Losing Milk Is Risky Business for Australia
The Australian dairy industry is gazing down the barrel of one of the largest annual falls in milk production. This season began with three consecutive months of double-digit falls and is likely to finish anywhere between 7-10% down. The last such fall was seen in 2002/03, when one of the country’s worst droughts in history was the catalyst for a contraction in supply of 8%.
The collapse in milk production is not surprising given the challenges being endured on-farm. Some producers are exiting the industry and those who remain are having to make strategic decisions in order to bring breakeven prices down. To make matters worse, seasonal conditions present challenges for a second consecutive season. Some regions are dealing with the seasonal conditions and fluctuation in milk prices better than others—the steepest declines are currently seen across the southern export regions.
Implications beyond the farmgate
So what are the implications of a potential collapse in milk supply beyond the farmgate? For processors, losing a large volume of milk supply is risky business. A loss of milk can have a material impact on business profitability because reduced efficiency and higher overhead costs mean that processing plants are running at less-than-optimal rates. The financial impact will depend on how much milk is lost, where from, and on the manufacturing footprint.
As well-publicised, the active recruiting of milk supply across Southern Australia, leaves processor Murray Goulburn the most exposed. For a processor that size, a short term loss of milk supply can, and will be, managed. However, losing a large quantity of milk in a rising price environment is not ideal. Furthermore, a more permanent loss of milk supply may require a review and resize of its manufacturing footprint (existing and planned) to meet supply realities.
Australian self-sufficiency at risk
Given the scope of the reduction likely this season, concerns are being raised at the ability of Australia to remain self-sufficient in milk and dairy. Entering this season, Australia was a net exporter of dairy and sold around 3.5 billion litres of milk (in liquid milk equivalents) into the global market.
Australia is actively engaged in global trade and is an open economy. Australia imports in excess 0f 1 billion litres (in liquid milk equivalent) of dairy products. A large proportion of this is cheese and butter for use across retail, industrial and foodservice. Australia also imports ingredients that are in short supply locally. Examples include whey and lactose products for nutritional powders.
Facing a drop in supply will mean a reduction in exports simply because our domestic market mostly delivers higher and more stable returns and supply is tied to longer-term contracts. This means Australia is likely to import more cheese, butter and ingredients in the coming period to help cover the loss of milk and to potentially help fill orders.
So what can we expect moving forward? Firstly, better seasonal conditions over the remainder of the season might help to start to stem the loss of milk. There are positive signs in global markets, seeing some improvement in farmgate returns. Rabobank sees potential in the current price recovery, which will, in time, flow back to the farmgate. While it might be too late to have a more material impact on margins this season, 2017/18 is shaping up better and should see a return to profitability on-farm.
This would go a long way towards stopping the bleeding of milk. But of course, stopping the bleeding is one thing. Rebuilding milk supply is another challenge and will require restoring confidence and appetite for investment at the farmgate—history shows this is tough in Australia.
There is a risk that Australia’s milk pool will remain stagnant or shrink further. Collective action is required to re-ignite profitable milk supply growth. Without an increased milk supply, Australia will become less export focused, reducing its commitment to fast-growing global dairy markets.
Figure 1. Annual % change in Australian national milk production
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Where to go from here
Michael HarveySenior Analyst - Dairy Read more