The dairy industry should enjoy a sustained recovery, over the next six to nine months, according to a leading Victorian analyst.
But Xcheque managing director Dr Jon Hauser said while there had been an improvement in the milk price in Australia and New Zealand, relative to the US and Europe, there was still some way to go.
“What is not clear, is what benefit will accrue in milk prices (in 2016/17) and what will happen, beyond that period,” Dr Hauser said.
“To say the industry is back is too strong a statement, although the drivers of commodity prices - and therefore milk prices - are all set correctly and prices are rising,” Dr Hauser said.
“The market is definitely going to strengthen, but it still has got a way to go, in terms of its value.”
The price drop was largely due to supply and demand: “the price didn’t start rising, until the tap was turned off. The milk price goes up, the milk price goes down - and all the major exporters of dairy commodities dance together in this cycle.”
Dr Hauser said European farmers would have to curb their post-quota enthusiasm for production growth.
“They need to need to learn to self-regulate their milk production if they want to avoid the boom bust cycle that we have seen in the past two years.”
Compared with the EU, American dairy farmers were showing signs they had an understanding of the supply/demand cycle.
“It does appear that US famers are picking up on market signals and slowing down supply before the situation becomes critical.
“That is an important first step in self-regulation of production and achievement of a more acceptable milk price range.”
Dr Hauser said since 2008 there had been a clear and relatively stable relationship between the value of commodity markets and the price of milk.
“You can see that in Australia and you can see that in New Zealand, the two countries follow each other, quite closely.”
But he said it was difficult to tell where further improvement in the milk price could come from, especially for farmers with seasonal milk production and a consequent exposure to international dairy commodity prices.
“This group encompasses most New Zealand farmers and also a high proportion of farmers in Southeast Australia.
“Murray Goulburn have changed their strategy quite dramatically, over the last three to four years – at the moment, you would say there hasn’t been significant benefit to farmers – or that there is benefit, just not as much as MG has been saying.”
Dr Hauser said the strategy had created two groups of suppliers, one with a relatively flat milk production price curve and the other being “traditional” farmers, such as those in Gippsland, the south west and Tasmania.
“The second group of traditional farmers are not getting the benefit from that strategy – and the interesting thing is whether MG is able to convert the value they are getting into increasing the value of milk, in relationship to commodity markets.
“It looks like they are making marginal gains, but last year they went backwards.”
Dr Hauser said the key driver behind the farmgate milk price reduction was an increase in costs.
“The costs went up by 60-70c kg/ms, which caused them to reduce the price,” he said.
He said there was no breakdown as to where the cost variances had occurred.
“It’s a bit of a mystery box, really.”
“The interesting result will be how does their business develop, over the next couple of years.”
