Australian dairy at a critical juncture: Rabobank

The report, Australian Dairy Industry: At an Important Juncture, by agribusiness banking specialist Rabobank, says "after a rollercoaster ride" over the past decade, Australia's dairy sector has experienced a remarkable turnaround, underpinned by favourable seasonal conditions, high farmgate pricing and a shift in the balance of power within the supply chain (with increasing competition for milk supply and the introduction of the Dairy Industry Code of Conduct).

But capitalising on this current strong position to invest in expanding national milk production will be "vital" for the future success of Australia's dairy industry, the report says, in order to take advantage of growth opportunities in export markets.

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Report author, Rabobank senior dairy analyst Michael Harvey said in recent years the Australian dairy sector had navigated a "perfect storm of widespread drought, isolated bushfires and floods - all coupled with a severe global market and unprecedented industry disruption and instability".

"This turmoil resulted in a squeeze on the profit pool and a drop in milk solids produced," he said.

"It also zapped farmer confidence, which ultimately heralded a major shift in how the supply chain operates."

Right now though, the report says, the dairy industry finds itself on a solid footing, with record-breaking profitability for many.

"The southern Australian dairy region is on track for a third consecutive season of outperforming industry benchmarks for average EBIT (earnings before interest and tax). And there has been a lift in confidence levels and investment intentions," the report said.

However, Mr Harvey said, while some recovery in national milk production has been underway, so far the milk supply response has "underwhelmed initial expectations", despite the period of farmgate profitability.

"The Australian dairy supply chain processed 8.86 billion litres of milk in 2020/21, 950 million litres less than in 2014/15, with 55 per cent of the fall coming from the northern Victoria irrigation system," he said.

Mr Harvey said expanding Australia's national milk supply is "essential to the growth prospects of the Australian dairy industry as it aims to construct sustained growth outside of a maturing domestic market".

"In contrast to the local market, key dairy export markets have considerable headroom for growth in the coming decade, particularly in emerging Asia," he said.

"This means offshore markets provide plenty of 'blue sky' and exports will remain the engine of growth for the sector."

However, without sufficient milk supply growth, the Australian sector will face challenges penetrating growth markets offshore, the report said.

"A vibrant industry requires a strong presence in growing export markets and being able to fully leverage existing access to Asian supply chains," Mr Harvey said.

"Australian dairy has some strong global market credentials, but a lack of a sustained growing milk pool is a weakness to overcome.

"Even with the mature domestic market, demand from key customers is outstripping supply growth, and many customers in the industry will require more volume over the next decade."

The report says with the Australian dairy supply chain short of milk solids and the foundations in place for a period of investment "on farm and for milk production growth", the stage is set for the industry to take advantage.

"If this strong run of healthy farm profitability, elevated investment ambition and positive investment outlook does not result in some well-executed long-term investments, it will be a missed opportunity for the industry in reigniting growth," Mr Harvey said.

"And to fully unlock growth, significant long-term capital investment is required to increase efficiency and production capacity."

The Rabobank report says Australia's dairy sector is expected to provide profitable capital investment opportunities for farm businesses over the next decade.

"While a transformational lift in profitability is not expected, there is a compelling case that the industry may outperform the previous decade in terms of EBIT performance," Mr Harvey said.

The report notes investing for long-term growth will not be the right strategy for every dairy farm business.

"While a growing industry is vital for the wider sector, the reality is that farm businesses should only invest in growth if there is a profitable and sufficient return based on any planned investment strategy. And for enterprises willing to invest, a well-structured plan and consideration of capital at risk is required," he said.

A close watch also needs to be kept on the changing dairy supply chain, with further shifts, consolidation and rationalisation expected in the coming decade.

"This constant supply chain evolution - which includes a variety of dairy company business models with very different product mixes, manufacturing footprints and growth priorities - provides increased options for dairy producers and presents risks and opportunities for farm businesses," Mr Harvey said.

The Rabobank report says a focus on reducing environmental impacts throughout the dairy supply chain will also remain a consistent theme over the coming decade.

"There is a goal to reduce emissions intensity by 30 per cent from 2015 levels by 2030, with more ambitious targets also being considered," Mr Harvey said.

"It is important to take a long-term view on the opportunities that will come with these investments, including productivity and efficiency gains, carbon sequestration incentives, and potential access to high-margin and/or high-growth markets."

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