Processors face input pressure as margins and milk supplies tighten

New research has highlighted a farmgate milk price step-up is unlikely in the coming months due to pandemic-related factors, but some industry commentators say it might not be bad news for dairy farmers.

United Dairyfarmers of Victoria president Paul Mumford said processors were facing increasing competition to retain and attract suppliers as farmers continued to leave the industry or diversify their enterprises.

"Couple that with the Dairy Code of Conduct, this has really forced the processors' hands to open up strongly at the start of the season," Mr Mumford said.

"Some processors may have extended themselves initially and they will be playing catch up."

He said one driving factor preventing a lift in milk prices was the lack of global movements, as foodservice channels evolved from pandemic-induced restrictions in a new way of life.

"Christmas should give us clearer signs to what global markets will be doing," he said.

"That's perhaps when we will see future step-ups but in saying that, processors are in a precarious position with farmers exiting the industry, so they must pass on any step ups to the sector in order to keep milk supply."

Australian Dairy Products Federation's Dairy Market Insights report for the third quarter shows a 'perfect storm' of issues relating to COVID-19, including vaccinations and global restrictions, as well as rising input costs, is placing pressure on processors and affecting already modest profit margins.

The report states tightening global milk supplies and a slow recovery from the economic effects of the pandemic, along with costly supply chain logistics, are also to blame.

However, for Victorian dairy farmers, Mr Mumford said the outlook was not so grim with processors facing a lot of pressure to secure milk supplies, an indication dairy farmers were more valuable than ever before.

"Those profitable times must continue for the dairy industry to regrow so if the processors want to continue their long-term strategy, they have to pass those step-ups on," he said.

"Farmers have got their heads down and bums up busy doing silage and hay and very favourable seasonal conditions is adding a sense of relief to farmers."

ADPF executive director Janine Waller said the remaining quarter of 2021 would pose a number of hurdles for processors due to several reasons.

"Processors are managing the costs associated with mandatory COVID vaccinations, increased safety protocols and labour shortages," Ms Waller said.

"Along with rising input costs - including the cost of raw milk and other ingredients, packaging, as well as utilities, freight and logistics - with air freight generally up three to six times since the COVID pandemic and an increase in sea freight of around 300-375 per cent."

Burra Foods chief executive Stewart Carson said it was too early to tell if farmgate milk prices would increase this financial year.

"I would love to think that we could [give step-ups] but I wouldn't rule them in or out at the moment," Mr Carson said.

"In terms of milk price, I can't see anything changing in the short term."

He said step-ups hinged on the reemergence of US and European economies as those regions exited lockdowns, and if domestic milk consumption remained at current levels or increased.

"I think it's going to depend on how markets come out of lockdowns globally and whether that demand remains high for goods," he said.

"I think prices are at a historic high, that's great for dairy farmers and their confidence for them to reinvest on farms and make some good profits."

He said processors needed to think about how they could manage their operations to maximise the value they brought in.

"If you can pivot your product mix to higher-value products, then maybe you don't need as much milk but at the end of the day you have overheads you need to recover, you need to be able to secure enough milk to pay down your investments," he said.

Fonterra Australia is expected to inform its suppliers whether a step-up in milk price will take place before the end of the month.

Fonterra Australia farm source director Matt Watt said the decision would take place as part of the processor's bi-monthly price review process.

"Like most companies, COVID has presented a number of challenges throughout the supply chain which we continue to manage," Mr Watt said.

"Our focus is on running a lean and efficient business and prioritising our milk to ensure we can fulfill our customer commitments and pay a competitive milk price."

He said a majority of the processor's site teams had been vaccinated, and those who had chosen not to be were given two options.

"We have provided the option to take accrued annual and/or long service leave or leave without pay for up to 12 weeks," he said.

"We have plans to transition these staff back to work if they choose to meet the government-mandated requirements."

Australian Consolidated Milk opted not to comment on the matter, while Saputo Australia did not respond by deadline.