Global dairy recovery underway but will take some time to stem declining production here

Global dairy recovery underway but will take some time to stem declining production here


Rabobank senior dairy analyst Michael Harvey in Lismore, northern NSW.

Rabobank senior dairy analyst Michael Harvey in Lismore, northern NSW.

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THE RALLY in global dairy prices is expected to be sustained into 2017 courtesy of falling worldwide production, with Europe finally coming to the party.

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THE RALLY in global dairy prices is expected to be sustained into 2017 courtesy of falling worldwide production, with Europe finally coming to the party.

However, it won’t flow through to a turnaround in declining milk production in Australia this season.

Australia is on track for a five per cent national drop in milk production in 2016/17, a response to the suffocating farmgate price squeeze in southern parts and the ongoing impacts of excessive rain in some regions.

The latest outlook reports from Dairy Australia (DA) and Rabobank say decreased production from Australia, New Zealand and Europe is helping ease the downward pressure on global commodity pricing caused by the oversupply issue of recent years.

Rabobank senior dairy analyst Michael Harvey said the contraction in worldwide production was expected to run for at least the next 18 months.

Speaking in Lismore last night at an event hosted by Rabobank Armidale, he said the effects of the weak global price floor will still also be felt by those supplying the domestic liquid milk although there were opportunities presenting.

Queensland’s growing milk deficit, combined with population growth in both that state and northern NSW, was one.

“Australia is a sophisticated  consumer market which can provide better margins, however to get above the $1.50 a litre level, there needs to be some sort of value proposition, not just a brand,” Mr Harvey said.

Local consumers rallied behind brands this year.

DA figures show branded sale volumes have lifted by 7pc, while supermarket brands fell 2pc.

“That’s a good news story - the show of support from the mass market for the farmers’ plight - but there was always the question about how sustained it would be and we are seeing now some shift back to generic labels,” he said.

More concerning, however, was the decline of per capita growth of milk consumption.

That is a trend that is very difficult to reverse, according to Mr Harvey.

The saving grace has been cheese, and butter is also back in favour, but even the flavoured milk market is starting to mature.

Mr Harvey said the provenance story was alive and was an option to get more value from the market but it was still quite niche.

There were also are still opportunities for processing innovations.

Having an outlet beyond the domestic market would provide leverage and growth, he said.

However, the talked-up fresh milk to China opportunity may not be as straightforward as it appears.

High quality UHT milk from respected suppliers like Germany offered at a cheap price will be a threat to Australia’s fresh milk premiums (Norco products retail for as much as $9/l), according to Mr Harvey.

Global balance returning

MR Harvey said the global price recovery was expected to continue over the next three months, stabalise after Christmas, then move into a more steady recovery throughout the course of 2017.

Three key factors had underpinned the downturn - Russia’s trade ban in 2014, Europe’s milk quota unwind and China’s excess inventory.

“In isolation, any one of these would have been problematic on the global level but combined, they have resulted in low commodity prices for 24 months, which, historically, is quite an extended period,” Mr Harvey said.

The sheer volume produced in Europe surprised analysts.

“They effectively had a 30-year handbrake on the amount of milk they could produce and in the lead-up (to quotas being dropped) big investments had been made on farm,” he said.

“That combined with cheap feed and good weather and in the first 12 months they added the equivalent of Victoria’s entire production to the global market.”

That is starting to change now, as European farmers cut production in response to low milk prices.

Russia, meanwhile, was not a big market for Australia but the locking out of Europe in its trade ban affected us.

Mr Harvey said Rabobank had ruled Russia out for any meaningful recovery in the short term and when it did re-open, it  “would look much different”.

Banks take long-term view

BANKS took the view during the worst of the global dairy trough that it was part of a cycle that would wash through and generally supported farmers, according to Mr Harvey.

Rabobank took a close look at debt levels across the industry, which have been more conservative in recent years.

“Debt levels vary by state but the view is the industry will weather the storm, that farmers are in a position to carry this,” Mr Harvey said.

There is some relief for producers on the cost front with feed prices under pressure, fertiliser costs low by historical standards and perhaps more easing of interest rates. Strong cull cow prices are also helping.

While recent rainfall had been excessive in some areas, the favourable climatic outlook for most of the country’s key dairy regions will also provide some margin relief for farmers.

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