Australian dairy market on the rise but economic uncertainty remains a concern

Wednesday 12 May 2010 | From Dairy Australia

The Australian dairy industry’s position has had a significant change for the better in 2010, with economic recovery underpinning renewed demand growth in key markets.

Analysis undertaken by Dairy Australia as part of the 2010 Situation and Outlook report, released today, has revealed there has been a return to the fundamentals of the dairy market after the industry was facing a crisis in 2009, with the global economic downturn cutting milk prices, and continued dry conditions placing many farm businesses at risk.

Dairy Australia Managing Director Ian Halliday said as the international market downturn hit, the Australian dairy market proved resilient, providing volume and value growth throughout 2009.

Mr Halliday said as production had contracted an increasing proportion of the industry’s milk – around 55 per cent of annual output, was supplied to the domestic market.

“The Australian market will continue to represent a relatively ‘safe haven’ of steady sales growth for the industry with neither the extreme highs nor lows of the international commodity market,” he said.

“Companies supplying the domestic market are positioned to push for margin recovery, given the tight supply situation and improved export opportunities.”

There has been a volume shift towards the grocery channel, contributing to growth in supermarket sales across most dairy categories, with some reversal of the trend toward private label products reflecting improved consumer confidence and aggressive brand promotion.

Dairy Australia Manager Strategy and Knowledge Joanne Bills said the international demand recovery had been led by China, indirectly as a major driver of the global economy, and directly as a significant and growing importer of whole milk powder.

“Many retail markets in developing countries are segmented, and with limited supplies, Australian exporters are concentrating on higher value segments to maximise returns – for example, infant formula for China,” Ms Bills said.

“Powder demand from South East Asia has remained resilient, as has the Middle East for cheese and other products. Japanese cheese demand remains weak and internal supply and demand issues are limiting the requirements for imports.”

Reduced supplies have seen dairy commodity prices rise sharply in US dollar terms, with spot international dairy commodity prices up 80 per cent since their February 2009 low, reflecting improved economic conditions and tight supply. The surging Australian dollar has limited the benefits for exporters, with local currency returns rising by 30 per cent.

“This has taken commodity prices back to the levels of two years ago - the dairy market is tightly balanced. However, significant uncertainty remains in terms of the wider global economy; continued dairy demand depends on continued growth in key markets,” Ms Bills said.

“While retail demand appears healthy, buyers remain cautious – buying ‘hand to mouth’ rather than rebuilding stocks, therefore adding to ongoing volatility.”

After re-instating market support measures in 2009 and re-building government stocks, the US and the European Union (EU) are no longer intervening in the global dairy market. Government stocks did not reach historical levels and are largely committed to domestic programs limiting their impact on international trade.

Situation and Outlook has been released almost one month earlier than normal this year. Mr Halliday said the move had come about after an extra short report was produced in March last year because of the uncertain conditions.

“The industry found that very useful, so this year instead of doing an extra update we have brought the full report forward to give farmers an earlier indication of price and give them a complete picture of what is happening so they can plan for the next season,” he said.

The Situation and Outlook report is just one of many examples of the dairy services levy at work. For more information on this and other levy projects visit www.dairyaustralia.com.au

For more information contact Felicity Gallagher on ph 03 9664 3894 or 0417 540 059 or email fgallagher@dairyaustralia.com.au