Outlook remains profitable

Following a year of close to record returns, overall conditions remain supportive for farm profitability.

Farm gate milk prices are generally higher compared to last season and global dairy markets dynamics are favourable.

Additionally, as most Australian COVID-19 restrictions ease ahead of summer, consumers are taking advantage of newfound freedoms, further buoying the domestic market.

However, rain continues to fall in record amounts, and while positive for dam levels and pasture growth, it has resulted in several challenges on-farm this season.

Market fundamentals look well supported going forward.

Globally, less supply and strong demand has continued to push commodity values upwards and prices of most dairy products are now above the five-year average.

Back home, consumer confidence has edged upwards with the end of lockdowns. Shoppers have returned in force as the economy reopens, and Dairy Australia’s foodservice index shows that café and restaurant spending has recovered since last year.

Takeaway products are growing in popularity and retail demand for dairy remains strong, with sales of yellow spreads and milk outpacing pre-pandemic volumes.

Combined with an increase in the average retail price of private label milk, the domestic market is well placed to deliver additional value growth for the industry going forward.

While dairy market dynamics remain supportive, seasonal conditions have made the path to profit less clear.

Above average rain, storms and cold fronts have caused flooding in some regions and disrupted harvest proceedings.

This has particularly been the case in Victoria, Tasmania and Western Australia, where silage-making efforts have been delayed or abandoned due to ground conditions.

At the same time, the wet weather also replenished water storage sites and the cost of temporary irrigation water has continued to fall in northern Victoria and southern NSW.

The lowered demand for purchased feed and strong water availability is likely to continue suppressing these input costs for a little while longer.

Contrastingly, prices of other inputs are on a separate trajectory.

A global shortage of fertilisers, combined with some countries limiting exports, is expected to restrict supply for the foreseeable future.

International pressures have also been impacting Australia’s grain prices.

While a significant amount of grain has been harvested so far, wet weather has not only delayed proceedings but worsened the quality of some crops.

While Australian grain prices currently remain below international values, eastern wheat and barley future markets have surged in response to recent weather impacts.

Other input costs, like energy and fuel, have also been mounting recently, adding to price pressures on-farm.

While wet and cold conditions have weighed on per-cow yields, the ongoing labour shortage has also contributed to a slowdown in Australian milk production this season.

The shortage of farm workers in Australia has resulted in severe competition between agricultural industries to secure staff. This is pushing up labour costs at a time when finding staff remains challenging.

While the re-opening of international borders may provide some relief next year, several farmers have for now chosen to diversify away from dairy or reduce stocking rates to navigate this issue.

At the same time, beef prices continue to surge, making culling more attractive. With prices reaching new records, farmers continue to make the choice to cull, taking advantage of strong returns. This will delay any rebuild of the national dairy herd.

Combined, these factors have made any growth in Australia’s national milk pool look fairly unlikely.

As such, competition for milk remains fierce among processors, evidenced by the latest milk price step-ups. This competition for milk supplies bodes well for the season ahead and is likely to underpin farm profit expectations.

According to the Dairy Farm Monitor Project, last year proved to be one of the most profitable in recent times, as most dairy regions reported their highest average returns since 2013-14.

Strong market fundamentals and lower fodder and water costs, suggest this momentum can be maintained.

While increasing costs of some key inputs may weigh on margins this season, a generally higher farm gate milk price is expected to help insulate against rising prices.

As Australia’s national milk pool is unlikely to grow this season, strong competition for milk is also expected to remain a feature of the processing landscape going forward.