Milk supply falls as farms face profitability squeeze

06 Dec, 2018 04:00 AM
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We've actually had a squeeze on profitability as a result of that flattening curve.

The flattening of the milk production supply curve in Victoria had left its dairy industry more exposed to feed costs and led to a fall in Australia's total milk production, a global dairy researcher told the Australian Dairy Industry Council industry breakfast on Friday.

This, combined with increasing domestic consumption of dairy, meant Australia was heading to becoming a net importer of dairy products, Earl Rattray said.

Mr Rattray, who has had roles as an adviser to the Reserve Bank of NZ, a director of Fonterra and a director of the New Zealand Dairy Board, is a consultant with Gira, a European-based strategic food consultancy, specialising in dairy, meat and food service industries.

He said the decline in Australian exports was occurring at the same time as demand for dairy was growing rapidly in the region, particularly in South East Asia and China.

But this demand was increasingly likely to be filled by the European Union and the United States.

Mr Rattray said an examination of Victoria's milk supply profile revealed one of the reasons for the decline in dairy commodity exports from Australia.

"What we find is Victoria's milk production has dropped by 11 per cent since 2000," he said.

"But it has cut season milk supply while its shoulder season supply has actually increased by 10pc.

"The milk production profile has flattened hugely."

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  • Mr Rattray said this had caused an increase in feed costs as a percentage of total farm costs.

    Farmers had been getting "some pretty good signals to produce milk out of season" but that meant buying in more feed.

    "And we've actually had a squeeze on profitability as a result of that flattening curve," he said.

    But the shift to a more domestic-market focused industry would not mean farmers were less exposed to price volatility.

    Research by Gira staff comparing farmgate milk prices around the world showed little difference in volatility between those countries with small exposure to commodity markets and those with large exposure.

    Mr Rattray said everybody in the supply chain had to be profitable.

    Watch a video of the industry breakfast including Earl Rattray's presentation here:

    It was vital to get profitability back into farming in Australia through developing hedging tools for feed costs but also by not losing sight of the value of pasture in producing milk at an internationally competitive cost.

    The trend in Australia was absolutely clear - flat production with Australia consuming more of what it produced.

    "It's starting to look like a picture if something doesn't change here, Australia will become a net importer of dairy products," Mr Rattray said.

    Gira was forecasting world dairy consumption to increase by 126 billion litres in the next five years, but with a lot of that happening in south Asia, principally India, which already had the biggest dairy industry in the world and was largely self-sufficient.

    But even in the free-traded world, consumption was expected to leap, up 31.5 billion litres by 2023.

    "The world is consuming more dairy," Mr Rattray said.

    "We lose track of just how big dairy is globally."

    The biggest driver of growth would continue to be China, which in the past decade had "shifted the dial on dairy demand".

    The trend for growing demand was definitely there but that did not mean there would be no fluctuations in prices.

    Mr Rattray pointed to the recent milk market history as evidence of this.

    A milk shortage in 2012-13 caused a spike in prices that prompted a 12 billion litre increase in worldwide milk production in 2014.

    The price then crashed and the EU and US stockpiled skim milk powder.

    The industry was still living with the consequences of that with the equivalent of 3.5 billion litres of milk still sitting in stores.

    Mr Rattray said the SMP stockpile had also caused the spike in butter prices.

    "Butter prices have gone through the roof," he said.

    But typically the prices of the different dairy commodities did not diverge much.

    "We've never seen a spread like we've seen recently between the product groups, namely fat and protein," he said.

    This was because the SMP stockpiles forced the price of SMP down, meaning manufacturers made less skim and therefore also made less butter, causing its price to increase.

    As the SMP stocks have started being sold, production is rising again and hence so was butter production and those prices "were coming off".

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