After a difficult 18 months, the Australian dairy sector is expected to start “climbing back off the canvas”, with local dairy farming businesses expected to see a much-needed return to profitability in the 2017/18 season, according to a recently-released report.
The Australian Dairy Sector – Climbing off the canvas, by agribusiness banking specialist Rabobank, says extenuating circumstances have meant the recovery in global dairy markets is yet to flow through the value chain. However, some of the forces should dissipate in 2017/18, and this will help deliver higher full-year milk prices for Australia’s dairy exporting regions.
Based on Rabobank’s latest commodity price forecasts (outlined in its upcoming Global Dairy Quarterly) and assuming a currency rate of USD 0.75, the report says the global market would deliver an average commodity milk return equivalent to AUD5.30/kgMS in 2017/18.
While the prospects of global commodity prices remaining elevated throughout next season are sound, the report warns there are some risks to the commodity and currency outlook, which need to be carefully monitored.
“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,” says report author, Rabobank senior dairy analyst Michael Harvey.
Providing global commodity markets remain at, or near, current levels and domestic market returns improve with greater efficiencies in the processing sector, Mr Harvey says, it is possible for the Australian export sector to capture a market premium.
“Historically, the Australian export sector has captured a premium beyond commodity returns,” he says, “and with the right conditions this could see full-year milk prices reach AUD5.70/kgMS.”
For dairy farmers selling to the domestic fresh milk market, Mr Harvey says premiums remain elevated compared to export regions, with these regions largely immune from recent global forces.
“However, while the outlook suggests the price floor for fresh milk will be lifted in time – 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 says.
“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.”