livestock Reporting Service indicate that in July close to 7000 cows passed through saleyards, an increase of 14 per cent compared with last year. Despite the slight increase in culling rates, the overall slaughter was down 19 per cent in 2017/18 on last year's figure.

Australia isn't the only country struggling with dry conditions. In Europe, a hot and dry summer continues to cause headaches for dairyfarmers. The remarkably cold winter delayed pasture growth and resulted in cows being housed for longer. Fodder shortages developed in Ireland and caused significant financial stress. Following the cold winter, an exceptionally hot and dry summer emerged. The hot weather has affected the fodder and grain outlook and Europe looks set to produce the smallest grain harvest for six years. Sustained fodder shortages in several key producing countries could restrict milk production if current conditions continue, offering some hope of higher milk price here.

The Bureau of Meteorology predicts rainfall will be well below average across most of the country for the next three months.

Continued dry conditions are likely to push fodder and grain prices even higher and risk offsetting any gains from stronger global dairy markets. Substantial rainfall is set to remain at the top of wish lists across regional Australia.

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READER COMMENTS

Bernhard
30/08/2018 3:22:00 PM, on Australian Dairyfarmer

Milk pricing needs to lift before October. Milk processors are saying words like the current milk price is aligned with world markets; it’s a prudent price a reasonable and responsible price. But that fails to take into account the risk in producing milk at the moment. That risk is not being shared equally between farmers and processors. Right now all the risk lies with the farmer. If nothing changes the processors are paying a milk price that they know they will make a profit from with the product mix they produce and sell. The same cannot be said for farmers. They will be losing money all the way through. So farmers are fully underwriting the profitability and strength of the processors at their own expense On-farm inputs and cost of production are going through the roof. At $5.80 farmers at best will be just breaking even through spring. With the reality, that the majority of farmers will be receiving a milk price below the headline $5.80 milk price. When you have no cash flow or profit you have no ability to make any choices with regards the current crises in the dairy industry no matter what programs you dust of for farmers. Milk production will fall off a cliff without a price increase right now of .25 cents /kg/ ms and farm exists will accelerate. So I think it would be prudent for DA to focus on telling and sending a message to processors. To start sharing the risk of the raw product that drives their businesses. Are we really going to have a true partnership between farmers and processors? It needs to start with fairer milk pricing. Start with that before telling farmers what they are well and truly aware of.

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