![Western Australian dairy industry finds resilience in domestic market strength Western Australian dairy industry finds resilience in domestic market strength](/images/transform/v1/crop/frm/126677566/122e124d-1896-4a91-86a7-877d72500e99.jpg/r0_114_4992_2922_w1200_h678_fmax.jpg)
Western Australian dairy farmers are eyeing off a profitable year, after a period of hyperinflation on supermarket shelves.
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RaboResearch senior dairy analyst Michael Harvey shared insight on the market's performance to a packed crowd at Western Dairy's 2024 Dairy Innovation Day, Brunswick, WA, in May.
Mr Harvey said the dairy industry had a newfound level of market resilience, which was due to the simple fact that milk was performing stronger.
He said while it wasn't great news for consumers, who were paying 30 per cent more for milk, it was for the supply chain moving forward.
"When you look at cheese and other bulk ingredients, market returns aren't overly strong," Mr Harvey said.
"This is the global pressure that we see having some impact on farmgate prices next season.
"It reinforces the story that around 80pc of WA milk goes into the white milk market and is outperforming the bulk ingredient market."
Food inflation peaked at about 10pc to the Australian economy in 2022, and has since taken a long time to normalise.
There are a significant number of food categories where inflation remains reasonably high - and dairy is one of them.
Mr Harvey said food inflation was now heading in the right direction, but it had been a challenging time for consumers.
"From a dairy perspective, in the most recent cycle we have seen retail pricing close to 20pc for the consumer," he said.
"Overall this is 20pc in milk, which provides a better return.
"We are of the view that, given the challenges around supply risk in Australia for milk production, returns are going to be stickier moving forward.
"We aren't expecting to see a discounting of white milk or dairy products on supermarket shelves anytime soon - that's the resilience heading through to the milk price in WA."
High population growth supports market
Mr Harvey said there was also resilience coming through the market - thanks to high population growth.
WA has one of the strongest population growth rates in Australia, which has provided some volume support for the size of the milk market.
As such, milk consumption in WA is mature compared to other States where per capita consumption rates have declined to moderate levels over a 10-year average.
Taking a look at how consumers had responded to cost of living pressures and high food prices, Mr Harvey said there were three major shifts - people were preparing meals at home, as opposed to eating out, pulling away from corporate brands and turning to supermarket or private labels, and trading in and out of certain categories, for example - switching to long-life milk over fresh milk.
"In the short-term there are some volume impacts coming through," he said.
"Consumers are spending less money on their food basket and also a little less on dairy.
"There has been some market erosion, as they move away from brands to private labels.
"There is plenty of competition in domestic markets because the export market has changed and there is a lot more milk kicking around Australia."
Mr Harvey said there had been a sizeable lift in import and bulk products coming into the Australian market competing for market share.
However, it wasn't so much a problem for milk, helped by access to export markets and the small amount of surplus milk WA had as a producing State.
"We've always been big importers of dairy products and we have seen a sudden increase in the volume of butter, milk powder and bulk cheese coming onto the market," he said.
"Hopefully that starts to normalise and we have more milk in the domestic market and the cost of milk in other markets starts to rise as well."
What does this all mean in terms of margin outlook and performance for WA's dairy industry?
Heifer market pressure
Mr Harvey said outside of the price outlook, non-milking cows were coming under increased pressure.
This was due to China not building new farms and, as such, the export heifer job being under a lot of pressure.
"It is not likely to turn back any time soon and will rely on improvements in China's foreign economics," he said.
"That is where milk prices increase and costs come down, so the margin performance in China improves and possibly triggers some farm expansion."
Mr Harvey said when China did return to the export heifer market, it may recover quite rapidly.
"We know they can't get heifers out of New Zealand anymore post the 2023 ban on live exports to global markets," he said.
"We are wary around that non-milk income.
"On the other side, we also know the livestock market is going through a bit of a downturn, after El Nino was declared last year.
"We are painting a more cautious outlook as to where these markets are going to go in the next four months.
"It won't be the bottom of the market that we saw six or 12 months ago, but certainly some price recovery."
Looking at the outlook for the next 12 months, Mr Harvey believed market centres were going to provide more resilience in the milk price outlook.
"This is all happening in context to some downward pressure that is coming through on target prices on the east coast," he said.
"It is worthwhile recognising that we are in an environment where food markets have some global storm clouds lingering in the background.
"There's two wars happening in the Middle East and Black Sea region - they prevent risk around the flow of food and energy into the global market.
"The China market is going through a period of slower growth and sluggish consumer market settings, which is having an effect on their appetite for products from the global market.
"Inflation is not unique to the Australian economy, we are seeing it right across the world in most developed economies and that is having a profound impact on the consumer."
Mr Harvey said there was some good news, with better times ahead forecasted for consumers.
However, it is starting off a very low base.
Separately he said both wages and unemployment were rising and there were some tax cuts and interest rate relief on the horizon.
"There are some better times ahead, but we are dealing with a tough consumer market at the moment - and that's across all categories," Mr Harvey said.
"We know cost inflations are still coming through in overheads, but that should normalise as inflation continues to dip off for the economy."