Rabobank forecasts $8.50-$9/kg new season milk price

The bank's Australian Dairy Seasonal Outlook: Looking for a Firm Landing Zone released on Wednesday says strong domestic dairy market returns, a weak Australian dollar and competition between processors will buffer the impact of a weaker global market.

"At worst, this represents a 10 per cent decrease from 2022/23 prices and a farmgate milk price that is well above the medium-term average for southern Australia since the introduction of the industry's Dairy Code of Conduct in January 2020," Rabobank senior dairy analyst Michael Harvey said.

"Another season of historically-elevated milk prices will support farmgate margins."

The bank is also forecasting an easing of some input cost pressures - with both feed grain and fertiliser prices having fallen from last year's extreme levels.

READ MORE: Australian milk production falls

The report says Australian milk production will fall below six billion litres in 2022/23, for the first time since 1990.

The battle to retain existing suppliers and attract new suppliers will keep opening prices elevated.

Mr Harvey said pressure for milk supply in the market would see processors offer opening prices as high as they could manage.

Despite the market uncertainty, there was unlikely to be a return to an approach of a conservative opening price, followed by step ups during the season as returns were confirmed, he said.

The forecast comes as green shoots continue to appear in global market prices.

Tuesday night's Global Dairy Trade (GDT) auction saw prices lift for the second consecutive time.

The GDT price index was up 2.5pc, led by big gains in whole milk powder (up 5pc) and cheddar (up 4.5pc).

Westpac senior agri-economist Nathan Penny said the result was step in the right direction for its positive outlook for next season, "albeit it is still very early days".

"We anticipate that as the Chinese economy gains momentum over the course of the year, following its reopening, we expect improved Chinese demand will lift global dairy prices," he said.

"And very subdued global milk supply will provide additional support for prices."

The Rabobank report points to increasing growth in milk production in export regions and "largely absent" Chinese buyers as key factors that have kept downward pressure on global commodity prices.

This has wiped 30-40pc off the export returns for Australia's product mix, which are now at or below the average of the past five years.

"However, at some stage the cycle will turn and global commodity prices will begin to increase, but this will depend on when China returns as a meaningful buyer in export markets," Mr Harvey said.

Despite the uncertainty about global markets, even the worst case forecasts still had prices at historically reasonable levels.

Rabobank expects the high returns in the domestic market to continue - after a reset last year.

"The domestic market is experiencing a structural increase in consumer prices across the dairy aisle led by drinking milk and cheese, in particular," Mr Harvey said

"This is driven by dairy processors passing through record-high farmgate prices and other input costs."

READ MORE: Dairy can't shrink to success: Australian Dairy Conference

Mr Harvey said these prices would be "sticky" for at least one or two seasons.

But he warned if the Australian market was out of whack with global markets for an extended period, importers, particularly New Zealand, could look to place products here at a cheaper price.

Mr Harvey said lower prices for purchased feed and fertiliser would provide welcome relief for farmers.

"Even if some dairy farmers see an easing in minimum price offers, this should come with cost relief," he said.

Grain prices that were sitting at $500 a tonne were now $400/t while fertiliser prices were back below pre-Ukraine war levels.

"Locally, grain supplies are high, after several bumper winter crops, with the prospect of another decent winter crop this year meaning feed supply will be adequate for buyers and will help to dampen feed supply risks," he said.

"Looking forward, Rabobank expects the underlying fundamentals in the fertiliser market to lead a period of price stability, which will assist Australian dairy farmers as they prepare their nutrient management programs for the year ahead."

But there will be input pressure in some other areas including higher interest rates and "labour is a major headache".

Reduced non-milk income could also hit some dairy businesses.

The price of cull cows was down and the export heifer market was less certain as China came to the tail end of a big expansion program in its dairy industry.

The Rabobank Outlook says consecutive seasons of farm sector profitability and industry stability are providing dairy producers with an opportunity to rethink their longer-term investment strategies.

"There has been a notable pick up in investment to increase labour efficiency and improve capacity," Mr Harvey said.

This included interest in robotic milking, but also things like housing on farm for labour.

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