After a difficult 18 months, the Australian dairy sector is expected to start “climbing back off the canvas”, with local dairy farming businesses expected to see a much-needed return to profitability in the 2017/18 season, according to a recently-released report.
The Australian Dairy Sector – Climbing off the canvas, by agribusiness banking specialist Rabobank, says extenuating circumstances have meant the recovery in global dairy markets is yet to flow through the value chain. However, some of the forces should dissipate in 2017/18, and this will help deliver higher full-year milk prices for Australia’s dairy exporting regions.
Based on Rabobank’s latest commodity price forecasts (outlined in its upcoming Global Dairy Quarterly) and assuming a currency rate of USD 0.75, the report says the global market would deliver an average commodity milk return equivalent to AUD5.30/kgMS in 2017/18.
While the prospects of global commodity prices remaining elevated throughout next season are sound, the report warns there are some risks to the commodity and currency outlook, which need to be carefully monitored.
“With this recovery being largely supply driven, recent price trends highlight how improvements in milk production across the export ‘engine’ can alter finely-balanced fundamentals,” says report author, Rabobank senior dairy analyst Michael Harvey.
Providing global commodity markets remain at, or near, current levels and domestic market returns improve with greater efficiencies in the processing sector, Mr Harvey says, it is possible for the Australian export sector to capture a market premium.
“Historically, the Australian export sector has captured a premium beyond commodity returns,” he says, “and with the right conditions this could see full-year milk prices reach AUD5.70/kgMS.”
For dairy farmers selling to the domestic fresh milk market, Mr Harvey says premiums remain elevated compared to export regions, with these regions largely immune from recent global forces.
“However, while the outlook suggests the price floor for fresh milk will be lifted in time – given the reduction in availability of milk for transport and improving export milk prices – it is not all smooth sailing for those in the fresh milk regions,” he says.
“The biggest risk facing dairy farmers in these regions hinges around security of their supply contract and the timing of contract renewal, which was evident recently with the supply imbalance in Western Australia.”
Farmer margins on the mend
The Rabobank report says it is not only higher milk prices that will maximise the prospects of the much-needed boost to Australian dairy farmer profitability, but also desirable trading conditions.
“While 2017/18 is shaping up to deliver a profitable price, farmer margins will also benefit from lower input cost pressures,” Mr Harvey says.
“After last year’s favourable spring, many farmers around the country are armed with a plentiful supply of home-grown feed and silage and, combined with a large local wheat crop, this has reduced the volume of feed they need to purchase and the price paid for any they do buy.
“Meanwhile, irrigation farmers will benefit from high water allocations and much lower trading prices.”
Cattle markets will also continue to support incomes and cashflow in 2017/18 but farmers will need to budget for lower prices, he says.
Looking forward, Mr Harvey says a timely and positive autumn break will be critical in setting up the next season, with growing potential for an El Nino event to develop later in the year.
The report says while short-term confidence in Australia’s dairy industry is being restored, the ability for the sector to fully recover will take time, as dairy farmers will need a sustained period of profitability to rebuild equity and position themselves for major investments.
“While the stars are aligning for a return to profitability, 2017/18 it is unlikely to deliver ‘super profits’ for Australia’s dairy farmers,” Mr Harvey says, “which will see producers armed with important decisions to make in the coming season.
“With farmers taking on more debt and working capital to get through the past two tough seasons, they are now faced with a choice between reducing debt and rebuilding equity or investing for growth.”
Implications for the supply chain
For the processing sector, Mr Harvey says while better global prices have started to flow through to higher revenues and improved profits, the biggest challenge will be the reduced milk intake.
“While we expect Australian milk production to increase by 4.5 per cent in 2017/18 – up from its lowest level in two decades – the competition to retain and grow milk supply will prove challenging,” he says.
“It could prove to be the biggest test for Australia’s largest dairy processor, Murray Goulburn, as to whether it can stem the loss of milk supply, resize its manufacturing operations and reposition itself as the market leader in setting farmgate milk prices.”