Strong Platform For Dairy Growth

AUSTRALIA - Positive economic indicators and widespread favourable seasonal conditions would appear to give many parts of the Australian dairy industry a platform for growth, according to the 2011 Dairy Australia Situation and Outlook report released last week.

23 May 2011

3 minute read

Oceania

Operating conditions for most in the Australian dairy industry have improved dramatically in 2010/11 and national milk production has been maintained with a marginal gain of less than one per cent taking the total to 9.1 billion litres. However, varying price signals and demand outlooks highlight significant regional differences.

“South eastern Australian dairy farmers are in a good position, but this has not yet translated into strong growth intentions”, Dairy Australia managing director Ian Halliday said.

“A more sustained period of reliable returns for farmers is required before we can expect to see significant investment in herd growth or infrastructure.”

The Australian market has represented a safe haven for the dairy industry in recent years, in contrast to the more volatile international market. However, with increasing pressure on margins, manufacturers will be carefully assessing the relative returns and opportunities for growth represented by the domestic and export markets.

“While the initial cuts to private label retail dairy product margins have been absorbed by the major retailers, the dairy industry has raised concerns about the long term impact on the profitability of the fresh milk supply chain if the discounting is continued,” Mr Halliday said.

The international dairy market has enjoyed a strong price recovery in 2010/11 with the combination of good demand from the developing markets led by China and Russia and the general weakness of the US currency. This delivered higher farmgate prices to Australian farmers. For exporters however, the benefits of higher commodity prices have been offset by the strong Australian dollar.

“Farmgate milk prices for 2011/12 are expected to open higher than last year, with the full year price in line with the current season, which is good news for southeast coast farmers,” Mr Halliday said. “The Australian dollar is a risk to this price outlook should it continue to strengthen ahead of the currencies of our competitors and customers.”

The annual report analysed a range of factors impacting the dairy industry, and pointed to high international commodity prices, the global economic recovery and robust growth in Asia as cause for optimism.

“Overall, the industry’s position has improved with steady demand growth in key markets such as China and South East Asia”, Mr Halliday said.

Despite initial concerns about the effect of the Japanese disasters and Middle East unrest on dairy consumption, the demand for imported product in those regions appears to be increasing.

“The international market now appears to be consolidating at relatively high levels, with far less price volatility than has been experienced in the past 3 years,” Mr Halliday said.

However, some economic uncertainty around the US economic recovery and the sovereign debt issues facing some European Union member countries remains. Economic growth and dairy trade will instead be focused on developing countries.

The report highlights limited substitution of lower priced vegetable oils and proteins, despite the sustained higher dairy products prices. Rising oil prices have contributed to increased volatility in vegetable oil markets, decreasing the attractiveness of these alternatives and consumers have shown a strong preference and willingness to pay for premium products using dairy-based ingredients.

At the farm level, the larger south eastern industry ― based in Victoria, the Riverina, South Australia and Tasmania ― is enjoying arguably the best conditions for a decade, with a stable international market, competition for suppliers and good seasonal conditions. While the northern and western industry are recovering from extreme weather conditions and dealing with uncertainty created by ongoing plant closures and private label milk discounting.

Looking further ahead, Mr Halliday believes policy settings around continued access to water and the impact of any carbon pricing schemes will be important drivers of the Australian industry’s future competitiveness and growth prospects.

The ability of the industry to attract, develop and retain people will also be important drivers of the industry’s future sustainability and development,” he said.