Markets

Challenging season to continue

By Sofia Omstedt

WE ARE now four months into the 2018–19 season, which has proved to be a challenging one for many dairy farmers.

Unseasonably hot and dry weather saw feed costs surge over winter and have for many farmers negated the benefit of better farm gate prices. Dairy Farm Monitor Project data showed all dairying regions had been affected by the rising cost of feed.

While seasonal conditions have proved challenging, the wider market has been much more settled. Dairy Australia’s recently released Situation and Outlook report shows demand for dairy remains strong in domestic and overseas markets.

Hot and dry weather over the past six months led to a sharp increase in feed costs, as demand for hay exceeded supply. Supply of hay has started to increase as new-season crops enter the market, yet demand remains strong.

The feed shortage, combined with high irrigation prices and limited rain, has led to a decline in cow numbers. Over the first three months of the season roughly 20 per cent more cows passed through saleyards compared to last year. As a result of these challenges, Australia’s milk production is forecast to contract between five and seven per cent this season.

Queensland and NSW are expected to be hit the hardest by the ongoing feed shortage and drought conditions on-farm.

Elevated water prices in northern Victoria have constrained farmers’ ability to respond to the increase in feed costs by producing more feed on-farm. The dry weather has also affected crop growth in the region.

Conditions further south in Victoria are more varied. East Gippsland is affected by a drought while parts of south-western Victoria are too wet. Dairy farmers in South Australia, Western Australia and Tasmania have been faring better over the past four months.

Nevertheless, the increase in feed costs has been felt across the whole country.

Earlier in October the Bureau of Meteorology updated its ENSO outlook to El Niño Alert, indicating a 70 per cent probability of an El Niño forming this year.

An El Niño, combined with an increased likelihood of a positive IOD, usually results in drier and hotter weather across Australia. As a result, weather forecasts are not providing much hope for improved climatic conditions for the remainder of 2018.

While weather and feed issues have dominated current news, the wider dairy market has formed a more stable picture.

The domestic market for dairy products continues to provide healthy demand for dairy. All key dairy products showed value growth, and all but dairy spreads saw increased volumes sold.

Drinking milk consumption continued to shift in favour of full cream milk and the recovery in private label sales has persisted. Flavoured milk sales grew five per cent, outpacing the broader category’s one per cent increase.

Private label cheese is closing in on half the market share of the chilled cheese market, while higher-value deli cheese grew in popularity. Yoghurt sales continued to grow, driven by strong demand for the ‘traditional yoghurt’ category.

The average retail price of butter grew 36 per cent over the year due to higher global dairy fat prices. Inelastic demand for butter in Australia saw sales value in the dairy spreads category grow more than 18 per cent in the past year.

Global dairy demand also remained strong and total exports from the six largest exporters grew 3.7 per cent over the 12 months to July.

Australian exports increased 4.1 per cent to 745 000 tonnes, driven by strong growth in liquid milk sales and infant powder exports. During the past year the majority of Australian infant powder exported was destined for the greater China region.

Growing demand for Australian dairy products serves as a timely reminder of the longer term opportunities for the industry. However, given current conditions, milk flows will inevitably be impacted this season.