Production unlikely to rise
Over the past few months, global demand for dairy has continued to improve.
Commodity prices have been trending upwards and there is much to suggest this momentum can be maintained, especially in light of tighter global supply.
Milk production growth has slowed in all major dairy exporting regions this spring and Australia is no exception.
Nationally, production has so far fallen short of last year’s volumes despite otherwise profitable economics.
With the end of the year quickly approaching, it is worth taking stock of current influences and how they may affect the dairy industry post-Christmas.
Commodity prices of all dairy products have increased since last year and are now trading above five-year averages.
As more regions re-emerge from COVID-induced lockdowns, demand for dairy has continued to grow, with sales picking up especially in South-East Asia and Japan.
While supply chain issues have added complexity to freight, these issues have also worked to further boost sales.
At present, US exporters are struggling to ship product to overseas markets due to port congestions. Several international buyers have been waiting for US dairy products to arrive and some have now chosen to buy more Australian-made products instead, as it can be delivered much quicker.
A slowdown in global milk production is also underpinning market fundamentals.
Although the Southern Hemisphere season is at its peak, Australia and New Zealand both reported year-on-year drops in August and September volumes. Meanwhile, the US saw its smallest increase in production in almost two years and growth rates remain subdued in Europe.
With less milk produced, buyers are rushing to ensure sufficient supply. Global supply is expected to be fairly tight, at least until the Northern Hemisphere spring, and as such, commodity prices look well supported going forward.
Improved market dynamics and strong competition for milk have resulted in generally higher farm gate milk prices this season in Australia. Despite higher prices, milk production growth is yet to eventuate as a wet winter and spring weigh on the milk pool.
Above average rain has boosted soil moisture levels, however, it has also caused minor localised flooding. There is a 70 per cent likelihood of a La Niña forming this season and the Bureau of Meteorology forecasts more rain this summer.
In combination with very wet soils, this has heightened the risk of widespread flooding, especially in south-eastern Australia.
Wet weather continues to interrupt harvesting and less hay is anticipated to be made this season. There is an abundance of weather-damaged product available for purchase, but it can be difficult to source good-quality cereal hay in some regions.
Nevertheless, with a significant amount of fodder in-store and plentiful pasture growth, demand for purchased hay remains subdued. The cost of fodder has dropped since last year and is trading well below the five-year average in all regions (except Western Australia and Tasmania).
Conversely, Australia is on track to produce the second largest wheat harvest on record.
While rain throughout key crop growth phases have supported yields, additional rainfall risks impacting the quality of the grain.
According to industry sources, this will most likely present challenges for export markets, as downgraded product may become unsuitable for some international buyers. As a result, more grain may be made available for the domestic market this year.
Despite significant local production, the cost of wheat remains elevated due to high international prices.
Heading into 2022, many factors are supportive for the dairy industry.
Relatively muted global milk supply growth and robust demand are expected to underpin commodity prices, while the cost of fodder continues to drop and feed availability remains strong.
Despite these positives, one thing that is looking increasingly unlikely in the new year is a material change to Australia’s national milk pool.
Wet and cold weather, especially in southern regions, continues to impede milk flows, while labour shortages, as well as firm land and beef prices, drive farm exits and culling.
While this will weigh on national milk production, the path ahead for ongoing farm gate profitability appears fairly clear.