Re­newed cheese fo­cus will help far­m­gate prices

Dairy News Australia - - MARKETS - LAU­RIE WALKER

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.

Look­ing for­ward,

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.

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