Dairy analysts have agreed while commodity prices have staged a significant recovery, low farm gate prices would continue to squeeze margins.
Dairy Australia’s latest Situation and Outlook report has shown global supply and demand were slowly balancing out.
Dairy Australia senior analyst John Droppert said Australia’s milk production was forecast to drop five per cent, over 2016/17, as a result of low milk prices, tight margins, the ongoing impacts of flooding and excessive rain.
“It’s definitely better than this time last year, but it’s a question of how much and how soon the recovery will occur,” Mr Droppert said. “It’s obvious things are still pretty tough on farm.
“The pain that many farmers in southeast Australia experienced last season, and the ongoing challenges around margins will prove significant obstacles for some processors in securing supply in the short term.
“Overall milk production will remain constrained in southeast states as farmers defer investment and focus on management to breakeven points, and conserving equity where margins are negative.”
Victorian production was expected to drop about 9.5pc, in August, on top of a 10.3pc fall in July.
The northern region was expected to be most affected, with production down 16pc in August.
But he said lower input costs, including fertiliser, feed and water, would be of benefit to the industry.
XCheque dairy analyst Jon Hauser agreed good spring rain - and the availability of lower cost water in irrigation areas - created a favourable outlook for feed production.
“That will create opportunity for direct elevation of milk production, as well as the carryover of lower cost fodder for autumn and winter production,” Dr Hauser said.
“Heifer and milker stocking decisions will, however, have already been made on farm.
“In many cases the decision has been made on the need for immediate cash flow, rather than future production and profitability.”
Mr Droppert said commodity markets were in a much better place than this time last year, but downside risks remained.
“The perennial challenge for both processors and farmers is to secure adequate milk flows to capitalise on market opportunities, while protecting against damaging price shocks,” Mr Droppert said.
“This will remain top of mind as the industry finds its feet in 2016/17.”
He said there had been an increase in Chinese demand, but other markets were more sluggish.
“Total global dairy import volumes by Greater China increased nearly 20pc over the 12 months to June 2016,” Mr Droppert said.
“Australia-China export volumes grew by 30pc, from around 136,000 tonnes to 178,000 tonnes, while their USD value increased by over 65% year-on-year, from US$350 million in 2014/15 to US$579 million in 2015/16.”
But he said while it appeared milk production in China was slowing, those figures had to be “taken with a grain of salt”, as there was no single source of data.
It could also be based on trader behaviour, as stocks – accumulated in 2014 – came down.
“That’s the real caution, it’s trader behaviour – as they see prices uptick, they all pile in and then it all fizzles out.”
Processors would be wary of passing on any returns, as no-one wanted to see a return to last season’s step downs. “It’s not in the bank yet,” Mr Droppert said.
Global dairy exports to Japan fell by one per cent, in volume over the course of 2015/16.
Overall demand in Southeast Asia also slowed, with 2015/16 import volumes falling one pc year-on-year, whilst the USD value fell 27pc. Australian export volumes to the region grew by 2pc.
Australia’s dairy export volumes to the Middle East fell by 17 pc from 71,000 tonnes in 2014/15 to around 59,000 tonnes in 2015/16.
Another leading dairy analyst, Fresh Agenda’s Steve Spencer said a global market recovery was underway, but there were still supply side risks.
“Milk prices are rising across the board in Europe, just as more than 50,000 farmers take up the Commission’s incentive to cut milk output for the three-month period,” Mr Spencer said.
“The upshot of these conflicting signals will be crucial to the pricing and availability of product out of Europe in the coming months, and just how quickly the market may chew through the massive SMP intervention stockpile in 2017.”
Mr Spencer said with milk output continuing to slow down in NZ and the EU, along with key South American exporting countries, US-based dairy suppliers were becoming increasingly competitive on the global market.
Mr Droppert said the Australian domestic market remained characteristically steady.
But he said consumers had responded to calls to by more branded milk, after price stepdowns earlier this year.
The split between house brand and branded milk was now 54pc to 46pc.
The outlook also reported full cream now accounted for 61pc of fresh white milk, up from 54 per cent three years ago.
“Total milk sales volumes have grown moderately, increasing by 1.5% to 1,358 million litres over the 12 months to September,” he said.
“Fresh, white full cream milk sales have increased their share, up 7% in terms of volume, and 9% by value.” Consumers had responded to calls to support dairy farmers, by buying branded milk, as well as seeking natural, less processed foods.
He said there was a trend back to acknowledging dairy fats were not harmful.
