Opening milk prices under fire

27 Jun, 2018 10:52 AM
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Rabobank senior dairy analyst Michael Harvey says it is still his organisation’s view that as the year progresses, there will be upside based on global dynamics.
We think this can be a profitable season but it will be a tight season.
Rabobank senior dairy analyst Michael Harvey says it is still his organisation’s view that as the year progresses, there will be upside based on global dynamics.

THE decision by milk processors to err on the side of caution with their opening milk farmgate prices has been criticised by producers as an unwillingness to take any risk in order to move the dairy game in Australia forward.

Australia’s largest milk processor Saputo’s $5.75 per kilogram milk solids, Fonterra’s $5.85 and Lion’s $5.82 have come in under analyst forecasts of $5.90 for the 2018/19 season based on improving global market dynamics.

The lower-than-hoped-for opening prices for the export-dominated southern industry has put a big dampener on hopes for a 1 to 2 cent per litre lift for domestic market suppliers in the north, many of whom have seen production costs go through the roof courtesy of drought.

However, Lion did lift it’s weighted average milk price for NSW suppliers by 1 cent per litre to 51 cents per litre (approximately $7.03/kg MS) and will hold its Queensland price of 58.1 cents per litre (approximately $8.01/kg MS).

Other northern price announcements will come between now and October.

Farmers appear to be both disappointed and somewhat surprised with the southern prices, given commentary around the global farmgate milk price cycle having turned.

NSW producer Graham Forbes, from advocacy body Dairy Connect, said those global dynamics provided an opportunity for processors to take some initiative in moving the industry forward by lifting prices enough to regain farmer confidence and investment.

“So far, it’s basically been about taking each other’s supply or market share as opposed to working on growing the value of the market,” he said.

“The processing sector has eroded the value capture out of the domestic market by tendering viciously low prices to supermarkets.

“Until that all stops, Australia’s dairy industry will keep contracting. From central NSW through to Queensland, we probably now have the lowest production ever seen.

“This (farmgate) price is last year’s price and the market has moved a lot since then.”

Rabobank senior dairy analyst Michael Harvey said it was still his organisation’s view that as the year progressed, there would be upside based on global dynamics.

Rabobank has forecast a full-year southern Australia price of $6.40/kg MS for 2018/19.

That is still possible under the latest processor announcements. Fonterra, for example, is forecasting a closing average milk price range with $6.20 at the upper end for the season.

Step-ups have allowed a forecast average closing price of $6.08/kg MS for this season.

Rabobank’s analysis points to milk supply growth out of Europe and the US failing to meet market expectations.

Combined milk supply growth across the world’s big export regions has stalled, it says.

Mr Harvey said recent rain in southern Australia might provide a bit of momentum to carry through slight milk production increases but farmers would not be in big herd rebuild mode.

“We think this can be a profitable season but it will be a tight season,” he said.

“Cash flow on farm is tight. It’s not just feed prices but water is also a key risk.”

Consultants and producers across the East Coast say dairy farm incomes are likely to come under heavy pressure from now until spring from rising supplementary feed and water costs. Fodder supplies are already severely limited in some regions and water prices in southern regions have increased to near five-year averages.

On top of that, the Bureau of Meteorology is saying median rainfall in that period is unlikely for south-eastern Australia.

It is still a long road to recovery for Australian milk production. Even with the 3pc lift this season, and 2pc in 17/18 factored in, it is a long way off the 8 to 9pc losses incurred.

Queensland Dairy Organisation president and South Burnett producer Brian Tessmann said the hope was Saputo would have opened with a higher price in a bid to attract suppliers.

Indeed, processors have been publicly stating their intention to increase their supplier base this financial year.

That talk was enough for senior government economists at the Australian Bureau of Agricultural and Resource Economics and Sciences to expect some support for farmgate prices and incomes over the next 12 months.

ABARES has forecast a 2.1 per cent increase in farmgate prices for 2018/19.

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