World events impact dairy

“It was the best of times, it was the worst of times.”

While more than 160 years have passed since Charles Dickens first published his book, A Tale of Two Cities, these words still ring true.

It has been a tumultuous start to the 2020s with bushfires, a pandemic, floods and war.

For Australia’s dairy farmers, this period has coincided with some of the most profitable years in recent times.

While Australia’s dairy industry has managed to navigate past the worse shocks so far, increasingly volatile global markets are starting to take effect with rising cost pressures through the supply chain.

All across the commercial world, costs are going up, due to a combination of pandemic-related disruption and geopolitical tensions.

Increasing prices of some inputs are starting to chip away at margins, while their access remains difficult due to supply challenges.

Dairy manufacturers and exporters have seen container rates skyrocket, along with port charges and all manner of ancillaries, while farmers are facing surging fertiliser, diesel and grain prices.

At the same time, global unrest has added a new level of volatility to commodity markets.

Russia’s invasion of Ukraine has so far seen fuel prices rise further and additional impacts are predicted as the war unfolds.

Market volatility is the premier one, with grain, energy and fertiliser especially likely to get swept up in this conflict.

Despite these challenges, Australia’s dairy industry remains profitable as commodity values continue to soar. A shrinking global milk pool has been a major driver behind these price leaps.

Due to weather challenges, New Zealand’s production has taken a dive this summer, with local analysts predicting at least a three per cent drop in production this season.

In Europe, milk flows remain sluggish, despite rising farm gate milk prices.

Declining cow numbers, poor quality feed, higher input costs and shortages of workers and fertiliser continue to weigh on growth opportunities. The war in Ukraine has further dampened growth aspirations, as feed and fertilisers are tipped to get even harder and more expensive to source.

In the United States, high input costs and supply chain struggles are also affecting supply.

Here in Australia, while higher farm gate milk prices help to mitigate margin impacts, rising input costs are expected to weigh on production plans.

At the same time, labour shortages, farm exits and ongoing culling continue to affect the national milk pool. In January, milk flows slowed by 6.3 per cent, and year-to-date volumes were down by 2.6 per cent.

Overall, a smaller national herd and subdued per-cow yields, due to weather challenges and poorer quality feed, are projected to result in a reduction in Australia’s national milk pool this season.

As such, Dairy Australia has revised its forecast to indicate a one to three per cent drop in the national milk pool this season. This would equate to a 2021-22 full-year range of between 8.59 and 8.77 billion litres.

In light of decreasing production, competition for milk remains strong among Australian processors.

This has seen several farm gate milk price step-ups in southern export-focused regions this summer as commodity prices have continued to rise.

Due to limited supply, many processors have already sold out for the season and are, therefore, unable to fully capitalise on attractive values.

Nonetheless, as we look ahead, continued market strength is a welcome sign — especially over the next few months, when new season budgets are prepared and opening prices are worked through.

Inflationary pressures are unlikely to ease any time soon. Australia’s dairy industry is feeling the impact, with mounting cost and margin pressures across the supply chain.

While strong dairy commodity values and firm farm gate prices will help to cushion the impact, times are set to remain volatile for the foreseeable future.