Positive outlook despite price cut

Dairy prices are expected the ease down from current record levels, but producers are being told to expect another favourable season.

In its annual Australian Dairy Seasonal Outlook report, Rabobank says the sector is set for its fourth consecutive profitable year.

Rabobank says while the upcoming season’s milk price will likely be lower, reflecting the current downturn in the global commodity price cycle, there is a firm landing zone expected for new season Australian milk prices.

It says this is due to stronger domestic dairy market returns, a weak Australian dollar and aggressive recruitment and retention strategies by dairy processors in a competitive market for milk supply.

Report author Michal Harvey says these factors are providing a buffering effect to the full extent of

global pressures.

With the June 1 deadline approaching for minimum milk price offers from Australian dairy companies, the bank is forecasting minimum offers for new season milk in southern Australia to be between $8.50-$9 a kilogram of milk solids.

“At worst, this represents a 10 per cent decrease from 2022-2023 prices and a farmgate milk price that is well above the medium-term average for southern Australia since the introduction of the industry’s Dairy Code of Conduct in January 2020,” Mr Harvey said.

“Another season of historically-elevated milk prices will support farmgate margins.”

The report, titled Looking for a Firm Landing Zone, says there is welcome relief fordairy farmers from  a recent record-high cost base, with lower prices for purchased feed and fertiliser  now flowing through.

“Even if some dairy farmers see an easing in minimum price offers, this should come with cost relief,” Mr Harvey said.

Global feed benchmark prices are down compared with last year, although still above medium-term averages, while local wheat prices are tracking close to global trends.

“Locally, grain supplies are high, after several bumper winter crops, with the prospect of another decent winter crop this year meaning feed supply will be adequate for buyers and will help to dampen feed supply risks,” he said.

Mr Harvey said Australian dairy farmers will already be seeing the benefits of a significant correction in global fertiliser prices.

“Looking forward, the bank expects the underlying fundamentals in the fertiliser market to lead a period of price stability.

However, the Rabobank Outlook warns, there will still be other cost headwinds on farm in 2023-2024  including higher interest rates and it says  labour is a major headache.

The report says milk prices in a number of dairy-exporting regions around the world have already fallen, following the large decline in global dairy commodity prices seen since their peak in the first half of 2022.

“Since that time, prices in the dairy commodity basket have fallen significantly on the back of a shift in underlying fundamentals in the market,” Mr Harvey said.

These included a return to growth in milk supply across most dairy-exporting regions, coupled with softer domestic demand, sluggish import appetite from the world’s largest dairy importer China and widespread demand ‘rationing’ in many dairy markets across retail, foodservice and ingredient channels.

As a result, Mr Harvey said, returns for Australia’s dairy product mix have fallen between 30 per cent and 40 per cent compared with the same time last year and are now at, or below, average returns of the previous five years.

Rabobank says increasing growth in milk production in export regions through 2023 and largely absent Chinese buyers until the second half of the year will keep downward pressure on global dairy commodity prices.

“However, at some stage the cycle will turn and global commodity prices will begin to increase, but this will depend on when China returns as a meaningful buyer in export markets,” Mr Harvey said.

Locally though, Australia’s domestic market returns have reset for the better.

Mr Harvey said the domestic market is experiencing a structural increase in consumer prices across the dairy aisle, led by drinking milk and cheese in particular.

This is important as it will support the value chain and lead to stable farmgate milk prices over multiple seasons for those milk producers supplying the domestic market.

However, Australia’s dairy supply chain continues to be challenged by a declining milk pool.

The report says in 2022-2023, the annual availability of milk for manufacturing will fall below six billion litres, for the first time since 1990.