The Australian dairy industry will continue to face considerable headwinds as it enters the 2019/20 season, however there are some green shoots on the horizon, according to Rabobank, with the prospect of record high milk prices for southern Australia.
In its latest annual seasonal outlook, Thirsty work - A Journey to Rebuild Begins, agribusiness banking specialist Rabobank highlighted the pressures mounting on Australia's dairy supply chain, despite the favourable price outlook, and the clear downside risks to farmgate margins if the season remains unfavourable.
Dairy companies are not immune to the margin squeeze, the report said, with the processing sector "confronted with record levels of surplus processing capacity" - in excess of two billion litres - in the new season.
However, Rabobank senior dairy analyst Michael Harvey said, there are signs of a bottoming in the margin cycle, with farmgate milk prices improving and more upside to come in 2019/20.
Releasing the bank's milk price forecast for the 2019/20 season, Mr Harvey said Rabobank's global market forecasts point to an indicative weighted average farmgate milk price in the Southern Export region of AUD6.40/kgMS - a mark only attained or exceeded once in the past.
Mr Harvey said the ability of dairy farm operators to capitalise on the higher farmgate milk prices would be determined by seasonal conditions and the cost of purchased feed.
"The importance of a timely autumn break this season cannot be overstated," he said.
"The volume of milksolids in the system is now at a 24-year low, and milk supply will drop further without an autumn break."
Even with good seasonal conditions, Mr Harvey conceded it would be a slow recovery in the milk pool, "with the national herd and number of dairy farm businesses now structurally smaller".
Headwinds to continue
Farmgate margins are expected to remain tight in 2019/20, the report said.
"Soil moisture profiles are below average, there are shortages of home-grown feed, and high water and purchased feed costs are leading to elevated cost of production," Mr Harvey said.
"While dairy farm operators are mitigating the margin squeeze by making adjustments to their feeding programs and reducing herd sizes, the need for a timely autumn break is critical if farmers are to grow their own home-grown feed and create a feed 'wedge'.
Otherwise we will see feed shortages quickly emerge on-farm."
Mr Harvey said the Murray Dairy region, given its reliance on irrigation water, had been hardest hit, with the region's milk pool falling by 285 million litres (year-on-year) to February 2019.
"While history has shown that, with the right settings, milk production can rebound quickly in the Murray Dairy region, the water price continues to be a key risk for the region heading in the new season," he said.
"Looking to the new season, water prices are likely to remain high given the low water storage levels in the Southern Murray Darling Basin, and this could see milk production in the Murray Dairy region fall by a further 5.1 per cent - with risks mounted to the downside."
Some green shoots
As the 2018/19 season winds down, Mr Harvey said farmgate milk prices had risen to around AUD6.00/kgMS.
"While this has been partly achieved through a late-season improvement in commodity prices, with the slowdown in global export supplies, competitive tension here locally has also played a role," he said.
Looking to the 2019/20 season, Mr Harvey said global milk supplies were expected to remain tight, particularly in the first half of 2019.
He predicted this would bring further upside to prices.
"Based on this global outlook, our forecast for farmgate milk prices in the Southern Export region to average 6.40/kgMS is based on an AUD/USD exchange rate of 0.71," he said.
"However should the currency drop back to USD0.68 - as we currently anticipate - prices could lift by more than AUD0.20/kgMS."
Can milk production bounce back?
In the season-to-date, Mr Harvey said the Australian dairy supply chain had already lost a significant volume of milk.
Further milk losses are expected, as culling activity remains elevated and many dairy farm operators are drying their herds off early given the shortage of feed.
In the 2018/19 season, Mr Harvey said the national milk pool was expected to finish the season at 8.6 billion litres - down eight per cent (year-on-year).
"The Murray Dairy region has been responsible for around 70 per cent of that fall in milk supply," he said.
"Yet some of the industry's most cost-efficient plants reside in that region. And this is creating a real conundrum for the industry."
Looking to 2019/20, Mr Harvey said national milk production was forecast to fall by a further 0.8 per cent - assuming an 'average' autumn.
"As such, there are clear risks to the outlook for milk production...as without a timely autumn break there could be another wave of farm exits and ongoing herd reduction," he said.
On the other hand, Mr Harvey said, if the 2019/20 season shapes up to be supportive of good on-farm profitability, some dairy regions were well placed to rebound.
"However, even with good seasonal conditions, it will be a slow recovery for the nation's milk pool given the national herd and number of dairy farm businesses are now structurally smaller."
The story Dairy headwinds continue despite positive price signals first appeared on Farm Online.