Australia’s dairy producers set for a profitable season

09-05 | |
Heading into the new season, farmers have a favourable level of homegrown feed reserves and access to a plentiful supply of supplementary feed. Photo: Rene Groeneveld.
Heading into the new season, farmers have a favourable level of homegrown feed reserves and access to a plentiful supply of supplementary feed. Photo: Rene Groeneveld.

Australia’s dairy producers are set for another profitable season ahead. Rabobank expects high milk pricing and favourable seasonable conditions – but risks are building.

In a just-released report, titled ‘Be Confident, but Beware’, Rabobank emphasises that while global dairy market fundamentals remain strong and high local milk prices will support profitability, farmer margins are under pressure from increasing costs.

“Meanwhile, a market correction is on the horizon, as a subtle rebalance in global markets occurs,” the report says. “While turbulence also looms large with continuing impacts from seismic global events. However, a soft landing in global markets and a strong currency will still support record milk pricing in 2022-2023.”

OVERVIEW OF GLOBAL DAIRY MARKET PRICES

Rabobank forecasts an indicative milk price of AUD$8.40 (US$5.93) per kg milk solids for southern Australia. This would be a record price. It would be 15% higher than benchmark milk prices for the current 2021-2022 season, says report author, Rabobank senior dairy analyst Michael Harvey.

“The global dairy commodity market is doing the heavy lifting in propelling farmgate milk prices to record levels,” Harvey points out. “As a result, Australia’s southern dairy export region enjoyed record milk pricing in the 2021-2022 season, with new records on the horizon for 2022-2023.”

Currently, commodity prices for Oceania-origin butter and cheese are trading at record levels and the milk powder complex is nearing record highs. “Global dairy markets are in unchartered territory,” Harvey says. “With global market tightness driven by a complete shutdown in milk supply growth across the export engine.”

Rare event for global dairy markets

Harvey explains that global dairy markets are witnessing a rare event, with the ‘Big 7’ dairy exporters (the EU, US, New Zealand, Australia, Brazil, Argentina and Uruguay) all recording lower milk production this year than last. “This supply crunch has primarily been driven by a combination of rising costs, supply chain disruptions and weather-related impacts,” Harvey says.

Rabobank expects the current upswing in the global dairy market, however, to be nearing its peak in the current quarter (Q2 2022).

…dairy producers need to exercise caution when it comes to other clear headwinds that will challenge margins.

“Coincidentally, as Australia’s new season gets underway,” the report says. “From here, we are forecasting a price correction in global markets on the back of a return to year-on-year growth in milk supply in export regions from the second half of 2022, a sizeable drop in Chinese bulk import volumes over the course of year and broader demand rationing from consumers in emerging markets.”

Harvey says that this commodity prices risk – and its impact on returns – will need to be navigated by dairy companies. “So, too, dairy producers need to exercise caution when it comes to other clear headwinds that will challenge margins, in particular climbing input costs.”

The dairy analyst finds it hard to recall a time when so many major global and geopolitical events clouded the outlook for markets at once. “Considerable cost inflation is already being felt on farm,” he says. “Despite the coming lift in milk prices in the 2022-2023 season, rising input costs mean there is potential for squeezed farm margins.”

OVERVIEW OF GLOBAL DAIRY MARKET PRICES

Supply competition

Given the complicated operating environment, dairy farm businesses should warmly welcome the strong local guaranteed milk pricing, according to the report, as processors compete for dwindling Australian supply.

“Few dairy farm businesses operating in trade-exposed dairy sectors in other markets have this security and longevity in guaranteed milk prices”, Harvey says. “There are record minimum milk price offers already in the market across southern Australia. This will provide a strong cashflow position for farm businesses and, given the level of price security, could provide a good risk management platform for inputs to ensure an adequate locked-in margin.”

Lower milk production down

In terms of milk production, Australia’s national herd has fallen for the fifth consecutive year, with Rabobank expecting the 2021-2022 season to finish down 3.5% at 8.55 billion litres. Although 2022-2023 is likely to show a small reversal to this trend.

But Harvey remains optimistic. “There are green shoots on the horizon. Heading into the new season, farmers have a favourable level of homegrown feed reserves and access to a plentiful supply of supplementary feed. Solid financial footing should drive more capital expenditure and reinvestment in their dairy farms.”

Groeneveld
René Groeneveld Australia correspondent

Beheer