Dairy farmers warned to expect lower milk prices

05 Jan, 2018 12:38 PM
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Australian dairy farmers have been warned prices are on their way down amid a rising tide of world milk supply.

However, analysts do not expect a repeat of the collapse in prices that contributed to the Murray Goulburn debacle of 2015-16 when the local industry was plunged into crisis.

Rabobank senior dairy analyst Michael Harvey said there were concerns that rising production in Europe could crash the market.

But he said: "We don't think there will be this overwhelming of the market through supply out of Europe in the coming six months."

"We know the cycle has turned and we are in a down cycle, but we don't think it is going to be a complete crash like we saw previously."

A wildcard in the Australian outlook is Saputo's $1.3 billion acquisition of Murray Goulburn.

The Canadian dairy giant is expected to tussle with Fonterra for milk volumes if the deal wins Australian Competition and Consumer Commission and other approvals as expected.

Global milk market softening

The competition will play out against a backdrop of a softening global market where the exportable surplus in liquid milk equivalents is estimated to be 3.2 billion litres higher year-on-year for the six months to March 2018.

Mr Harvey said Saputo was likely to seek to recover some of the milk supply lost by Murray Goulburn while Fonterra had recruited a lot of supply and would fight to retain it.

"That means two giants could be butting heads over milk supply. That leads to competition and that leads to aggressive milk pricing," he said.

"What we don't want to see is what happened with Murray Goulburn, where it becomes completely irrational to what the global market is doing.

"What a lot of farmers and a lot of the industry will be watching with the completion of the Saputo transaction is how successful and aggressive they are in going to get the milk that Murray Goulburn lost as a business."

Rabobank has revised its full year milk price in Australia's southern export regions for 2017-18 down by 20 cents to $5.50 per kilogram of milk solids, excluding any supplementary payments and market premiums.

Revised production forcasts

While production in Europe has increased and will jump during spring in the northern hemisphere, Fonterra last week revised its forecast for New Zealand production in 2017-18 to 1480 million kilograms of milk solids, down from 1525 million kilograms in November.

Fonterra's latest forecast is down about 4 per cent on 2016-17 on the back of unfavourable seasonal conditions.

The ACCC is pushing for a mandatory code of conduct for dairy processors after investigating the industry crisis sparked by Murray Goulburn and Fonterra retrospectively slashing prices paid to farmers in 2016.

Mr Harvey said farmers should expect some downward pressure on prices and those signals were already clear in global markets.

"Even butterfat prices, which had been defying gravity, have fallen in recent months," he said.

"However, the low stocks of butter and robust demand are expected to support prices well above the five-year average. "

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