Aus­tralian milk pro­duc­tion shows mod­est growth

Dairy News Australia - - MARKETS - JOHN DROPPERT • John Droppert is se­nior in­dus­try an­a­lyst with Dairy Aus­tralia.

DAIRY AUS­TRALIA’S latest Sit­u­a­tion and Out­look re­port was re­leased on Oc­to­ber 11, dur­ing what’s shap­ing up as a pe­riod of re­cov­ery for the Aus­tralian dairy in­dus­try amidst a noisy cor­po­rate and pol­icy en­vi­ron­ment. Milk pro­duc­tion is be­gin­ning to show mod­est growth as farm­ers make the most of slightly higher far­m­gate prices, rea­son­able weather, and gen­er­ally con­tained in­put costs. None of these fac­tors are uni­ver­sally bet­ter across all pro­duc­tion re­gions, but the over­all pic­ture is one of in­cre­men­tal im­prove­ment, tem­pered by risk aver­sion and fi­nan­cial lim­i­ta­tions that will take longer to over­come. The broader mar­ket re­mains sup­port­ive of a grad­ual re­cov­ery. In­ter­na­tion­ally, dairy com­mod­ity prices re­flect a rel­a­tively bal­anced sup­ply/ de­mand equilib­rium, chang­ing lit­tle over the past few months as busi­ness trick­les along. But­ter prices re­main near record lev­els, whilst skim milk pow­der (SMP) val­ues con­tinue to be sup­pressed by the large volumes held in Euro­pean pub­lic stor­age. Most other prod­ucts are some­where closer to ‘av­er­age’, and the com­bi­na­tion of rea­son­able de­mand and re-emer­gent sup­ply sug­gest they are likely to re­main so. In­ter­na­tional mar­ket bal­ance has been main­tained by slow growth in milk pro­duc­tion across a num­ber of key ex­porters. In par­tic­u­lar, Euro­pean pro­duc­tion re­mained be­low ex­pec­ta­tions due to sub-op­ti­mal weather through the northern spring and sum­mer, and the post-down­turn re­cov­ery in New Zealand has only re­cently be­gun to gather pace. A mar­ket-driven ac­cel­er­a­tion in out­put is now un­der­way in both cases, and the US — where pro­duc­tion never re­ally slowed — is once again eye­ing in­ter­na­tional mar­kets as the so­lu­tion to a grow­ing do­mes­tic sur­plus. Dairy de­mand has shown wel­come growth and re­mains sup­port­ive over­all, with to­tal volumes for the year to the end of June up by 4.1 per cent, whilst value grew 7.1 per cent in US dol­lar terms as com­mod­ity prices re­cov­ered through the pe­riod. Whilst the rate of buy­ing has been ad­e­quate to sup­port prices in the cur­rent en­vi­ron­ment, a key con­cern amongst ex­porters re­mains the abil­ity of the mar­ket to soak up ad­di­tional volumes of milk as they ap­pear. This sea­son’s Ocea­nia spring peak is an ob­ject of par­tic­u­larly keen in­ter­est, co­in­cid­ing with out of sea­son sup­ply pres­sure from the northern hemi­sphere. The Aus­tralian do­mes­tic mar­ket has de­liv­ered some sur­prises, with to­tal su­per­mar­ket milk sales volumes grow­ing by 2.5 per cent over the 12 months to Septem­ber, out­paced by a 4.6 per cent boost in value on ro­bust sales of branded milk. Such growth in the sales vol­ume and value of the fresh milk cat­e­gory in a well-es­tab­lished and ma­ture mar­ket like Aus­tralia is un­usual, given the on­go­ing de­cline in sales seen in com­pa­ra­ble mar­kets such as the United States and many Euro­pean coun­tries. Flavoured milk sales con­tinue to grow strongly, whilst dairy spreads vol­ume growth mod­er­ated, in part due to re­tail price in­creases re­flect­ing ear­lier moves in com­mod­ity mar­kets. Based on the com­bi­na­tion of con­tained in­put costs and a mod­est im­prove­ment in far­m­gate milk prices, mod­est growth in milk vol- umes is ex­pected in south­ern re­gions. In do­mes­tic-fo­cused re­gions, un­cer­tainty and pes­simism sur­round­ing the di­rec­tion of far­m­gate milk prices re­mains a fea­ture, and re­cent weather con­di­tions have gen­er­ated ex­tra chal­lenges. On­go­ing fi­nan­cial and con­fi­dence im­pacts from pre­vi­ous years, to­gether with a con­strained herd and the po­ten­tial for weather and in­put cost set­backs are likely damp­en­ers to growth. Dairy Aus­tralia’s fore­cast for 2017–18 milk pro­duc­tion re­mains a growth range of be­tween 2 and 3 per cent on the 2016–17 to­tal of 9.01 bil­lion litres. This im­plies a fore­cast to­tal of around 9.2 bil­lion litres for 2017–18. Whilst ru­mours con­tinue to swirl in the cor­po­rate sphere, most farm­ers will be get­ting on with the task of shoring up their busi­nesses fol­low­ing a fi­nan­cially and emo­tion­ally drain­ing pe­riod. Though not with­out chal­lenges, both the in­ter­na­tional and the do­mes­tic mar­ket are de­liv­er­ing op­por­tu­ni­ties at the top line, and in­put prices have kept some of the pres­sure off costs. In the cur­rent sea­son, the im­por­tance of the in­vest­ment head­lines to farm prof­itabil­ity and ul­ti­mately milk pro­duc­tion, will most likely be out­weighed by the many lower pro­file idio­syn­cra­sies cur­rently at play in all of these mar­kets.

Global dairy com­mod­ity prices

Flavoured milk sales con­tinue to grow strongly in Aus­tralia.

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