According to Dairy Australia's Situation and Outlook Report, released on Wednesday, the 2022/23 season is opening with large numbers on both sides of the ledger.
Early announcements of opening milk prices have set new records, backed by stiff competition for milk and robust global markets.
Meanwhile fertiliser, fuel and grain prices are on the up amid the reality of a war in Europe, renewed geopolitical tensions and ongoing disruptions associated with COVID-19.
After successive seasons of recovering profitability, the net effect of these rapid and substantial changes on margins is a key question as farmers and processors try to plan ahead in a volatile market.
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Despite some market volatility, data from the 2022 National Dairy Farmer Survey indicated profitability has continued to improve, with 88 per cent of survey respondents reporting an operating profit in 2020/21, and 90pc expecting to do so in 2021/22.
The report also revealed that 82pc of Australian dairy farmers are confident about the future of their own businesses (up by 2pc on 2021), while 68pc of farmers are feeling positive about the future of the industry (up 4pc).
Dairy Australia's Industry Insights and Analysis Manager, John Droppert, says the report confirmed that dairy commodity markets remain strong, driven by a combination of tight supply, robust demand and buoyant soft commodity values.
The report indicated that ongoing growth limitations and heightened margin risk are expected to offset strong milk prices and favourable seasonal conditions, resulting in a comparatively flat milk pool totalling 8.6 billion litres.
"The 2022/23 season will be marked by rising numbers throughout the supply chain - from production costs to farmgate prices, from commodity values to food expenditure," Mr Droppert said.
"Meanwhile, labour shortages remain a significant constraint, while high beef prices and soaring land values have enticed farmers and farmland away from dairy."
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Domestic consumption volume has shifted from grocery to foodservice as the effects of the pandemic recede and more consumers are out and about.
Meanwhile, the value of dairy products sold through supermarkets has increased.
The report also finds that Australia's major competitors are experiencing negative or slow growth in milk production, driving up demand and competition.
"This theme is likely to be tempered by an absence of growth in milk production," Mr Droppert said.
"Nonetheless, robust balance sheets after several profitable years might just mean that the volatility accompanying such giddy numbers is something the Australian dairy industry is well-placed to tackle."
Domestic dairy market
With the dust wiped from the tables of the foodservice industry and restrictions eased, people have been out in droves enjoying some long-awaited freedom.
However, on par with the rollercoaster of the last two years, as the pandemic turns a corner another challenge awaits around the bend.
Inflation has hit the supermarket shelves.
COVID-19 cases are not the only thing running rampant since the opening of domestic and international borders; consumers' food expenditure has also notched up some serious growth.
Cafe and restaurant spending has surged over the three months to February compared to the same period in 2021, even tracking above pre-pandemic levels.
This is a significant shift from the past two years, where strength in the takeaway food and quick service restaurant (QSR) sector has supported the overall foodservice category.
At the same time, supermarket spending remains strong.
Food expenditure within the retail channel was much higher during the last two years, as consumers were forced to give up eating out.
With the recent foodservice growth and recovery, a rebalancing of the scales would be expected, yet while behaviours have reverted, such a change has been slight to non-existent in dollar terms.
Inflationary pressures have been felt right across the supply chain, flowing through to the consumer level and are the key to continued supermarket sales strength.
It is no secret in recent months that grocery bills have become larger (and not necessarily longer), with many products increasing in value during 2022, including dairy.
In the 12 weeks to March 27, the average per unit prices of fresh milk and long life milk increased 5.4pc and 2.9pc, respectively, compared to the same period the previous year.
Additionally, the average per unit price of butter rose 2.7pc.
At the same time, the volume of white milk varieties and butter sold decreased 5.4pc and 2.8pc, respectively.
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Whilst a shift in shopper behaviour has driven this change, the data suggests it does not reflect consumer resistance to increased retail prices.
Lockdowns and working from home during the pandemic saw many consumers buying from the supermarkets less frequently than pre-COVID and purchasing more each trip.
Moving into a new normal that comprises of a blend between working from home and in the office, as well as the freedom to travel and roam, purchasing frequency has declined further.
With less time spent at home, people are now consuming and utilising less dairy there too.
Dairy Australia has previously reported that 98pc of households purchase dairy milk and this holds true, despite decrease in volume sold.
Dairy's status as a staple product offers significant advantage, in that increased retail prices are less likely to curb consumer demand, but rather shift the way consumers purchase their dairy needs.
It is more likely that higher prices will see increased preference for private label products within individual dairy product streams, as these are typically cheaper compared to branded products.
The prospect of consumers gravitating towards alternatives in the face of higher dairy prices is also raised, but of minimal consequence.
Research has illustrated perceptions around health and sustainability are significant drivers to the switch to alternatives, as opposed to financial circumstances. In any case, broader inflationary pressures are affecting alternatives too.
Average per unit values of plant-based beverages increased 4.9pc in the 12 weeks to March 27, compared to the same period in 2021, with the most significant rise in the almond milk category (11pc).
Prices have also been rising for butter's long-established substitute, margarine, up 7.9pc.
Cheese has far fewer substitutes, and as such, financial pressure is more likely to see consumers move towards lower cost formats such as blocks, rather than individual slices, and could reduce the volume purchased of more discretionary entertaining style cheeses.
Whilst consumers may adapt to current financial circumstances and change the way in which they purchase their staple dairy needs, the more discretionary style products appear to be most as risk.
Significant innovation and product development has helped drive returns for dairy over the last decade, as the establishment of 'every day low prices' for staple products limited product expansion.
As such, focus was drawn to products such as flavoured milk, deli cheese and functional yoghurts, creating points of difference in the market and generating significant value.
These types of products appear most vulnerable if consumer spending pulls back, and if inflation bites harder.
Looking forward, it is likely with continued input and production pressure, the rise of retail prices is far from over.
This will support overall supermarket spending despite shopper behaviour continuing to evolve.
Whilst overall purchased volumes of dairy may decline, and the ways in which consumers purchase their needs shifts, dairy will continue to be widely consumed in households across Australia.
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