The dairy industry was in a cautious recovery and could be three to six months from a peak, according to leading dairy analyst, Freshagenda director Steve Spencer.
Mr Spencer was guest speaker at the RASV annual International Dairy Week Industry Leaders’ breakfast, in Tatura.
“In the longer term, we are going to see a market which is firm in trend, we will see volatility, caused by some of those changes in weather,” Mr Spencer said.
Europe was coping very poorly with volatility while there were land and environmental constraints in New Zealand and Australia’s milk production this year was “pretty sad.
“It’s going to be down seven to 10 per cent, over the season, water supply was excessive in the spring, and we have seen weak, or no margins, which have caused people to contract.”
He predicted the farm gate milk price would end up between $5 and $5.40kg/ms.
“You will see some companies achieve at the better end of that, just because of their product mix, and you’ll see some at the bottom end of that, because of performance issues and lower milk supply.”
He said a farm gate price of six dollars would not be seen, until next year.
“Our stock prices lag actual trades done by dairy companies – the spot market is actually three to four months ahead of actual business.”
Mr Spencer said Australia was still strongly linked to global trends and finely balanced.
“The global market still drives Australia’s milk value, we are still on that roller coaster,” he said.
“Weather drives global volatility, weather impacts milk supplies, and applies to most of the moves we see in market changes.”
He said there was still limited transparency, as to who was holding what stocks, particularly in China, and oil, feed, and milk product values tracked very closely.
“It’s not cause and effect, if you have lots of oil, at cheap prices, you have impacts on the industries which rely on, or compete with, oil as product.
“The impact of low oil prices has some demand impacts, which are positive - there is more affordability and certainly people get in their four wheel drives and drive to their pizza parlours in the US
The impact of low oil prices has some demand impacts, which are positive - there is more affordability, certainly people get in their four wheel drives and drive to their pizza parlors in the US.
- Steve Spencer, Freshagenda
“That has a big impact on cheese consumption; we’ve seen it, and it’s quite large.”
An oil price of around $50-55 a barrel translated into weaker biofuel demand, which meant more grain could be fed to cattle, resulting in cheaper costs in Europe and the US.
“Despite the fact three quarters of our milk is used in dairy products, a large amount of that product stays on shore - we are now running to 70 per cent of milk staying on shore, yet we are so influenced by that world market, because we are an open market for cheese, and butter fat,” he said.
“That cheese market, from New Zealand and the US, plays a key role both in retail products, but especially in food service and industrial products, so our play is trying to sell domestically, into the cheese market here, which is very strongly influenced by world prices.”
The volatility in the market could be shown by the effect of even small movements in production.
“A one per cent change in EU milk supply, in the first half of the year, is a billion litres of milk, and impacts prices between $120 and $130 US dollars a tonne. The impact of China and Russia pulling back in 2015 was something a bit of three billion litres, in one year.
“Because New Zealand is highly exposed, it doesn’t take much milk, a two per cent change in New Zealand, is only 200 million litres, but it could move powder prices by $200 a tonne, because of that export dependence, because of how much the world market watches what New Zealand is doing.”
Mr Spencer said one of the biggest challenges for Australian processors was value capture.
The growth in cheese sales was the “real good story,” with more than 40 per cent of milk going into that product category.
But he said prices were under threat, in several areas.
“Margins in domestic markets have been eroded seriously by sacrifice, by a much tougher fast food market, seeking value, huge pizza businesses, which are just seeking cheaper products and there are players who just want to give it to them,” Mr Spencer said.
It was also getting a lot harder to capture margins, in the ingredients sector.
“We have seen an erosion in that capacity to add to commodity values, which is going to be a concern to dairy farmers.
“Volatility is still going to be the greatest limiter, we still have that big challenge of managing volatility, on farm, and its impact on confidence.”
He said with Murray Goulburn (MG) under pressure, there was much weaker milk price leverage, and the ability to put a “stiffener” in it.
“Other companies are now starting to disconnect themselves from MG being the benchmark, and look at what the true market is – we are in an interesting environment,” he said.
Processors would move away from commodities, as they sought to become “more agile and more tailored,” and the other issue to watch was the role of the Australian Competition and Consumer Commission (ACCC).
Mr Spencer said it was unlikely incoming American president Donald Trump would have a big impact on trade, with his greatest influence on the currency.
He told the breakfast the industry was facing a “cautious recovery.
“Long term demand is quite good, but it is still quite sensitive, and still quite conditional, there are more complexities out there, affecting the demand response form certain economies, and certainly consumer segments, it’s not there for the taking,” Mr Spencer said.
He said while the industry was still on a “theme park, roller coaster ride,” the world and dairy market had matured, with prices still rising between two and three per cent.
The world market was a complex landscape, with many variables, having an impact on growth and contraction.
The Chinese market would remain very tough, “it always has been.
“There’s lots of people who clip tickets between the point of entry and the retail market, so getting your product established, and knowing where its going – the lesson we have seen here is people not knowing where their product is going.”
He said value capture was one of the key areas where price improvement could occur.
“It’s a tough retail environment, with shelf space that is precious and consumers who were very sensitive to prices, there are lot of people responding to that, and that it gets passed back down the chain.”
“The consumer is still backing the cheaper product, the retailer is still putting it in front of them, and there’s a whole pile of players who contributed to that outcome, over time.”
The consumer market remained difficult, because the economy was weaker.
“The economy for lower and middle income people is weaker than what it was, they have retail opportunities, which remind them how cheap product can be,” Mr Spencer said.
Consumers were looking for cheaper value coupled “with a whole pile of people, looking to give it to them.
“It’s not just an industry story, it’s characteristic of our food market, that it is a tough environment.”
