Walking the tightrope: Rabobank's findings on Australian dairy

According to a report by Rabobank, Australians are seeing a significant price increase across dairy products, with milk prices rising at the fastest rate since records began.

In its Global Dairy Quarterly Q4 2022 – Walking the Tightrope into 2023 report, Rabobank saw emerging signs of dairy demand weakness as willingness and ability to spend on discretionary items softened.

“For Australia’s dairy producers, farmgate margins remain positive and are supported by the record milk prices,” said report co-author Michael Harvey, senior analyst for Dairy and Consumer Foods at Rabobank.

“Average farmgate milk prices across Australia’s Southern Export regions range between $9.50 and $10.00/kgMS. The high milk prices have mostly offset major cost headwinds — fertiliser, fuel and feed — for dairy farmers; while labour availability remains a major challenge for dairy farming businesses.”

Rabobank is not expecting further major lifts in milk prices as the season draws to a close, according to Harvey.

Production

With the impact of production constraints, flooding and excessive rainfall becoming visible in peak production months — October and November — Rabobank is revising its milk production forecast downward for 2022/23. The report said that, as of October, Australian milk production is down 6.6% for the season to date, with decreases across all states and regions.

Harvey said that across much of Eastern Australia, a wet summer is in play, driven by La Ninã in the Pacific Ocean and a negative Indian Ocean Dipole (IOD). Many dairy production regions on Australia’s east coast have been dealing with excessive rainfall and flooding.

“There has been significant feed and fodder losses as a result of the rain and flooding — it is one of the key challenges faced by impacted farms. Some supply chain/logistics issues have been reported as a result of the wet weather — including some dumping of milk — but not to the point of having a material impact on milk processing,” he said.

Rabobank is expecting a large winter wheat crop, which will give dairy farmers access to supplementary feed in the months ahead.

Exports

Despite falling milk supply, Australia’s dairy exports continue to grow. This is supported by global freight market improvements and normalising consumer behaviour, post COVID, across export markets in Asia.

Harvey said Australia’s total dairy export volumes were 4% higher in the first two months of the 2022/23 season. This, however, only saw strong liquid milk exports, with a slow start for cheese and whey.

Global outlook

The report found that weaker global dairy markets remain a key theme as 2022 comes to a close, though there is a clear divergence between regions and dairy products.

It found that in the US and Europe, cheese and butter prices have performed the best, while Oceania Global Dairy Trade (GDT) powder and butter prices have been declining. Oceania skim milk powder (SMP) prices dropped 14% on average from Q3 2022 end prices and have dropped 34% since the peak in early Q2.

The second half of 2022 tested the affordability of dairy for importing countries.

“China remains conspicuously quiet on the buying front compared to last year as it digests local inventories and imported stock,” the report said. “The US dollar lifted by six per cent on a broad dollar index basis at its peak during Q3, before eroding much of the gains by mid-November. Yet, weaker US dollar-priced dairy commodities have incentivised tier two and tier three buyers to return to the market, taking the opportunity to refill inventory pipelines as tourism returns and hospitality recovers.”

Driven by Europe and US exports, Rabobank expects that milk supply will “gain modest momentum” in 2023 from most regions apart from Australia, where weather continues to disrupt production.

Milk production from the big seven dairy exporting regions — New Zealand, Brazil, Argentina, Uruguay, EU, US and Australia — is anticipated to grow by 1% annually, which will be enough to offset the 0.8% decrease in 2022 and remain on par with 2021 production rates.

Meanwhile, consumption growth is becoming challenging in some export regions. In the US, dairy demand has remained defiant to cost-of-living challenges, while Europe has felt the impact. Southeast Asia has seen some resilience; however, this may be illustrated by smaller sales volumes and downstream margin pressure.

The report said all eyes remain fixed on China.

“Buying patterns will remain subdued across 1H 2023 if rolling lockdowns remain a feature, milk production continues to be set on growth mode and consumption wavers as challenging economic conditions take hold. China is likely to re-enter markets in Q2 with a bigger presence from Q3 2023 onward.”

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