Feed costs remain elevated and the weather continues to play havoc on drought-affected regions. Dairy Australia’s recently released Situation and Outlook report shows that water costs continue to weigh heavily on farm profitability and overall input costs on dairy farms are likely to remain high. While the feed shortage and cost pressures are expected to remain relatively unchanged, many turn their hopes to global markets for better news.
New Zealand weighs on market
Global markets remained steady to slightly weaker during the final months of 2018 as the strong New Zealand season continued to weigh on the market.
New Zealand experienced a very favourable start to the 2018–19 season, with weather conditions across most dairy regions remaining supportive of pasture growth through the spring.
For the (June to May) season to January, milk production is up 4.9 per cent on a volume basis. This contributed to a fall in prices of major dairy commodities.
From 2019 global prices have shown signs of recovery.
The GlobalDairyTrade (GDT) platform delivered price increases for the past six events, partly driven by a stronger demand from major markets.
China dairy imports rise
Greater China (PRC, Macau and Hong Kong) dairy imports have increased in the last few months following a year of a subdued demand.
Over the year China’s domestic milk production only grew moderately and combined with low levels of imports, stock levels have been run down.
China has now re-entered the market and increased purchases of dairy products.
In 2019 China is forecast to be an active buyer on the world market and looks set to partly absorb some of the extra supply available this year.
Skim milk powder stockpile reduced
The disposal of the European stockpile of skim milk powder (SMP) has been one of the most notable developments on global markets which has helped to improve global commodity prices.
In October, 282 000 tonnes of SMP remained in storage; this has since been reduced to 22 000 tonnes via aggressive selling, particularly in the later months of the year.
The speed of the drawdown has been welcomed as removing a key downside influence overhanging the market.
Worth noting is that most traders are cognisant of the fact that the product has been sold more quickly than it is likely to be consumed. Hence, much of the product has simply moved from public to private balance sheets.
Nonetheless, recent sales have been at progressively higher prices, and fresh SMP prices are also moving up, to the point where SMP and butter are currently offering better returns than cheese.
The impact of reduced SMP stock overhang and increased butter production are clear on the chart below.
Domestic dairy demand stable
Domestically demand for dairy remains stable. Supermarket sales of milk and yoghurt have remained fairly steady over the past twelve months. Despite this, healthy growth in higher value subcategories, such as flavoured milk, premium dairy desserts and probiotic yoghurts, drove value growth for these major categories.
Cheese sales continued to expand and butter sales grew 0.9 per cent over the past twelve months, marking the first increase in sales volume since the global butter price rally.
Aussie milk production down
Australian milk production has continued to lag 2017–18 levels, tracking 4.8 per cent lower for the current season to December.
The year-on-year gap has also increased as the season progresses, with December intakes down 7.8 per cent compared to December 2017.
After a period of widespread dry conditions, the late spring-early summer period brought varying degrees of relief.
Much of southern Victoria and Tasmania saw good rainfall through November and into December, extending the growing season and reducing fodder demand.
In other areas, such rainfall was not received, or arrived at inopportune times.
Drop in milk production predicted
With limited feed available and the mercury set to stay high, milk production volumes are expected to continue to fall year-on-year.
Dairy Australia’s forecast for 2018–19 milk production has been updated to reflect the continuing challenges on-farm.
The current forecast is for a national decrease of between 7 per cent and 9 per cent relative to 2017–18.
Global demand is improving and looks set to balance global markets in the months to come. When and if any improvements in global markets will translate to a better domestic outlook is still uncertain. As the milk pool shrinks however, passing any gains on will become more urgent if access to milk is to be maintained.