November 12, 2004

 

 

Market Overview of the Australia's Dairy Market
 

The 2004-05 season has started slowly, with a mixed pattern across the states at this early stage, according to Dairy Australia.

 

The outlook for inputs is also mixed, but with enough encouraging signs to maintain a "cautiously optimistic" view for the year ahead.

 

Slowed Milk Production

 

Milk production in most states is forecast to be slightly behind that of 2003/04, except for Victoria, which is showing quite healthy figures. Data available so far for 2004/05 suggests that Queensland and NSW production figures are substantially down and the remaining States are down marginally.

 

Dryer, Warmer Months Ahead

 

An increased risk of below-average rainfall and above-average temperatures across many parts of south-eastern Australia is seen during the December quarter, according to a number of Bureau of Meteorology weather models. All models are currently predicting that neutral conditions will return by April 2005.

 

Lower Prices May Result from Too Much Wheat

 

The outlook for feed grain prices continues to look promising for Australian dairy farmers, if not for grain farmers. Australian Wheat Board's estimated pool returns for feed grade wheat is down more than 25% to $150/kg for 2004/05 as at the end of September.

 

Increased global supplies (with good crops reported in the US, Canada, Russia and much of Europe) as well as a lack of fresh export demand are contributing factors to boosting supply and putting downward pressure on global wheat prices.

 

There are reports that this year may be the first in a five-year period when world wheat production outstrips consumption.

 

International Dairy Market

 

Prices are still buoyant as the international dairy market remains tight. Better economic conditions throughout Asia have also boosted dairy exports to the region since January.

 

Australia's dairy supplies are still behind previous levels as it recovers from the drought that has affected the country for the past two years. Although the outlook for the upcoming milk production season is showing some encouraging signs, it will be some time before stocks of dairy commodities can be rebuilt to their preferred levels.

 

Similarly, New Zealand is carrying smaller quantities of product into the latter half of 2004. As a result, New Zealand has reportedly sold forward the majority of its current season's production, which will help stabilise international prices over the next six months.

 

EU Market Remain Stable

 

A firm internal European Union (EU) dairy market is supporting world dairy prices. Given that supply from other key global suppliers is tight, as is the case in Australia and New Zealand, higher export prices out of Europe are underpinning world prices. The appreciation of the Euro against the United States (US) dollar has put upward pressure on export offers from Europe in US dollar terms. Accompanied by significant cuts to export subsidies for most dairy products, this has been the backdrop for higher export price offers out of the EU and, therefore, a stronger tone to international dairy prices. This is likely to be the case in the coming months.

 

Having now moved past its seasonal peak, some of the bigger dairy producers in the EU have had less milk available for the manufacture of dairy commodities. This has contributed to a tight balance in the domestic EU market and, therefore, firm wholesale dairy prices. However, there is a chance that domestic wholesale prices will be pushed lower by sales of butter and skim milk powder (SMP) from government intervention in the coming months. Any price falls should be kept to a minimum given that commercial and government stocks of dairy commodities in Europe, particularly butter and SMP, are lower than normal. Moreover, heavy EU export activity, which has been stronger than normal due to reduced competition, should continue until Australia and New Zealand have begun to rebuild their dairy supplies. On the whole, this will contribute to a better-balanced EU domestic market.

 

The Next Six Months

 

With the international dairy market tightly balanced for the first time in years, prices should remain strong for the rest of 2004 and early 2005. Although there is an expectation that international dairy prices could ease, as buyers resist the current high prices, the shortage of dairy products out of Australia and New Zealand should stabilise prices in the next six months.

 

Economic growth throughout Asia, largely led by improved conditions in China and Japan, should continue in the coming months. This will ensure that dairy exports to the region remain strong. The only downside to this could be a slow down in the US economic recovery, which would then have a flow-on effect to the Asian region.

 

While the internal EU dairy market stays tight, and export subsidies remain at record lows, international dairy prices should be able to consolidate on the recent strong gains. Current pressure on the EU to reduce its financial support for the agricultural sector could see further cuts to export subsidies.

 

As we move towards 2005, Australian exporters will be gearing up to take advantage of greater access for Australian dairy products into Thailand and the US under the new Free Trade Agreements with both countries.