The Update focuses on six key market drivers of farm profitability. These drivers are in some instances related, and can affect both the income and cost side of dairy businesses. 

So what are the drivers, and why are they important? 

The table (right) summarises the drivers and describes their impact. Their status refers to the current effect on the operating environment for - and profitability of - Australian dairy farmers.

As always, there is a mixed outlook for these drivers, however the global economy, supply and exchange rates are the areas of most concern. 

International economic issues are being widely reported across all media, and would be expected to influence demand for dairy and other commodities.  

However, demand has remained remarkably stable. 

While Chinese imports of whole milk powder slowed in 2011, total Chinese dairy imports increased more than 20% to a little over one million tonnes. 

Sales to other key importing regions in South-East Asia, Russia and the Middle East remain consistent. 

Consumption in troubled European and US markets has also proved resilient, a positive for international market balance.

While demand is steady, increasing supplies to the international market is having a negative impact on dairy commodity prices. 

All major milk production regions around the world are increasing output in response to improvements in farmgate prices in the past two years, and generally favourable seasonal conditions. 

With supply growth likely to outpace demand over the next 12 months, commodity prices will continue to come under pressure.

The final result for farmgate prices and incomes will depend heavily on exchange rate movements, particularly the strength of the Australian dollar against the US currency – in which most dairy commodities are traded. 

Major bank forecasts are for the dollar to remain high, and currency markets generally to be volatile – this is likely to be a negative in terms of next year’s opening price.

On the cost side, the most positive driver is the outlook for input prices, which provide a significant opportunity for protecting farm margins in the coming year.

 In particular the record Australian winter crop in 2011, combined with carryover supplies and building international stocks mean ample grain is available to dairy farmers, and prices will continue to slide. 

For the full Dairy 2012 Situation and Outlook February Update report, go to www.dairyaustralia.com.au

Jo Bills is Manager - Strategy and Knowledge with Dairy Australia.