Renewed cheese focus will help farmgate prices
AFTER TWO tough seasons, a number of factors suggest that the 2017/18 season may be a more promising one. Higher opening prices and a more balanced international market, as well as the support of affordable input prices suggest an improved outlook for dairy farmers.
However, downside risk remains and Dairy Australia believes that any recovery in milk production in 2017/18 will be modest, in the order of 2-3%.
A significant factor is that many farm businesses will be looking to repair their balance sheets and rebuild equity, rather than ramping up production.
As shown by the 2017 National Dairy Farmer Survey, confidence has also been badly shaken, and trust in the supply chain remains an issue.
Moreover, another constraint to production growth is that there are simply fewer dairy farms and fewer dairy cows than before.
The total number of registered dairy farms in Australia in 2015/16, as reported in Dairy Australia’s InFocus 2016 publication was 6102.
This was informed by estimates from the various state dairy safety authorities.
According to these same authorities, as of April 2017, there were 5810 farms across Australia, representing a 4.8% decline in total dairy farm numbers.
The effects of the events in April 2016 have been clear cut in terms of Australian milk production, which is forecast to fall around 6-8% for the entire 2016/17 season, compared to the 2015/16 season.
This would lead to total milk production of around 8.95 billion litres, compared to 9.5 billion litres of milk in 2015/16.
Dairy Australia’s Milk Production report for May had national production down by 7.6% in year-todate terms.
The fall in milk production has been felt the most in Victoria (down 9% in year-to-date), and especially northern Victoria (down 17.7% in yearto-date).
The largest decrease occurred in Victoria, where 263 dairy farm licenses were cancelled, with the largest number of cancellations coming from the north of the state. The total number of Victorian dairy farms now sits at 3899, compared to 4141 farms as of June 30th 2016 (there were also 21 new applications).
However, it is important to note that not all of this can be attributed directly to the events of April 2016 and the fall in farmgate milk prices.
Some 241 of these cancellations were ‘bulk cancellations’, processed in August 2016. These were effectively an automatic biennial cancellation of licenses for farms that had ceased production for at least 6 months prior to their delisting. This suggests that many of the Victorian dairy farmers that exited the industry had made the decision well before the stepdown.
In keeping with postderegulation trends, remaining dairy farms will continue to increase in size, while the share of production attributed to very large farms (more than 1000 cows) will increase.
Nonetheless, in the short run, there are simply less cows and less farms than before, which places an upper limit on any growth in Australian milk production.
Faced with lower milk volumes, processors have been forced to make hard choices about product mix and markets to service.
In some cases, this has meant closing factories altogether, and ceasing certain product lines. For processors with an international presence, this has also meant in some cases choosing between domestic or export markets.
Australian dairy imports of cheese, infant formula and butter, mainly from New Zealand have all increased. At the same time, Australian exports of the same products have either remained fairly stable or grown.
This points to Australian processors seeking to maintain ongoing export market relationships at the expense of servicing lower-margin segments of the Australian domestic market.
Given the importance of long-term business relationships to Australia’s trade in high-value markets such as Japan and much of Southeast Asia, it is understandable that processors would seek to protect their business in these markets where possible.
Australian processors are seeking to maintain ongoing export market relationships at the expense of servicing lower-margin segments of the Australian domestic market.
Australia’s exports are likely to be further oriented towards niche, high value products such as infant formula or fresh milk, and cheese, at the expense of powders and butterfat.
While international prices for dairy fats are performing extremely well, the large overhang of EU SMP stockpiles means that the total returns from this processing stream are generally below that of cheese.
Significant increases in cheese production capacity are also understood to be coming on line, both from Fonterra’s recommissioned Stanhope plant, and also from upgrades to Warrnambool Cheese and Butter’s Allansford cheese plant.
This increased capacity, at a time when other processors are rationalising operations and ceasing production of some lines also underscores the intensity of competition for supply that we are likely to see this season.
This competitive pressure should also help to lift farmgate prices for suppliers able or willing to capitalise on it.
• Laurie Walker is industry analyst with Dairy Australia.
Significant increases in cheese production capacity are coming on line, both from Fonterra’s recommissoned Stanhope plant (pictured), and from upgrades to Warnambool Cheese and Butter’s Allansford cheese plant.