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April 11, 2017
 
Rabobank foresees resurgence of profitability for Australia's dairy sector
 
 
Australia's dairy sector is expected to see a much-needed return to profitability in the 2017/18 season, following a challenging 18 months, a Rabobank report states.
 
According to the report "The Australian Dairy Sector - Climbing off the canvas", "extenuating circumstances" have hindered recovery in global dairy markets from flowing through the value chain. Still, such obstacles should diminish in 2017/18, paving the way for higher full-year milk prices for Australia's dairy exporting regions.
 
Based on Rabobank's latest commodity price forecasts as outlined in its upcoming Global Dairy Quarterly, and assuming a currency rate of US$0.75, the global market is anticipated to deliver an average commodity milk return equivalent to AUD5.30/kgMS (US$4) in 2017/18.
 
While the prospects of global commodity prices remaining elevated throughout next season are sound, market observers need to be watchful for possible risks affecting the commodity and currency outlook.
 
"With this recovery being largely supply driven, recent price trends highlight how improvements in milk production across the export 'engine' can alter finely-balanced fundamentals," says report author and Rabobank senior dairy analyst Michael Harvey.
 
Providing global commodity markets remain at, or near, current levels and domestic market returns improve with greater efficiencies in the processing sector, Harvey explains. In addition, the Australian export sector might be able to obtain a market premium.
 
"Historically, the Australian export sector has captured a premium beyond commodity returns," Harvey says. "With the right conditions, this could see full-year milk prices reach AUD5.70/kgMS (US$4.30)."
 
For dairy farmers selling to the domestic fresh milk market, Harvey expects premiums to stay elevated compared to export regions.
 
"However, while the outlook suggests the price floor for fresh milk will be lifted in time - given the reduction in availability of milk for transport and improving export milk prices - it is not all smooth sailing for those in the fresh milk regions," Harvey cautions. "The biggest risk facing dairy farmers in these regions hinges around security of their supply contract and the timing of contract renewal, which was evident recently with the supply imbalance in Western Australia."
 
According to the Rabobank report, it is not only higher milk prices that will maximise the prospects of the much-needed boost to Australian dairy farmer profitability, but also desirable trading conditions.
 

"While 2017/18 is shaping up to deliver a profitable price, farmer margins will also benefit from lower input cost pressures," Harvey points out. "After last year's favourable spring, many farmers around the country are armed with a plentiful supply of home-grown feed and silage and, combined with a large local wheat crop, this has reduced the volume of feed they need to purchase and the price paid for any they do buy."

Cattle markets will also continue to support incomes and cashflow in 2017/18 but farmers will need to budget for lower prices.
 
Looking forward, a timely and positive autumn break will be critical in setting up the next season, with growing potential for an El Nino event to develop later in the year, Harvey says.
 

The report further states that while short-term confidence in Australia's dairy industry is being restored, the ability for the sector to fully recover will take time, as dairy farmers will need a sustained period of profitability to rebuild equity and position themselves for major investments.

Despite a promising sign of profitability, "2017/18 is unlikely to deliver 'super profits' for Australia's dairy farmers," Harvey comments. "With farmers taking on more debt and working capital to get through the past two tough seasons, they are now faced with a choice between reducing debt and rebuilding equity or investing for growth."
 
While better global prices have started to flow through to higher revenues and improved profits for the processing sector, the biggest challenge will be the reduced milk intake.
 
"We expect Australian milk production to increase by 4.5% in 2017/18 - up from its lowest level in two decades," Harvey states. However the competition to maintain and grow milk supply will prove challenging.
 
"It could prove to be the biggest test for Australia's largest dairy processor, Murray Goulburn, as to whether it can stem the loss of milk supply, resize its manufacturing operations and reposition itself as the market leader in setting farmgate milk prices," Harvey says.
 

- Rabobank

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