Rabobank predicting farmgate milk price to drop by more than 10 per cent

That's the view of the latest report from agribusiness banking specialist Rabobank.

In its recently-released Australian Dairy Seasonal Outlook 2024, 'Walking a Tightrope' Rabobank said "all signs indicate that, with diligent budgeting and planning, the average Australian dairy farm business will post a fifth consecutive season of profitability in 2024/25."

Rabobank expects minimum farm gate milk prices across the south to range between $8.00-8.20/kilogram milk solids (kg/MS) for the season ahead, down approximately 11pc from current pricing.

It follows the release of the latest Dairy Australia Situation and Outlook report.

It also comes as Fonterra Australia a review into its local business, with the potential for divestment.

Report author, RaboResearch senior dairy analyst Michael Harvey said Australian dairy companies found themselves "walking a tightrope", needing to send strong price signals to milk suppliers, while navigating a backdrop of softer market returns.

"In a market short of milk - and with an ambition to build momentum around the current milk supply recovery in Australia - dairy companies need to present sustainable milk price signals to suppliers in order to remain competitive," Mr Harvey said.

"However, Australia's milk supply recovery is ahead of schedule - with some excess volumes being channelled toward bulk ingredients and commodities, which are under performing in local and export markets - meaning parts of the product mix are loss-making.

"The domestic market is delivering better returns for dairy following a period of hyperinflation across the grocery aisle, but consumers choosing to trade down as a result of cost-of-living pressures is negatively impacting the domestic retail channels."

From now, Rabobank says, any upside to minimum farmgate milk prices will likely come from further global dairy commodity market recovery.

"And this is not Rabobank's base expectation for the next 12 months given the sluggish global market fundamentals," Mr Harvey said.

"In fact, global market uncertainties warrant a more conservative approach to minimum pricing."

"The dairy commodity market (in US dollar terms) has rallied from the 2023 lows that took a toll on farmg ate milk prices in export regions outside of Australia.

But, while commodity returns were showing positive trends, the recovery in global commodity markets has cooled ahead of Australia's new production season."

Rabobank forecasts Australian milk production will finish the 2023/24 season 2.9 per cent higher with momentum expected to continue in 2024/25 to deliver expected growth of 1.5pc.

Brad Couch, Brucknell, said it had been "hit and miss" in the south-west.

"Some farms have had a good start, others are waiting for another 15 millimetres of rain to get things kick-started and get some urea on," Mr Couch said.

He milks 350 Jersey-Friesian crossbreds on his family farm, near Timboon.

"We are expecting a price drop, how that looks is still yet to be seen - our group (South West Dairy Limited) are pretty well set up for a price drop," he said.

"We are all seasonal and we have a strong focus on controlling our costs, where we can, we utilise home-grown pasture."

But he said SWDL members were genereally still "fairly optimistic and confident".

"There are a lot of moving parts but the main factor is as an industry we haven't focused on profitability - there has been too much of a focus on production.

"There has been a big push, particularly from processors, to produce milk all year around and that comes at a cost."

Bernice Lumsden, Leitchville, prices were front of mind, with Rabo forecasting a "pretty major drop" in the milk price.

The family runs a 700 head herd.

"For a business like ours, it could mean a $500,000 income deficit, so that's pretty hard to recoup," she said.

"It is a tightrope, as they say, but I think there is not too much elasticity in the milk price - with the cost of inputs, it's going to be a tricky year."

On the upside, water was "relatively available".

"The weather outlook, who knows at this point? But at least there is water around.

"We've got the usual pressures of staff, fuel costs, electricity, fertiliser prices have softened a little bit, but are still up there.

"Its a bit of a double whammy, milk prices down, inputs up."

She said the Australian price was not "out of step" with the rest of the world and there was no "wall of milk".

"China doesn't have a wall of milk, there is not a wall of milk in the EU, and in fact, if anything, those countries are contracting," she said.,

She said she would not be rewarding processors "with more milk, for less pay".

"Cropping is looking fairly attractive, at the moment," she said.

"I won't make milk cheaper, when I have a commodity there is demand for - it might be that we become opportunistic in the cropping/fodder market, rather than dumping out milk at a smaller margin over feed cost.

"There are other opportunities for things to do with the land, it's not easy to pivot, but you can massage your business slightly."