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Australian Agricultural Commodities - Dairy

30 October 2012

Lower world dairy prices are predicted, as higher feed prices are expected to constrain growth in milk production, according to the Australian Bureau of Agricultural and Resource Economics.

Lower World Dairy Prices

Despite a forecast slowing in the growth of global milk production in 2012–13, an assumed economic slowdown in the European Union and weaker demand growth in Asia is expected to result in world dairy prices averaging lower in 2012–13.

The world price of butter is forecast to fall by 14 per cent to an average of US$3350 a tonne in 2012–13. For both skim milk powder and whole milk powder, world prices are forecast to decline by around 4 per cent and average around US$3100 a tonne and US$3280 a tonne, respectively. The world price of cheese in 2012–13 is forecast to fall by around 3 per cent to an average of US$4150 a tonne.

World Dairy Prices

f ABARES forecast.

Higher Feed Costs to Constrain Growth in Milk Production

Forecast lower farmgate milk prices and higher world feed grain prices in 2012–13 are likely to constrain growth in milk production in many major dairy producing countries over the remainder of 2012–13.

European Union

EU dairy farmers are expected to face lower farmgate milk prices and higher feed grain costs in 2012–13. As a result, growth in milk production in the European Union is expected to be limited to around 1 per cent in 2012–13. This follows increases in EU milk production of 2.6 per cent in 2010–11 and 2.3 per cent in 2011–12, with the largest gains occurring in Germany, France and Poland, which accounted for around 45 per cent of output. At this forecast growth rate, milk production is expected to remain within the EU quota which increased by a further 1 per cent for the 2012–13 marketing year (April to March). As a result of the EU’s 2009 Health Check of the Common Agricultural Policy, national milk production quotas are being increased by 1 per cent a year until 2015 when the quota system will cease and production liberalised.

EU wholesale prices for butter fell by around 23 per cent in the first six months of 2012 but remained above the EU intervention price. While intervention stocks of butter in the European Union were close to zero at June 2012, stocks of butter held in the Private Storage Aid Scheme increased by 37 per cent to 91 000 tonnes in the 12 months to June 2012. The European Union uses the Private Storage Aid Scheme, which subsidises private storage of butter, to remove surplus spring/summer butter from the domestic market and release it during winter when supplies are low. Storage is usually for the period 1 March to 15 August.

EU Milk Production, Selected Countries, Year-on-Year Change, 2011–12

United States

Milk production in the United States is forecast to fall by 1.4 per cent in 2013 to 90.2 million tonnes following a forecast rise of 2 per cent in 2012. Forecast higher grain prices and lower milk prices in the United States are expected to reduce profitability in the dairy sector, leading to increased culling of dairy cows over the remainder of 2012 and into 2013.

In June 2012 the US milk-to-feed price ratio averaged around 1.38, having declined by 26 per cent from the November 2011 level and below the ratio of 1.48 recorded in mid-2009 when the US dairy herd last started contracting.

Despite an expected reduction in dairy cow numbers, continued gains in milk yields are expected to partly offset the effects on US milk production of a smaller herd.

US Dairy

New Zealand

Assuming average seasonal conditions, New Zealand milk production is forecast to remain relatively unchanged in 2012–13 (June to May marketing year) at 19.6 million litres. While the New Zealand dairy herd is estimated to have risen by 2.3 per cent in the year ending June 2012, average milk yields are forecast to fall slightly in 2012–13. In 2011–12 New Zealand milk production expanded by 10 per cent in response to favourable seasonal conditions and growth of 3 per cent in the national dairy herd.

Driven by relatively firm import demand in emerging Asian markets, New Zealand is expected to maintain its exports of milk powders in 2012–13, following growth of 5 per cent in 2011–12.

New Zealand Dairy Production

f ABARES forecast.


Argentina, the third largest global exporter of milk powders, is forecast to increase its exports by around 30 per cent in 2012 to 260 000 tonnes. This reflects the effect of forecast strong growth in milk production in 2012 by 7 per cent to 12.8 million tonnes. Favourable seasonal conditions and a slight rise in dairy cow numbers are expected to lead to the forecast rise in production.

Developing Countries to Support Dairy Demand

While global economic growth is assumed to remain subdued in 2012–13, relatively robust economic activity in the developing countries of Asia, North Africa and Central America is expected to continue to support an increase in world dairy trade, especially milk powders.

