Dairy production headed to 20-year low

10 Apr, 2017 10:52 AM
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The fall in output is mainly being recorded in the key export-focused regions of southern Australia.
Milk production won't come thundering back.
The fall in output is mainly being recorded in the key export-focused regions of southern Australia.

Australia's dairy production is headed for 20-year lows as the slump in milk prices has prompted farmers to either quit the industry or slash output by cutting the size of their herds.

And with farmgate prices tipped to rise only slightly over the balance of the year from present levels, as global prices for most of the main export products are likely to remain under pressure, a quick recovery is not on the cards.

"It is a bit of a grind," said Steve Spencer of FreshAgenda, the specialty dairy advisory operator.

Rabobank has forecast Australia's dairy output to decline as much as 7 per cent to less than 8.9 billion litres for 2016/17 which, if correct, will see output drop to 20-year lows.

The fall in output is mainly being recorded in the key export-focused regions of southern Australia, centred on Victoria. But the recent uptick in some product prices coupled with good rains which led to flooding in some areas six months ago has helped to revive sentiment in some quarters.

"As the 2016/17 season draws to a close, farmer margins remain pressured," the bank said in a quarterly report on Friday.

"Some slight improvements in export-orientated farmgate prices, coupled with reasonably attractive feed and irrigation water prices, are providing some relief.

"More importantly, many dairy producers have a good inventory of home-grown feed."

The modest recovery in global prices for dairy products has likely peaked, however, with the bank forecasting moderate price declines from the highs recorded in the March quarter in all key product categories such as cheddar cheese, butter, whole milk powder and skim milk powder, with prices likely to stabilise through the second half of the year.

The slight improvement in the outlook for the sector in recent months has also seen output begin to rise again in New Zealand, with wariness that output there could recover faster than anticipated, which could hurt dairy prices globally.

But flooding in New Zealand earlier this week as the remnants of Cyclone Debbie passed over parts of the country may hit output for a time.

That flooding prompted emergencies to be declared in some regions, with an estimated 20 million litres of production in the affected regions, for example.

The flooding prompted a rise in dairy futures in New Zealand, ahead of the next global dairy trade auction after Easter.

Along with the turn in New Zealand production, there is a common view within the industry that European output will also rebound faster with improved milk prices.

"Our outlook says prices won't move too much," Mr Spencer said. "Production in New Zealand and Europe has come back a little and so has demand. The market is broadly in balance right now."

FreshAgenda sees the farmgate milk price next season, which kicks off from July, edging a little higher, towards $5.75/$5.80 a litre. This is up around 50¢ from the present price of $5.20/$5.30 a litre. Mr Spencer said.

"Milk production won't come thundering back," he said.

Much of the focus within the industry is on Murray Goulburn, the large Victorian processor. The continued pressure on product prices as well as the limited upside in farmgate prices received by farmers is expected to result in Murray Goulburn facing a continued loss of supplies.

The continued operational pressures come as it is faced with multiple class action litigation as well as investigations by the corporate regulator the Australian Securities and Investments Commission over potential breaches of the Corporations Act as well as the competition regulator, the Australian Competition and Consumer Commission, over possible breaches of the Competition and Consumer Act.

The processor has been subject to criticism over its accounting treatment of the $183 million support package provided to farmers with a firm of forensic accountants raising detailed questions about the accounting treatment of the move.

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SMH

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