Dairy Australia outlook uncertainties

The report was released on Wednesday, the morning after the Global Dairy Trade (GDT) fell for the fourth time in a row.

The skim milk powder price fell 8.1 per cent and the GDT as a whole, 3.9pc, while butter was almost steady and cheddar rose 2.6pc.

Many analysts had expected the result to be much worse and DA's report highlighted the crisis of confidence.

"Although market fundamentals remain sound, the elephant in the room remains the COVID-19 outbreak, which continues to spread," the report said.

"Supply and demand of dairy products is yet to be materially impacted by this developing issue, however, market sentiment has become more bearish, with prices for most commodities trending lower in recent weeks."

The bad news is that nobody really knows how much African Swine Fever and COVID-19 will hurt dairy export markets.

"Whilst sentiment has been the main impact on dairy to date, broader disruptions are also beginning to be felt," the report said.

"Travel restrictions are limiting face-to-face business development and negotiations, while container availability and blank sailings (ships skipping ports) are complicating the logistics task.

"Widespread restaurant closures and quarantine restrictions in China caused disruptions to food service channels, though more recent reports suggest gradual reopening is taking place."

Aside from the short-term complications wreaked on global trade by the pandemic, DA warned of longer-term damage to the local and global economies.

Such is our reliance on China, it absorbs one third of Australia's dairy exports and roughly 12pc of all Australian milk produced ends up on the Chinese market.

"China plays a vital role balancing global markets and supporting commodity prices for dairy," the report said.

"Whilst short-term disruptions drive instant market reactions, they are less likely to have significant flow-on effects on global values in and of themselves - whatever the level of news sensation.

"Instead it is sustained changes to underlying demand that would be expected to influence returns throughout the dairy supply chain, and that's the factor to watch."

The Australian dollar has steadily weakened this year but DA says that's not necessarily all good news.

"Exporters typically benefit from a lower Australia dollar, improving competitiveness internationally," it said.

"However, the outbreak of COVID-19 has complicated the usual flow of trade.

"Fearing that the outbreak could cause a global recession, investors have pulled out of the market.

"Australian economic growth reached 1.7pc in 2019 (down 1pc from 2018) and had been forecast to remain stable this year.

"Although a sluggish finish, fires throughout January and the ongoing economic damage from COVID-19 will add further downside to the outlook."

On the other hand, the domestic market has been something of a star, with value growing in fresh milk 6.9pc, while the popularity of deli-style cheeses as well as shredded and sliced cheese lifted the value of cheese sales by 5.6pc.

Yoghurt was up 4.7pc in volume and 6.1pc in value.

But DA warned against underestimating the impact of international markets on domestic pricing.

"Whilst a majority of dairy produced in Australia these days winds up on the domestic market, global commodity prices still drive returns throughout the supply chain," the report said.

"The one third of milk exported overseas is directly impacted by international competition, as is local product that competes against imports."

Globally, dry conditions in New Zealand limited its milk production growth but supply pressure was slowly building in the US and Europe.

Locally, Mother Nature delivered February deluges to some parts of the country, dousing bushfires and boosting production.

But it's a low bar indeed.

For the first time in 18 months, Australian production grew in December 2019 and was up on last year, albeit by just 0.5pc, again in January.

It adds up to a season-to-date drop of 3.7pc compared to the same time last financial year.

DA still expects production to be 3-5pc lower this year, reaching just 8.35 to 8.5 billion litres.

And the turnaround is far from uniform.

It's been powered by Gippsland and Tasmania, where the weather has been kindest.

The season had also been "excellent" in south-west Victoria but the region's production continued to slide.

"South-west Victoria faces a somewhat unique combination of excellent seasonal conditions and falling milk production, driven by farm exits and conversions to beef and sheep production," the report said.

Farmers in the northern states continued to rely on bought-in fodder, Western Australia's farmgate margins had shrunk, and irrigation water was still expensive in northern Victoria.

While the bushfires devastated many rural communities in NSW, Victoria and SA, DA said the overall impact on milk production was minimal.

A total of 128 dairy farms were affected, some of them significantly, but DA described the loss of milking cows as "limited".

But many farm businesses not directly affected by the bushfires suffered a tough summer thanks to the drought or high feed costs it brought.

While rain has eased demand in many regions, DA said it remained strong in central west NSW, driving some of the inquiry for hay in Victoria.

Dry conditions in Tasmania's north-central and east coasts was also creating demand.

"While the movement of hay has slowed there is still a lot of hay being transported around the country," it said.