Australian dairy sector far from recovery

Higher interest rates and soft export prospects mean Australia's milk industry is unlikely to recover quickly from a slump in production which is proving even worse than had been thought.

USDA officials in Canberra have slashed by 370,000 tonnes, to 9.20 million tonnes, their forecast for Australia's milk production in the year ending in June.

The revision, which the USDA bureau said was "somewhat unexpected" given lower feed prices and improved pasture, reflected estimates that farmers had made deeper cuts than had been thought to herds.

According to the bureau, recent years have seen record high feed and irrigation water prices increase production costs, while declining world dairy prices and a stronger Australian dollar have eroded returns. Dairy cow numbers are expected to fall by 76,000 to 1.60 million over the year.

Meanwhile, productivity had been hit by "unseasonably dry conditions" earlier in the season which "slashed production to levels well below previous expectations".

Also, output from Australia, which has historically vied with Argentina for third place in the world league of whole milk powder exporters, looks set to be held back by sluggish demand from key foreign buyers, such as Japan, as well as domestic hurdles.

Farmers attempting to rebuild herds face near-record prices for dairy cattle, while interest rate rises have constrained many dairy producers in their response to improved conditions, the briefing said.

Australia's central bank this month raised its main interest rate to 4.5%. Rates were 3% in October.

Heading into 2010-11, cow numbers are expected to increase slowly and milk yields improve slightly, the report said, noting that the industry would work through its recovery process over the longer term.