Despite better earnings prospects in global dairy markets, Australia’s depleted herd numbers and depressed milk production are unlikely to make much of a recovery this financial year, or next.
Research by Rural Bank suggests the anticipated export market recovery will be patchy and slow to inspire Australian farmers to rebuild.
Interestingly, however, relatively few have actually quit the industry altogether after a shocker 12 months of savage price cuts.
Fewer than five per cent surveyed by the bank were looking to leave or change enterprises.
In some cases farms were still investing in expansion, notably in eastern South Australia and in areas along the Murray River in NSW and Victoria.
Australian milk production slumped eight per cent to 7.7 billion litres in the first nine months of 2016-17 – a legacy of the collapse in farmgate payments to southern region farms in late 2015-16.
Victoria’s milk production drop, which was exacerbated by droughty weather and high feed costs in 2015-16, was the nation’s most pronounced – down almost 10pc by April this year.
Queensland, however, has been mostly immune to the price crunch, lifting its output slightly (1.4pc) in 2016-17 and enjoying Australia’s best return on dairy farming assets in 2015-16 - up from 3.4pc to 4.4pc.
Milk returns also improved 1.9pc and farm costs fell 2pc in the same period.
In comparison, Victorian and Tasmanian farmers copped 70pc and 12pc per cent falls in respective gross incomes in 2015-16.
“In general we can’t see herd sizes increasing markedly, although they’ll probably ride up gradually over a couple of years,” said Rural Bank’s agribusiness general manager, Andrew Smith.
Strong red meat prices for “chopper” cows had helped motivate herd cuts in the past two years.
Over-the-hooks values for cull milkers in Victoria, Tasmania and South Australia jumped from a five-year average of 356 cents a kilogram to 443c/kg in June.
NSW chopper prices were up from 360c/kg to 458c and West Australian prices had risen to 423c from a 318c average.
Increasing numbers of southern dairy farms had also cashed in on meat returns by joining dairy heifers with beef sires, which Mr Smith said would limit the number of dairy heifers available for herd expansion.
Using Wagyu bulls over dairy cows to take advantage of big demand for Wagyu cattle had been one notable offer available to some cash-strapped dairy farms.
Plan for volatility
Given the shortage of milk on offer to processors, Rural Bank, which has about of 30pc of its Victorian customer base on dairy farms, urged farmers to make “considered, evidence-based decisions” about contracts and production plans in the medium to long term.
Mr Smith said this year’s improved seasonal conditions should help farmer confidence and ease production costs, but while pasture density in eastern Australian dairy areas was currently good, a neutral to drier than average trend was tipped through spring.
Rural Bank also cautioned organic growth in global dairy markets was unlikely to drive significant export demand in the short term, especially as the US was competing strongly in Asia as its herd expands.
I don’t think we should expect a shortage of milk in the world for a while
The full potential of milk production increases in Ireland, Germany and the Netherlands was also yet to be realised.
“I don’t think we should expect a shortage of milk in the world for a while,” Mr Smith said.
Asian demand recovering
However, while the recent global price crash had been largely caused by greater European, New Zealand and US production and big inventory volumes in key importing countries such as China, the message from Rabobank’s Shanghai-based senior dairy analyst, Sandy Chen, highlights a reviving Chinese appetite for dairy imports.
Mr Chen said after a two-year hiatus from the global dairy market, China was getting back in play, just as export activity was cranking up again.
Longer term Chinese dairy demand would continue expanding and create trade opportunities for Australia, although he said much of this demand would be limited to higher-quality and value-add dairy products.
Mr Smith agreed demand appeared to be growing, with Vietnam importing its largest orders of milk powder from Australia late last year and Chinese demand for cheese lifting this year.
Australian milk powder had been an unusually strong volume performer for our $2.2 billion dairy export market in 2016-17, jumping about 12pc.
However, shrinking raw milk supplies and restrained export orders reduced our total cheese exports 1pc.
“The mood is still pretty cautions among farmers, but most know the market goes in cycles and they’re looking further out than just the next season or two,” Mr Smith said.
Returns on farm assets have been tracking about 5pc until recently, but we’ve had customers achieving more than 10pc return and some who still want to buy more land.
“Returns on farm assets have been tracking about 5pc until recently, but we’ve had customers achieving more than 10pc return and some who still want to buy more land.
“While we know dairy farmers are doing it tough at the moment, we have not seen the predicted mass exodus of farmers from the industry.”
Rural Bank wanted producers to prepare for ongoing volatility, reviewing their business and supply arrangements with a view to the medium term.