Near-term peak in dairy commodity prices behind us

Dairy-pasturesFarmgate milk prices remain on the “high side” across much of the world, and at near-record levels in Australia, as dairy demand proves resilient in the face of the pandemic, according to the latest Rabobank Global Dairy Quarterly report.

The report says while some regional disruptions will continue to occur as a result of COVID-19 and uncertainty remains, the potential for major global demand shocks is limited, with downside risk to the global dairy market more likely to stem from the anticipated slowdown in Chinese import demand.

With supply expected to outpace demand in China, as domestic production and inventories increase, the country’s imports are expected to start to decline in the second half of this year, the report says.

“Global markets may be able to absorb lost sales through 2021, but pressure will be felt in 2022, initially in Oceania, but eventually rippling through global dairy markets,” it says.

And with prices heavily dependent on import demand, the “near-term peak in global dairy commodity prices is likely behind us”.

Meanwhile, global milk supply has been on an “extended run of interrupted growth” which is set to continue, the report says, albeit at a slower pace.

“The growth rate has been sustainable without becoming overly burdensome on markets so far, but any slowdown in global demand would quickly lead to inventory build,” it says.

Farm margins

The report cautions while milk prices are mostly higher around the world, farm margins are mixed.

“High feed prices and general input cost inflation are a common thread, but the ability to withstand the cost pressures depends on the milk price,” it says.

While “much of the world”, including Australia, is “experiencing high enough milk prices to offset higher costs”, margin pressure is creating headwinds in the US and EU.

“Persistent margin pressure has disrupted a year-long streak of increasing cow numbers” in the US while in the EU “milk prices are barely keeping up with the rising input costs”.

And there is little relief on the horizon for feed costs, it says, with poor US corn crops and the failure of Brazil’s safrinha crop.

For Australia

For Australian dairy farmers, farm margins are positive with “most experiencing healthy on-farm profitability”, according to Rabobank’s senior dairy analyst Michael Harvey.

“Near-record milk prices, affordable purchased feed prices and supportive seasonal conditions have set many up for positive trading conditions ahead,” he says.

While the cost of fertiliser has jumped, Mr Harvey says it has only had a “slight negative hit on farmgate margins”, with the majority of Australian dairy farmers locking in near-record milk pricing for the current season.

“We have revised up Rabobank’s farmgate milk price to AUD 7.05/kgMS for 2021/22,” he says. “While this is broadly in line with the official farmgate milk prices range, it also takes into account the limited upside in global dairy markets for the remainder of this season.”

Mr Harvey says Australian dairy farmers are also heading towards a “favourable spring peak” with the bank forecasting milk production growth to be up 1.5 per cent in 2021/22, to 8.9 billion litres – a level not reached since 2017/18.

“With the spring peak just around the corner, conditions on the farm remain very favourable with the latest seasonal outlooks pointing to average winter-spring rainfall in key production regions,” he says.

This is also boding well for irrigators, he says, with lower water prices and increased allocations as demand from competing crops has subsided.

Mr Harvey says dairy export volumes are also up, with liquid milk and milk powders leading the way.

“Export activity remained upbeat throughout the first half of the year and as at mid-2021, dairy export volumes across most of the dairy commodities were higher than year ago levels,” he says.

In the domestic market, Mr Harvey warns current lockdowns are leading to “ongoing channel distortion in dairy markets”.

“With a large proportion of consumers in lockdown due to the Delta variant, the Australian consumer market is on a rollercoaster,” he says. “That said, pantry-loading seems to be less pronounced this time round and dairy consumption seems to be holding firm in the face of all this uncertainty.”

Key watch factors

The report says that while “all eyes” will be on China as the global dairy market remains heavily dependent on import demand, there are other factors to watch.

These include ongoing logistic disruptions, inflationary pressures not only at the farmgate but along the supply chain, and the impact of the Delta variant, and new COVID-19 variants, on global economic growth.

 

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