Australian dairy is set to recover this season on the back of good spring conditions but there are clouds on the horizon for global prices, according to Rabobank.
The bank's Global Dairy Quarterly released on Wednesday paints a bright picture for the Australian industry with improved seasonal conditions, lower input costs and good prices providing a basis for recovery.
But the global market is delicately poised with production growth forecast across the big-7 dairy regions at the same time as consumer markets are taking time to recover from the impact of the coronavirus pandemic.
The report said Australian dairy was heading for its best 'spring flush' in three seasons, as timely rainfall in key regions ramped up milk production.
Rabobank is forecasting Australian production to lift 2.8 per cent in 2020/21, following a marginal decline in 2019/20.
The bank's senior dairy analyst Michael Harvey said the milk pool began to recover in December 2019 and was already 4.1pc higher in June 2020 compared with the same month last year.
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Dairy Australia's latest milk production report showed growth continuing at the start of the season, with a 2.9pc increase in July.
All regions - with the exception of Queensland - grew with South Australia (up 4.3pc), Victoria (up 3.8pc) and Western Australia (up 3.8pc) leading the lift.
Mr Harvey said the ongoing recovery in milk supply would be welcome news for the Australian dairy supply chain.
"Australia's exportable surplus will continue to recover with milk supply growth," he said.
"Not only will more milk in the system help alleviate some overhead cost pressures for dairy processors, it will also allow dairy exporters to explore growth opportunities."
Lower feed costs and higher cull cows prices would also be good news for farmers.
Rabobank's farmgate 2020/21 milk price forecast remains at $6.30 a kilogram milk solids.
This would see the Australian dairy sector set for a profitable season, Mr Harvey said.
Global price warning
The report said the global market was undergoing a delicate rebalancing.
With global milk production forecast to grow in the next 12 months and consumption taking time to recover, Rabobank expects global market fundamentals to remain weak into 2021.
The bank is forecasting a 1.3pc increase in production across the big-7 dairy regions in the fourth quarter of 2020 and 1pc in the first half of 2021.
The bank's senior analyst dairy Sandy Chen said farmgate milk prices had been resilient but it warned this was largely on the back of government support - government purchases, inventory management and consumer fiscal stimulus.
"However, the outlook for government support is less certain in quarter four and into 2021, which elevates the risk of downward price pressure," he said.
The recovery in foodservice demand (for cafes and restaurants) would take time, even in countries that were ahead of the curve of recovery from the pandemic.
China also presented uncertainties, with ongoing local milk supply growth and a possible shift in stocking strategy.
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