Many Australian dairy farmers have been hard hit by the impacts of a deep and persistent trough in international dairy markets after late cuts to farmgate prices by some processors in the southern, export-focused states.
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According to Dairy Australia’s latest Situation and Outlook report released Wednesday, an already challenging season, due to dry conditions, has become significantly more difficult as the effects of the price reduction continue to unfold. Farmer confidence has been impacted; with flow on effects for on-farm investment and likely future growth.
“There is little doubt that managing short term pressures to achieve longer term business plans will prove a greater challenge than usual in the months ahead,” Dairy Australia senior analyst John Droppert said.
Confidence among farmers measured by the National Dairy Farmer Survey (NDFS), conducted in February and March, showed a decline in the proportion of farmers feeling positive about the future of the industry from 74% to 67%. A recent supplementary survey suggests the number of farmers feeling positive about the industry has now dropped below 50%.
Dairy Australia analysis shows farmers across Victoria, South Australia and Tasmania face income losses of more than $150,000 in a number of cases – based on the late season changes to farmgate milk prices by some processors.
Even prior to the recent price announcements, Victorian farmers in the Murray Dairy (58%) and WestVic (52%) regions as well as those in Dairy Tas (60%) were most pessimistic in terms of 2015/16 profit expectations.
Mr Droppert said underlying tension across the industry in the export-focused states had been amplified and brought to the surface by the recent price cuts.
He said Victorian dairy farmers were now more concerned about farm gate milk price than they had been for some time.
“In the survey’s 12-year history, the national trend in farmer sentiment showed a close relationship with farm gate prices. Statistical analysis suggests that prices account for more than 80% of the variability in farmer positivity about the future of the dairy industry,” he said.
“The survey highlighted confidence in the future of the industry is lower across Victoria than it has been for the past few years,” Mr Droppert said.
“Since then, late season cuts to farmgate prices have caused a significant further decline in sentiment across most regions, which follow up research is currently attempting to quantify.”
Although far from immune to such market pressures, those focused on the fresh milk market in northern and western regions of Australia are yet to be directly affected.
Mr Droppert said national milk production is expected to be down about 2% for the 2015/16 season to between 9.55 and 9.65 billion litres. The outlook for 2016/17 is heavily dependent on seasonal conditions, but a further 2-5% fall in production is anticipated.
Despite overall national milk production tracking below the levels of last season since early spring, 2015/16 milk intakes across New South Wales and Western Australia are higher in year-on-year terms. Northern states have had a better season, with coastal parts of NSW enjoying good rainfall and Queensland having avoided both flooding and cyclones.
NSW, Queensland and WA dairy farmers interviewed for the NDFS earlier in the year also indicated they are more confident of making an operating profit this year, with most farmers in these regions expecting profit levels the same if not higher than the average of the previous five years.
On the international front, dairy demand has recovered in most importing regions over the past 12 months, with the overall volume of dairy trade up nearly 6%. China has been responsible for a large proportion of this growth, with total exports to the country up 16% in volume. Exports to Southeast Asian markets have continued to grow, with strong expansion in milk powder categories, while export volumes to the Middle East and Japan have eased slightly.
However, Mr Droppert said supply continued to outpace demand, with inventories in many parts of the world building as production in Europe and the US continues to expand.
“Despite early signs, a global market turnaround remains unlikely until 2017. On a more positive note, demand in the Australian market remains stable and some relief from elevated farm input costs is likely,” he said.
Although there has been some slowing, overall trends for supermarket sales of major dairy categories remain relatively stable. Dairy spreads continue to grow strongly (up 4.2% in volume), while sales in cheese volumes increased by 1.7% for the 12 months to March 2016 and sales volumes for fresh milk are holding steady.
On farm, dry conditions, low allocations for irrigators and constrained pasture growth has coincided with a tight market for hay. Lower international grain prices have taken some time to flow through to the Australian market, while global fertiliser prices have been depressed for some time.
“A more favourable rainfall outlook suggests farmers may be better placed to take advantage of the ongoing global oversupply to grow more feed on farm, where cash flow allows it,” Mr Droppert said.