Dairy Australia’s latest situation and outlook report has delivered a better than expected market picture, with global supply and demand fluctuations shifting in favour of Australian farmers.
But while global market forces and domestic competition for milk supply looked set to usher in better farm gate prices, they were offset by high operating costs and decreased farmer confidence.
Dairy Australian senior industry analyst John Droppert said that was likely to restrict production growth to about one per cent, in 2018/19.
“Hay, grain and irrigation water prices are all eroding margins and present significant headwinds for the season ahead, particularly in those parts where dry conditions persist,” Mr Droppert said.
Tight margins and difficult seasonal conditions in 2017/18 hit Australia’s northern, domestic-focussed dairy regions hardest, prompting an increase in farmers exiting the industry in those areas.
But an unfavourable northern hemisphere spring meant a predicted European oversupply failed to materialise.
This delivered a brighter outlook for farmers in Australia’s southern, export-focussed dairy regions.
Specialist agribusiness bank Rabobank said the global farmgate milk price cycle has turned, to set the tone for a more bullish market.
Rabobank’s senior dairy analyst Michael Harvey predicted a southern Australian full-year price of $6.40 a kilograms milk solids was now within reach.
Mr Harvey said with milk supply growth out of Europe and the US failing to meet market expectations, global farm gate milk prices had moved off the lows posted at the start of the year.
They were expected to move seasonally higher, through the second half of 2018.
The rally in global commodity prices, driven by unfavourable weather, which tempered milk production in the EU spring peak and expectations for the Australian dollar to ease slightly, had fed the bank’s upward revision to its full-year forecast.
“Recent milk pricing announcements in a number of regions, including Australia, confirm that the price cycle has now turned in most key export regions,” Mr Harvey said.
Mr Droppert said the annual National Dairy Farmer Survey showed less than half (47 per cent) of farmers across all eight dairy regions remained confident in the industry’s future, down from 53pc last year.
The survey was undertaken in March, amid growing concerns at a lack of rain and uncertainty around changes in the processing sector.
Farmers were more likely to have confidence in their own operations, than in the industry as a whole, with 55pc saying they felt positive about their own business.
In SA global competition for milk could result in a lift in prices across the state.
Mr Droppert said farmers more closely linked to export markets in the South East were likely to see the benefits of a European supply dent soonest, but it would ultimately be to all farmers’ advantage.
“Competition for milk supply among Australian processors will likely mean marginally better prices for the domestic-facing regions – like the Fleurieu Peninsula, the Barossa and the Mid North,” Mr Droppert said.
“Unfortunately the dry summer and autumn has driven up water, grain and hay costs and that is likely to limit the short-term impact of any price rises on farmers’ balance sheets.”
The National Dairy Farmer Survey showed SA was consistent with a national trend of falling farmer confidence levels, with only 39 per cent of the state’s farmers saying they remained confident about the industry’s future – below the national average of 47pc.