INCREASED COMPETITION for milk will steer farmers towards a profitable 2018–19 season, according to Rabobank senior dairy analyst Michael Harvey.
In a new report for Rabobank, Australian Dairy — Let the big milk battle begin, Mr Harvey writes the “battle between two global dairy giants looms large on the horizon”, as Saputo’s quest to win back milk supply begins and Fonterra maps out further capacity expansions.
Further increasing competition are smaller and newer dairy players actively recruiting milk to secure their share of the milk pool.
Mr Harvey said these competitive pressures for milk supply, which are likely to intensify next season with Saputo’s acquisition of Murray Goulburn, will translate into higher premiums being passed to farmers and help compensate for the lower commodity price.
“In the global market, while risks loom in the near-term and this is likely to see dairy companies take a conservative approach when opening their prices for the 2018–19 season, the prospects for a gradual tightening in global dairy markets is bright,” Mr Harvey said.
He added: “The timing of the recovery is expected to favour Australia by taking place through our seasonal peak in production.”
Assuming a spot currency rate of US77 cents, Mr Harvey said Rabobank forecasts the global market to deliver a base farmgate milk price of A$5.40/kg milk solids (MS) in 2018–19.
“However greater competition for milk is likely to bring higher value-add payments to Australian producers with Rabobank forecasting an annual average farmgate range across southern Australia of A$5.40 kg/MS to A$5.90 kg/MS in 2018–19.”
Rabobank is forecasting domestic milk production to increase by 2.7 per cent in 2018–19 to deliver an additional 170 million litres of milk to the market. This follows the 3.2 per cent increase (or additional 390 million litres) in 2017–18.
“A well-timed autumn break will be vital to setting up the season,” he says, “with increased purchased feed costs and lower cull cow prices expected to place some pressure on margins.”
Mr Harvey said Australian dairy farmers preparing for the new season would need to budget for higher feed costs, but also factor in the cash flow implications of a conservative opening price and lower non-milk income.
“The reality is that 2018–19 may be characterised as another season of consolidation due to looming market pressure, however margins are on track to remain above breakeven,” he said.
Big battle for milk looms
Given the increase in Australian milk supply and the gradual repositioning of the milk pool, the report says a “big battle for milk looms” between processors, to retain producers next season and to be in a position to grow their milk supply in the longer term.
“At the frontline of this battle are the two large international companies butting heads over milk supply as Saputo looks to win back milk supply and Fonterra maps out capacity expansions,” Mr Harvey said.
“With the Murray Goulburn asset footprint having an excess capacity of more than one billion litres, Saputo will be looking to win back that lost milk supply.
“And then you have a number of dairy companies that have already taken up the lost milk from Murray Goulburn and they will be determined to retain their recently-acquired milk suppliers.”
Mr Harvey predicts Australia’s dairy processing capacity will increase further over the next two years, with an estimated 900 million litres of capacity to be built.
“This comes off the back of one billion litres of commercially-viable processing capacity coming on board in the past two seasons.”
In light of the increased processing capacity, Mr Harvey said Australia’s dairy sector needs to ensure sustained milk supply growth continues.
“Without a growing milk pool, the industry risks carrying too much surplus processing capacity, fuelling manufacturing inefficiencies, with the margin pressure just ‘pin balling’ from one processor to the next.
“And this is a looming risk for the sector because if it faces another sustained period of aggressive milk pricing, it could potentially transform into an unsustainable squeeze on processors margins and profitability.”