Rabobank: Dairy industry climbing off the canvas

By Alana Christensen on April 11, 2017
  • Rabobank: Dairy industry climbing off the canvas

    Dairy farmers could be receiving some relief in the coming months, with Rabobank predicting the industry is ‘‘climbing back off the canvas’’.

Dairy farmers could be receiving some relief in the coming months, with Rabobank predicting the industry is ‘‘climbing back off the canvas’’ and will return to profitability in the 2017-18 season.

The Australia Dairy Sector – Climbing off the canvas report predicts higher full-year milk prices for Australia’s dairy exporting region, with the price floor for fresh milk also expected to rise.

Based on the group’s commodity price forecasts, milk will receive an average return of $5.30/kg of milk solids in 2017-18, something that could be set to rise according to Rabobank senior dairy analyst Michael Harvey, with the possibility Australia can capture a market premium.

‘‘With this recovery being largely supply-driven, recent price trends highlight how improvements in milk production across the export ‘engine’ can alter finely-balanced fundamentals,’’ he said.

‘‘Historically, the Australian export sector has captured a premium beyond commodity returns and with the right conditions this could see full-year milk prices reach 5.70/kg of milk solids.’’

The news comes off the back of an Australian Bureau of Agriculture and Resource Economics and Sciences report that forecast prices for the 2016-17 season have jumped seven per cent, before a predicted 40 per cent boost in 2017-18.

Senior economist Peter Collins said the turnaround had been driven by improvements in the world dairy markets.

‘‘In 2017-18 the value of exports is expected to increase by a further 11 per cent due to rising world prices and some recovery in export volumes of other major Australian dairy commodities, such as cheese and skim milk powder,’’ he said.

‘‘The value of Australian dairy exports is projected to grow consistently to around $3.5billion (in 2016-17 dollars) by 2019-20.’’

There is also some relief for the domestic market according to Mr Harvey who predicts the price floor to lift over time, yet it will not be smooth sailing with security surrounding supply contracts again a topic of conversation.

‘‘Given the reduction in availability of milk for transport and improving export milk prices — it is not all smooth sailing for those in the fresh milk regions,’’ he said.

‘‘The biggest risk facing dairy farmers in these regions hinges around security of their supply contract and the timing of contract renewal, which was evident recently with the supply imbalance in Western Australia.’’

The rising prices will also be joined by favourable market conditions which are expected to add an extra boost to farmers, with desirable trading conditions expected throughout this season and larger profits expected as a result of lower input cost pressures.

Despite the good signs, Mr Harvey cautioned against expecting ‘‘super profits’’ and said the recovery would take time.

‘‘Whilst the stars are aligning for a return to profitability, 2017-18 is unlikely to deliver ‘super profits’ for Australia’s dairy farmers, which will see producers armed with important decisions to make in the upcoming season,’’ he said.

‘‘They are now faced with a choice between reducing debt and rebuilding equity or investing for growth.’’

Yet the tough decisions are not confined to suppliers, with processors facing some difficult decisions as a result of reduced milk intake, despite milk production predicted to increase by 4.5 per cent from its lowest levels in two decades.

‘‘It could prove the biggest test for Australia’s largest dairy processor, Murray Goulburn, as to whether it can stem the loss of milk supply, resize its manufacturing operations and reposition itself as the market leader in setting farmgate prices,’’ Mr Harvey said.

By Alana Christensen on April 11, 2017

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