Milk production continues downward

By Rodney Woods

Australian milk production has fallen by 5.5 per cent, a loss of 190 million litres, in the first four months of 2019-20, according to Rabobank’s latest global Dairy Quarterly report.

With the latest outlook from the Bureau of Meteorology suggesting conditions could remain drier-than-average over the summer months, Rabobank senior dairy analyst Michael Harvey said the bank had revised down its 2019-20 milk production forecast to a fall of 5.8 per cent.

“On a volume basis, this fall to 8.3 billion litres represents another loss of 500 million litres of milk from the system,” Mr Harvey said.

“With the majority of falls to come from northern Victoria and the southern NSW irrigation districts.”

That said, Mr Harvey said production was tipped to return to growth in some key dairy regions in southern Australia, with producers in these regions in a better position to capitalise on high milk prices given their on-farm silage reserves.

In terms of the price outlook, Mr Harvey said Rabobank had held its commodity milk price forecast for 2019-20 at $6.65/kg of milk solids.

“Over the past quarter, there has been further upward movements in announced farm gate milk prices, with reported weighted average prices across the southern export region ranging between $6.90/kg MS and $7.20/kg MS, including supplementary payments.”

With production down, Mr Harvey said Australian exporters continued to battle tighter-than-normal exportable surpluses.

“This will mean an ongoing push to optimise their respective product mixes, with the exportable surplus set to remain under pressure throughout 2020.”

The report also said that with milk and dairy product prices on the rise, the ability to pass on increases to consumers through the supply chain could prove a challenge.

It said consumer demand could be at risk, with “much of the world either recovering from, in the midst of, or on the verge of some degree of recession”, citing slower growth already seen in the United States (in its restaurant trade) and Argentina.

“Dairy producers around the world have spent the last several years waiting for a return to price levels reminiscent of those seen in 2014,” the report said.

“Now we are approaching that territory, there is anxiety over consumers’ ability to withstand price increases.”

Despite the positive price signals, the report said dairy producers were hesitant, or unable, to expand as they wait to see if the higher prices can be absorbed by consumers. If not, the upside potential could be limited.

This is flowing into limited supply growth, with combined milk production growth among the big-seven milk producing regions (the US, the European Union, New Zealand, Australia, Brazil, Argentina and Uruguay) expected to remain at, or slightly below, one per cent throughout 2020 and into the first half of 2021.

Most of this growth is expected to come out of the EU and US, however it will be relatively modest.

In New Zealand, the volatile weather will tip the balance for the season between incremental growth of around 0.5 per cent or a decline of similar magnitude.

While in China, the report said, elevated milk prices were driving an increased interest in herd expansion, with the country’s 2020 output forecast to grow by two per cent.

Given the modest milk production outlook, skim milk powder prices are likely to see the most improvement, while butter prices are expected to remain generally range-bound and cheese, fairly stable.