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Dairy Australia Situation and Outlook June 2019

As farmers prepare for the season ahead, the Situation and Outlook report ensures farmers and the industry have access to current market insights and future projections to inform farm business decisions.

High costs have pressured Australian dairy farmers, resulting in lower milk production and low farmer confidence. Well-balanced global markets, exchange rates, competition among processors and autumn rainfall are all in dairy farmers’ favour. As dairy farmers look to take advantage of some of the highest farm-gate prices in recent years, grain, hay and water prices will be the key to profit.

Access episode six of Dairy Australia's podcast to hear Dairy Australia Trade and Strategy group manager Charlie McElhone discuss key insights from the report with senior analyst John Droppert.

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Global demand

Global demand for dairy remains strong and continues to support global commodity prices. In the 12 months to February 2019, dairy exports from the six largest suppliers (New Zealand, the EU, US, Australia, Argentina and Uruguay) increased 3.2 per cent to 8.8 million tonnes. This increase was supported by growing demand in key markets, such as Greater China and South East Asia.

+3.2%
increase in global demand
8.8 million
tonnes exported to key markets

Global supply

With New Zealand’s milk flows dropping away quickly (-1%) and relatively muted northern hemisphere production growth, global dairy exports are well matched to current market demand. In the United States (+6%), whey products are the exception to booming US exports, brought down by trade disputes and China’s ASF crisis. Cheese continues to be a focus in the European Union (+2%), with exports of fresh and ex-intervention SMP also growing. Falling milk production in Australia (+2%) has constrained availability. Ceding SMP share to Europe, New Zealand is exporting more WMP and significantly more liquid milk.

    *Data displayed is percentage % total volume change

    Australian grocery market sales

    Milk and spreads

    Supermarket sales of major dairy products continued to generate value growth for the dairy industry, with dairy spreads growing 7.3 per cent . The end of $1 litre milk has seen value increase in the domestic milk market, despite a small decrease in overall sales. This change resulted in an increase in the (annualised) average retail price of fresh white milk, up 1.5 per cent to $1.42/litre. A majority of the growth stems from an increase in the private label average price (up 2.3 per cent to $1.05/litre on an annualised basis).

    butter icon
    YoY value growth of +7.3%
    Milk bottle icon
    YoY value growth of +2%

    Cheese and yoghurt

    Cheese is a key driver of demand for dairy, both in Australia and overseas. In supermarkets it is the second-largest value creator for the dairy industry. Demand for cheese in supermarkets grew over the 12 months to January 2019, up 1.9 per cent to 151,000 tonnes. Whilst chilled cheese sales only increased modestly, up 0.9 per cent to 126,000 tonnes, deli cheese sales surged, up 7.4 per cent to 26,000 tonnes. Deli cheese continued to grow in popularity with Australian consumers and deli cheese sales made up 17 per cent of cheese sold.

    Cheese icon
    YoY value growth of +4.9%
    Yoghurt icon
    YoY value growth of +3%

    Input costs

    On the back of record high fodder prices throughout 2018, the market has softened slightly since October. Prices remain higher than average although they have reduced slightly in most areas due to some late rain in November and December. The late rains did little to improve water storage levels around the country. Drought conditions and low availability of water allocations for irrigation have driven competition and water prices remain at record levels.

    Grain icon
    grain prices increased by up to 255% in some regions
    Hay icon
    hay prices increased by up to 30% in some regions
    Water icon
    water prices increased by up to 260% in some regions

    National Dairy Farmer Survey

    Sentiment and challenges

    The latest National Dairy Farmer Survey (NDFS), conducted in February 2019 amongst 800 farmers nationwide, highlights how these challenges have affected farmer sentiment. The survey showed that only 34 per cent of farmers feel positive about the future of the dairy industry. This is the sixth consecutive year of declining sentiment nationally and there are now more negative than positive farmers in all dairying regions, except Tasmania.

    34%
    positive about industry future
    64%
    concerned about feed costs and availability

    Enterprise phase and profitability

    Since February when the initial 2019 NDFS interviews were conducted, there has been a minor improvement in farmgate price, supermarkets removed $1/litre milk and weather conditions have improved in some regions. Consequently, the April supplementary survey showed that while still low overall, there has been a slight rise in the proportion of respondents now confident about both the future of the industry and their own business. Comparing responses to the supplementary survey with the same farmers who took the main survey, confidence in the industry’s future increased from 38 per cent to 46 per cent.

    35%
    in temporary holding pattern or contracting
    43%
    expecting operating profit in 2018-19

    Milk production

    Dairy Australia’s 2018–19 forecast for a decrease of between seven and nine per cent relative to 2017–18, is unchanged, implying a total of between 8.45 and 8.65 billion litres. Despite positive developments in recent weeks, a significantly smaller national herd, reduced farmer confidence, and ongoing cost pressures will continue to weigh on production in the short term. Hence, Dairy Australia’s initial forecast for 2019–20 anticipates a further drop of between three and five per cent, to a total of 8.1 to 8.3 billion litres.

    3% – 5%
    decline in milk production forecast for 2019-20
    8.1b – 8.3b
    litres predicted in 2019-20

    Previous Situation and Outlook Reports

    If you are interested in viewing previously published reports on the dairy industry's situation and outlook, please visit our archive.

    Read previous reports
    Situation and Outlook front cover Feb2019