Recovering global dairy markets are unlikely to be as bullish as the industry is hoping for, but Rabobank says southern Australian prices could be worth up to $5.80 a kilogram for milk solids (MS) in 2017-18.
That forecast continues the pressure on financially stressed Murray Goulburn co-operative which last week bowed to market forces, rushing to upgrade its farmgate milk price for southern suppliers to $5.20/kg.
The revised offer was a significant 50 cents/kg lift just two weeks after its initial opening price quote for the new financial year had stunned farmer shareholders who complained it was below milk production costs.
Murray Goulburn’s new price to its Victorian, southern NSW, South Australian and Tasmanian suppliers is still well below rival milk processor, Bega Cheese, which offered $5.50/kg just 48 hours after MG’s first announcement.
Warrnambool Cheese and Butter has matched Bega, and Fonterra will pay its 1200 farmer suppliers at least $5.30/kg.
Rabobank’s senior dairy analyst, Michael Harvey, predicted the “partial recovery” in world milk values to be worth $5.40/kg to $5.80 for southern export regions next season.
“Fundamental to this outlook, we expect global markets to remain well balanced through the 2017-18 Australian season,” he said.
We expect global markets to remain well balanced through the 2017-18 Australian season
United Dairyfarmers of Victoria president, Adam Jenkins, said MG had made “a sensible decision after listening to its supplier base”.
He urged all processors to pass any milk market rises to farmers.
“Many farm businesses expect to remain challenged into the new season,” he said.
However, Rabobank’s Mr Harvey was cautious about further price rises overseas, believing global pricing had reached a cycle peak.
On a more positive note, key input costs remained affordable for Australian farmers, particularly as climatic conditions appeared to be setting up a much better season for home-grown feed production in many dairying regions, with early rainfall indicators “mostly favourable”.
Many farm businesses expect to remain challenged into the new season
Rabobank’s latest global dairy quarterly report said in the wake of a “very challenging 18 months” when the sector was crunched by low prices, poor seasons and a milk supply slump, Australian trading conditions now looked relatively favourable.
Milk production slump
It tipped a “decent” three per cent recovery in milk supply volumes, but this would go only part way to replacing last season’s 8pc supply slide.
“In the past 12 months national milk supply was more than 660 million litres down on the same period the previous season,” Mr Harvey said.
More than 80pc of that decline occurred in Victoria – 50pc in northern Victoria alone.
Milk volume declines had slowed in most key dairying regions and 2017-18 was expected to see a modest supply recovery.
With milk scarcity worrying processors and making MG vulnerable to losing more suppliers, the big co-op conceded it must maintain milk supply and provide improved cash flow for farmers “in the current competitive environment”.
“The decision to revise the opening price to $5.20/kg is intended to assist in maintaining competitiveness and support the supplier base,” it told shareholders in a letter.
MG, the parent company behind the Devondale brand, had also reviewed its chances of achieving a planned milk intake of about 2.5 billion litres with its original payment price.
Two seasons ago, when it paid $6/kg, it collected 3.6b litres.
It said last week’s updated farmgate price took into account improving commodity prices reflecting anticipated market returns, together with additional contracted product sales by the company.
However, MG’s market optimism has not helped its unit trust share price this week, which dipped to near-record lows of 62 cents on Tuesday, compared with highs of $2.70c in December 2015.
Market growth sporadic
Rabobank’s Mr Harvey said global markets were higher than last season, but Chinese import growth had been disappointing for the year to April.
China was expected to be a more substantial buyer on global markets in the second half of 2017, which would help keep the global market balanced.
However rising production in New Zealand – the world’s biggest exporter – and sporadic demand growth in developing markets, would contribute to “keeping prices relatively range-bound”.
Australian dairy export volumes had fallen 2.1pc in the past year.
“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.
Inventories were low with milk now being prioritised over production of cheese, skim milk powder/butter and liquid streams.
Healthy growth in domestic consumption of about 2pc for cheese, butter and milk was also absorbing some of the expected supply increases.