Worst yet to come for dairy as milk prices fall in first quarter

Worst yet to come for dairy as milk prices fall in first quarter

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FUTURE PREDICTION: The new Rabobank report flags uncertain times for dairy.

FUTURE PREDICTION: The new Rabobank report flags uncertain times for dairy.

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A new report flags a potential shortfall in the farm gate milk price.

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Australia's domestic dairy sector remains buoyant thanks to recent record-high milk prices and export returns, however, a new report urges caution as COVID-19 diminishes demand and prices globally.

Rabobank's Australian Dairy Seasonal Outlook A Global Storm is Coming predicts "the worst is yet to come" as the industry comes to terms with the global pandemic.

Rabobank senior dairy analyst Michael Harvey said the "upward trajectory" milk prices enjoyed in late 2019 had since stalled as prices fell in the first quarter of 2020.

He said a cautious approach to southern export milk prices was necessary considering the global trend.

"Around the world, in major dairy markets, demand will inevitably fall as unemployment rises and discretionary spending slows," Mr Harvey said.

As foodservice and hospitality industries wind back, the report predicts a global demand slowdown is imminent and the surge in consumer demand as supermarket shelves are stripped bare will be short-lived.

Meanwhile, the spring flush in the northern hemisphere, where milk production had gradually gained pace, is expected to add pressure to supply and pricing.

"We forecast modest growth through the spring flush but at a time when dairy demand is expected to be considerably weakened, this could have significant consequences on global pricing," Mr Harvey said.

Under the worst-case scenario, demand could significantly weaken, inventories could build up across supply chains, and dairy commodity prices, particularly in Europe, could fall 10 to 15 per cent from April 2020 levels.

Under this scenario, the report predicts the commodity farm gate milk price for 2020/21 across the southern export region may sit at 5.20/kgMS.

Australian dollar may bring some relief

Dairy farmers may take comfort in the low Australian dollar boosting export returns and domestic market premiums flowing through to help bolster farm gate returns.

"The Australian dollar is likely to be lower than it was during the global financial crisis .... helping support farm gate returns in 2020/21 and proving key to preserving farm gate milk prices above break even levels," Mr Harvey said.

He said Rabobank's base case scenario for an annualised southern export milk price in 2020/21 stood at AUD 5.70/kgMS.

"For these farm businesses, it will take longer to reflect global price movements, while a branded consumer market will also provide a safely net during the 2020/21 season," Mr Harvey said.

The current in-home consumption surge has also supported a short-term boost, with retail price increases working their way through the value chain and reflected in farm gate milk prices.

At the farm gate, better seasonal conditions in 2020/21 may relieve feed costs, while elevated cull cow prices as a buoyant live export sector would also provide opportunity to support business margins.

The Australian milk pool is expected to close out the 2019/20 season at 8.4 billion litres, a 4.9 per cent drop on the previous year, however, the report predicted strong growth in 2020/21, pending seasonal conditions, with a 4.3 per cent lift in national milk production forecast.

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