Bad weather, farm exits see milk production continue to decline

Production dropped 4.1pc for the 12 months to June 30, 2022, compared with the 2020-21 season.

Dairy Australia reported 406,019 million litres of milk was produced in June 2021, compared with 369, 518m litres for this year.

In western Victoria, financial year production dropped by 4.1pc, from 5,650,790 in 2020-2021 to 5,419,976 litres in 2021-22.

Northern Victoria's 2.5pc decline was the smallest in the state.

Nationally, milk production also fell by 9.2pc when compared with June 2021; it was also down 3.9pc by the end of the financial year.

Dairy Australia Industry Insights and Analysis manager John Droppert said the late season drop was larger than expected.

"But we knew milk flows were down on last year and expected them to remain so," Mr Droppert said.

A combination of staffing issues, input prices (especially where fertiliser use was cut back in March and April due to increased costs) wet weather and flooding in NSW and Queensland all had an impact.

"The abrupt transition to cold weather in early June didn't help either," Mr Droppert said.

"The primary impact for processors is what we saw in June with milk pricing - tight supply means stiffer competition, and the scramble to secure supply is explained by what they were seeing happening with intakes at the same time.

"The upshot is that Australia will have very little (if any) excess product in the short term, which will help in the current falling market: there won't be as much pressure to drop prices to move volumes."

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He said DA had heard anecdotally milk flows had started to recover, in year-on-year terms, into August.

Rabobank Dairy and Consumer Foods senior analyst Michael Harvey said there had been quite a "sizeable drop" in production for the season.

"It was accelerating as we came to the end of the season," Mr Harvey said.

'You are seeing ongoing consolidation, so you have this tail of farmers who have been exiting dairy into other enterprises, particularly beef and livestock, as they are providing a good return and there are not the labor shortage issues.

"It would be starting to tail off now, but it is still playing into the numbers."

Flooding saw double digit production declines in NSW.

Mr Harvey said he didn't think lower production would lead to higher farmgate prices.

"What has been happening with milk supply has already come through in the milk price signals farmers have got," he said.

"If you go back to the start of this season there was a mad rush around milk prices,{that came] on the back of a declining milk pool and a strategy around the milk companies trying to retain the supply they already had."

That resulted in record high prices and timing, in terms of milk price announcements, he said.

"The falling milk supply has already come through, in terms of providing benefits to farmers, because there has been that mad rush to send really strong, really early price signals at the start of this season."

The challenge was that record high prices were coming at a cost to the profitability of the industry.

"The profit at farmgate is quite favorable - downstream processors are feeling the pinch as there are cost headwinds in other parts of their business, whether its labour availability, packaging costs, distribution, the supply chain and everything else."

Higher costs would be passed on to consumers and food service, to restore margins, he said.

"Our message would be we probably don't think milk prices can go higher, this season, given where the market settings are at," he said

"But the dwindling milk pool is going to keep competition pretty fierce.

"It's going to mean farmers are going to get fair value for their milk."

Mr Harvey said production could start to turn around within the next 12 months.

"There are really strong price signals, there is plenty of irrigation water, there is plenty of feed around - fast forward 12 months you are going to be cycling at a 10 per cent production decline, year on year.

"We think there is going to be stabilisation and possibly recovery, but its going to be very modest."