STEADY improvements in global prices and Australia’s improved seasonal conditions are benefiting dairy producers; a far cry from the dire situation early last year.
In National Australia Bank’s (NAB) latest In Focus: Dairy report the NAB weighted dairy export price indicator shows Australian dollar denominated dairy prices at their highest level since March 2014.
NAB’s head of agribusiness for Victoria, Roger Gaudion, said the speed of the recovery has exceeded the bank’s expectations, noting export prices are now nearly 30 per cent above the long run average level from 2010 to 2016.
“A key driver of the recovery has been falling milk production in most major exporting nations,” Mr Gaudion said.
“In New Zealand and the European Union, the world’s two largest dairy exporters, production in late 2016 was down 4.5 and 2.4pc respectively, year on year,
“However, the US bucked the world-wide trend by increasing production at the end of last year, largely due to an abundance of cheap feed corn underpinning lower input costs.”
Australia milk production has plunged, with October 2016 deliveries down 11.4pc year on year.
Mr Gaudion said the ongoing impact of lower farmgate prices has been the major influence.
“While the rally in international markets should see some further upside at farmgate, it is unclear whether production will respond as the seasonal peak is now over,” he said.
“We also have some doubts about the ability for production to recover quickly, given recent herd thinning driven by low farmgate milk prices combined with good cull cow prices.”
Mr Gaudion said if domestic milk deliveries continued at the pace set last year, 2016-17 seasonal production will be down 8.2pc to 8.7 billion litres. Even if production recovers this year, production will still be down around 5pc.
Feed prices remain very low in the wake of a bumper grain and hay season across eastern Australia, and NAB’s weighted feed grain price index currently stands at its lowest level since April 2010.
NAB is forecasting US dollar gains in 2017 as President Trump’s economic plans unfold, but only single-digit percentage gains as the US dollar cycle is already quite mature.
A weak growth outlook for 2018, a possible rise in unemployment and ongoing low inflation has NAB continuing to predict the Reserve Bank will cut rates by 25 basis points in each of May and August 2017.
An A70c in 2017 is not dependent on RBA cuts but if these eventuate they would make a sub-US70c more likely, he said.
CLICK HERE to read NAB’s latest In Focus: Dairy report.