China is expected to remain a significant importer of milk powders in 2012–13. Imports of skim milk powder are forecast to increase by nearly 40 per cent to 180 000 tonnes in 2012, double the volume of imports in 2010. Imports of whole milk powder are forecast to rise by 6 per cent in 2012 to around 340 000 tonnes. Further growth in Chinese domestic demand and continuing concerns about the safety of domestically produced dairy product are expected to drive Chinese import demand. New Zealand is expected to remain the dominant exporter of whole milk powder to China.

Imports of milk powders in South-East Asia are also forecast to rise in 2012–13, with Indonesian imports forecast to increase by 10 per cent to 240 000 tonnes.

In the past two years India has become increasingly reliant on imported dairy products; imports of skim milk powder increased by 65 per cent to 30 000 tonnes in 2011. However, with a build-up of domestic stocks of skim milk powder in the first six months of 2012, the Indian Government removed its export ban on skim milk powder in June 2012, allowing for export of up to 60 000 tonnes in the second half of 2012. The extent to which this export quota will be filled depends on India’s milk production, which was adversely affected by below average rainfall in the June to July period of the 2012 monsoon season.

Algerian imports of whole milk powder are expected to increase by 5 per cent to around 200 000 tonnes in 2012, reflecting the longer-term trend of increased consumption of dairy products.

Mexican imports of skim milk powder are forecast to increase by around 8 per cent to 210 000 tonnes in 2012, following a 60 per cent rise over the five years to 2011. Imported milk powder is rehydrated to produce liquid milk and other fresh milk products, such as yoghurt and ice cream.

The Russian Federation is a significant importer of dairy products, importing 340 000 tonnes of cheese and 116 000 tonnes of butter in 2011, equivalent to around 44 per cent and 35 per cent of its domestic consumption. With milk production in the Russian Federation remaining relatively unchanged over the past decade, growth in domestic consumption of dairy products was met through higher imports. In 2012 imports of butter by the Russian Federation are expected to be lower as a result of forecast higher milk production. Imports of cheese by the Russian Federation in 2012 are forecast to remain largely unchanged from the previous year.

Australian Milk Production to Rise

The Australian farmgate price for milk is forecast to fall by 7 per cent in 2012–13 to average around 39 cents a litre. Such a price outcome would be 9 per cent below the average milk price, in real terms, for the past three years and the lowest milk price, in real terms, since 2006–07.

Opening prices for manufacturing milk in 2012–13 were set around 9 per cent lower by dairy processors in Victoria at around 34 cents per litre. Contract milk prices are expected to be lower for many farmers in Queensland and northern New South Wales in 2012–13 as a result of lower prices for manufacturing milk and a 9 per cent volume reduction in milk processor, Lion’s, market milk contract with Dairy Farmers Milk Co-operative.

Assuming favourable seasonal conditions in the main dairying regions, national milk production is forecast to increase by 1.3 per cent in 2012–13 to 9.6 billion litres, following a 4 per cent rise in 2011–12.

The national dairy herd is estimated to have risen by around 1 per cent in 2011–12 and is forecast to rise by a further 2 per cent in 2012–13 to around 1.64 million cows. Nearly all the increase in dairy cows is expected to occur in southern New South Wales, Victoria and Tasmania where farmers are expected to increase retention of heifers and reduce culling of older cows.

Despite the prospect of ample feed grain supplies in Australia through the remainder of 2012–13, feed grain prices are expected to remain relatively high. While dairying in Australia is predominantly based on grazing pastures, use of supplementary feeds has become more significant in recent years. The cost of fodder, including feed grains, accounted for between 25 and 30 per cent of Australian dairy farm total cash costs. In northern New South Wales and Queensland fodder costs accounted for 36 per cent of dairy farm cash costs, while in Tasmania fodder accounted for 17 per cent of cash costs.

Following significant improvement in availability of irrigation water in northern Victoria and southern New South Wales, milk production increased strongly in these regions in 2011–12. As at early September 2012, water storage levels in the Murray–Darling Basin were at about 97 per cent capacity. Milk production in northern Victoria and southern New South Wales is forecast to rise in 2012–13.

Australian Exports

The total value of Australian dairy exports is forecast to decline by 2.5 per cent in 2012–13 to $2.2 billion, primarily reflecting the effect of forecast lower average dairy product prices on world markets. The assumed strong Australian dollar in the year is also expected to adversely affect export returns.

Export volumes of cheese and skim milk powder are forecast to increase by 4 per cent and 3 per cent in 2012–13 to 168 000 tonnes and 146 000 tonnes, respectively.

October 2012

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