Markets

Australian milk production shows modest growth

By John Droppert

Dairy Australia’s latest Situation and Outlook report was released on October 11, during what’s shaping up as a period of recovery for the Australian dairy industry amidst a noisy corporate and policy environment.

Milk production is beginning to show modest growth as farmers make the most of slightly higher farmgate prices, reasonable weather, and generally contained input costs.

None of these factors are universally better across all production regions, but the overall picture is one of incremental improvement, tempered by risk aversion and financial limitations that will take longer to overcome.

The broader market remains supportive of a gradual recovery. Internationally, dairy commodity prices reflect a relatively balanced supply/demand equilibrium, changing little over the past few months as business trickles along.

Butter prices remain near record levels, whilst skim milk powder (SMP) values continue to be suppressed by the large volumes held in European public storage.

Most other products are somewhere closer to ‘average’, and the combination of reasonable demand and re-emergent supply suggest they are likely to remain so.

International market balance has been maintained by slow growth in milk production across a number of key exporters.

In particular, European production remained below expectations due to sub-optimal weather through the northern spring and summer, and the post-downturn recovery in New Zealand has only recently begun to gather pace.

A market-driven acceleration in output is now underway in both cases, and the US — where production never really slowed — is once again eyeing international markets as the solution to a growing domestic surplus.

Dairy demand has shown welcome growth and remains supportive overall, with total volumes for the year to the end of June up by 4.1 per cent, whilst value grew 7.1 per cent in US dollar terms as commodity prices recovered through the period.

Whilst the rate of buying has been adequate to support prices in the current environment, a key concern amongst exporters remains the ability of the market to soak up additional volumes of milk as they appear.

Flavoured milk sales continue to grow strongly in Australia.

This season’s Oceania spring peak is an object of particularly keen interest, coinciding with out of season supply pressure from the northern hemisphere.

The Australian domestic market has delivered some surprises, with total supermarket milk sales volumes growing by 2.5 per cent over the 12 months to September, outpaced by a 4.6 per cent boost in value on robust sales of branded milk.

Such growth in the sales volume and value of the fresh milk category in a well-established and mature market like Australia is unusual, given the ongoing decline in sales seen in comparable markets such as the United States and many European countries.

Flavoured milk sales continue to grow strongly, whilst dairy spreads volume growth moderated, in part due to retail price increases reflecting earlier moves in commodity markets.

Based on the combination of contained input costs and a modest improvement in farmgate milk prices, modest growth in milk volumes is expected in southern regions.

In domestic-focused regions, uncertainty and pessimism surrounding the direction of farmgate milk prices remains a feature, and recent weather conditions have generated extra challenges.

Ongoing financial and confidence impacts from previous years, together with a constrained herd and the potential for weather and input cost setbacks are likely dampeners to growth.

Dairy Australia’s forecast for 2017–18 milk production remains a growth range of between 2 and 3 per cent on the 2016–17 total of 9.01 billion litres. This implies a forecast total of around 9.2 billion litres for 2017–18.

Whilst rumours continue to swirl in the corporate sphere, most farmers will be getting on with the task of shoring up their businesses following a financially and emotionally draining period.

Though not without challenges, both the international and the domestic market are delivering opportunities at the top line, and input prices have kept some of the pressure off costs.

In the current season, the importance of the investment headlines to farm profitability and ultimately milk production, will most likely be outweighed by the many lower profile idiosyncrasies currently at play in all of these markets.

• John Droppert is senior industry analyst with Dairy Australia.