Dairy outlook remains grim

He said the national milk pool was expected to finish the 2018-19 season at 8.6billion litres — down eight per cent (year-on-year).

‘‘The Murray Dairy region has been responsible for around 70 per cent of that fall in milk supply,’’ Mr Harvey said.

‘‘Yet some of the industry’s most cost-efficient plants reside in that region. And this is creating a real conundrum for the industry.’’

The Murray Dairy region’s milk pool has fallen by 285million litres from February 2018 to February this year as a result of high water and feed prices and ongoing hot and dry conditions.

‘‘While history has shown that, with the right settings, milk production can rebound quickly in the Murray Dairy region, the water price continues to be a key risk for the region heading into the new season,’’ Mr Harvey said.

‘‘Looking to the new season, water prices are likely to remain high given the low water storage levels in the southern Murray-Darling Basin, and this could see milk production in the Murray Dairy region fall by a further 5.1 per cent — with risks mounted to the downside.’’

And dairy companies are not immune to the margin squeeze, according to the Thirsty Work: A journey to rebuild begins report, with the processing sector ‘‘confronted with record levels of surplus processing capacity’’ — in excess of two billion litres — in the new season.

However, Mr Harvey said there were signs of a bottoming in the margin cycle, with farm gate milk prices improving and more upside to come in 2019-20.

Releasing the bank’s milk price forecast for the 2019-20 season, Mr Harvey said Rabobank’s global market forecasts pointed to an indicative weighted average farm gate milk price in the southern export region of $6.40/kg MS — a mark only attained or exceeded once in the past.

He said the ability of dairy farm operators to capitalise on the higher farm gate milk prices would be determined by seasonal conditions and the cost of purchased feed.

‘‘The importance of a timely autumn break this season cannot be overstated.

‘‘The volume of milk solids in the system is now at a 24-year low, and milk supply will drop further without an autumn break.

‘‘Soil moisture profiles are below average, there are shortages of home-grown feed, and high water and purchased feed costs are leading to elevated cost of production.

‘‘While dairy farm operators are mitigating the margin squeeze by making adjustments to their feeding programs and reducing herd sizes, the need for a timely autumn break is critical if farmers are to grow their own home-grown feed and create a feed wedge. Otherwise we will see feed shortages quickly emerge on-farm.’’