Australia’s dairy farmers can look forward to an improved 2017/18 season ahead, with a partial recovery in forecast farmgate milk price for southern export regions to AUD 5.40-5.80/kg MS, according to Rabobank in its newly-released Global Dairy Quarterly report.
Favourable input prices and better seasonal conditions will support a partial recovery in milk production, the agribusiness banking specialist says.
In its Q2 report, Rabobank says this farmgate milk price is slightly higher than the previous forecast and supported by a better-than-expected butter fat price.
Rabobank senior dairy analyst Michael Harvey said opening prices announced by southern Australian dairy processors are in line with Rabobank's expectations.
“Fundamental to this outlook, we expect global markets to remain well balanced through the 2017/18 Australian season,” he said. “And while global pricing has reached the peak of the cycle, markets are set to remain well balanced for the next 12 months.”
The report says – after a very challenging past 18 months with the sector beset by low prices, poor seasonal conditions in key areas and milk supply decline – trading and seasonal conditions look mostly favourable for Australia’s dairy farmers, with the 2017/18 season approaching.
Supply growth
Rabobank expects to see a recovery of approximately three per cent in Australian milk supply in the coming season.
While this represents a “decent” level of supply growth, Mr Harvey says, it goes only part way towards replacing the supply lost last season.
“Since the start of the 2016/17 season, Australia’s national milk supply has fallen by more than 660 million litres (or eight per cent) compared with the same period the previous season,” he said. “Not surprisingly, more than 80 per cent of that decline has come from Victoria and 50 per cent from northern Victoria alone.”
Mr Harvey said the rate of decline in milk supply had started to slow in most key dairying regions in Australia.
“Rabobank’s expectations are for a modest supply recovery in the 2017/18 season,” he said.
“The cost of key inputs remains affordable, but more importantly climate conditions look likely to set a much better season from a home-grown feed perspective. Early indications are rainfall has been mostly favourable in many dairying regions which goes a long way to helping set up an improved season.”
Mr Harvey said confidence levels were improving among dairy farmers, but from a very low base. Also, the capacity to recover production remains constrained by lower herd size and the ability and willingness to invest heavily on-farm.
Exports
The report says Australia’s exportable milk surplus had significantly contracted over the past 12 months. In the period from July 2016 to April 2017, dairy export volumes from Australia fell 2.1 per cent.
“Trade in skim milk powder and butter has been hit hardest due to reduced production and product shortages in the local market,” Mr Harvey said. “As the season winds down and the focus shifts to the new selling season, inventories are low in Australia.”
Mr Harvey said milk volume was an issue confronting most dairy processors. “The national trend has seen milk being prioritised over cheese, skim milk powder/butter and liquid streams,” he said.
The report says there will be an easing off in the decline in Australian milk supplies eventually returning to growth later in the year. This will help in delivering higher milk volumes for export markets going forward.
“A healthy rate of volume growth in Australian domestic consumption will partially offset any supply increases in the first instance,” it says. “Dairy consumption is growing in excess of two per cent across major dairy categories, including cheese, butter and milk.”
Globally
Looking globally, the report says the dairy market continues to move back towards modest year-on-year milk supply growth in the major export regions. In line with Rabobank’s previous forecast though, growth has been slower than expected by many, Mr Harvey said.
New Zealand, the world’s largest dairy exporter, has started its new season with expectations of healthy year-on-year production growth, due to higher milk prices and compared with the weak level of production last season.
While China – after disappointing import growth for the year to April – is expected to be a more substantial buyer on global markets in the second half of 2017 which will help keep the global market balanced.
“These global factors should continue to keep prices relatively range-bound through the forecast period,” Mr Harvey said. “While demand growth for dairy in developed markets will remain strong, reducing export surpluses and countering more sporadic demand growth in developing markets.”
Watch factors
There are several watch factors, however, for the remainder of the year which may impact this forecast price outlook, Rabobank says.
These include the level of supply response in New Zealand and the fate of current EU skim milk powder stockpiles, as well as moves to substitute expensive dairy fats with cheaper vegetable alternatives among industrial and bakery end users.
“The other factor to watch is anticipated Chinese buying in the second half of the year and whether it does not materialise,” Mr Harvey said.
Rabobank Australia & New Zealand Group is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.
Media contacts:
Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand
Phone: 02 8115 2744 or 0439 603 525
Email: denise.shaw@rabobank.com
Skye Ward
Media Relations Manager
Rabobank Australia
Phone: 02 4855 1111 or 0418 216 103
Email: skye.ward@rabobank.com