Production margins remain tight as equity position rebuilds

rotary-dairy

The 2017 calendar year has started on a more positive note for the industry, but the overhanging issues from the events of 2016 will not be erased overnight.

The balance in global dairy supply and demand has improved markedly in recent months, while closer to home farmers are seeing some improvement in drivers of farm profitability, according to Dairy Australia’s February 2017 Situation and Outlook report.

International dairy commodity prices for most products are back above five year average levels and costs of major inputs continue to fall, with big grain and hay harvests bolstering supplies.

However, Dairy Australia Senior Analyst John Droppert said production margins remained tight or negative, and many farmers face a significant task rebuilding their equity position after the past 12 months.

“The 2017 calendar year has started on a more positive note for the industry, but the overhanging issues from the events of 2016 will not be erased overnight,” Mr Droppert said.

“Better seasonal and margin indicators are encouraging, but ongoing challenges surrounding confidence and trust remain big impositions for many farmers in southeast Australia. Improved farmgate profitability will help, and the current market settings look conducive to delivering this, albeit not without risk given the threats posed by resurgent supply growth internationally and broader political and economic disruption. It’s also important to acknowledge that in many domestic-focused regions, farmgate prices are coming under pressure, so these farmers are at a different stage in the cycle.”

The year on year drop in Australia’s milk production has moderated, from over 10% for the first four months, to 8.5% for the July to December period. Dairy Australia expects this gap will narrow further but remain significant, forecasting full season production to be down 6-8% on the 2015-16 total of 9.5 billion litres.

In the wider international market, the balance between supply and demand pressures is keeping commodity prices stable in the short term, after a steady recovery during the second half of 2016.

“Sentiment drove the recovery, and the fundamentals have since caught up,” Mr Droppert said. “The question is: what next? A period of consolidation around current commodity pricing seems likely.”

The global milk supply picture remains cautiously positive for sellers, with only the US currently showing growth amongst the major exporters. New Zealand and the EU warrant close watching, but for now, milk flows in both regions are likely to remain constrained.

Global dairy demand presents a mixed, but overall positive picture. The volume of dairy products traded over the past twelve months to the end of October 2016 rose by just over 7%, with a recovery in demand from Greater China accounting for around a third of that growth.

“The value of global exports was down by 14% though, with falls across all major markets except Greater China, reflecting the lower global prices for key dairy commodities for much of the year,” Mr Droppert said.

Domestically, dairy sales in the Australian supermarket channel outgrew the rate of population increase (1.4%) for each of the major categories except yoghurt, according to the most recent data. Total liquid milk sales volumes grew by 2.4% to 1,372 million litres over the 12 months to January.

-Dairy Australia

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