Dairy farmers weather global storm with strong return to profitability

Share on facebook
Share on twitter
Share on linkedin
Share on whatsapp
Share on email

Its three consecutive years of growth and profits for Dairy farmers as another good season is predicted

Dairy farmers have jumped the world wide jeopardy queue and are in good shape for three profitable seasons in a row

Our local dairy industry has weathered the “severe global storm” and emerged in good shape, with the southern export sector on track to report healthy profitability for the third consecutive season.

This is the finding in Rabobank’s just-released annual Australian Dairy Seasonal Outlook – In Pursuit of History.

The agribusiness banking specialist says the industry, has been plagued by market and climatic disruptions, but is now “staring down history” with the prospect of a trifecta of profitable annual returns for dairy producers in the southern export region.

Using the Australian Dairy Plan target – at AUD$1.50 EBIT/kgMS – as the profitability measure, the report says Victorian farmer margins exceeded industry targets in 2019/20 and are expected to again in 2020/21.

And things are on track for a similarly strong result in 2021/22 in the majority of dairying regions in Australia.

Rabobank senior dairy analyst Michael Harvey says “if successful, it would be the first time since benchmarking began in 2006/07 that three consecutive years have exceeded industry targets.”

Rabobank’s senior dairy analyst Michael Harvey has placed his faith in a strong season ahead

Effectively marking the end of an extended period of low-margin volatility, this return to profitability is “remarkable”, Mr Harvey says, “given the challenges the industry has had in previous seasons and that they have just come through a pandemic.”

“The elevated outlook for the milk price is key to profitability,” he says, “but also favourable seasonal conditions and livestock trading conditions.”

Mr Harvey says while many dairying regions in Australia are enjoying favourable seasonal conditions, there are some northern areas now grappling with floods.

Favourable milk price outlook

Releasing the bank’s milk price forecast for the 2021/22 season, Mr Harvey says Rabobank’s global market forecast points to an indicative weighted average farmgate milk price in the southern export region of AUD6.65/kgMS – in line with current season expectations.

“Price signals ahead of the 2021/22 season remain favourable,” he says, “with the upside and downside risks to the global outlook more balanced then they were this time last year.

That said, while the pandemic-related uncertainty has subsided, it has certainly not disappeared.”

Mr Harvey says global freight and logistical challenges, which are complicating the outlook and market dynamics, are set to recede by mid-2021.

But Chinese import demand, which has been robust, looks set to soften in the second half of the year.

“This should see the global dairy commodity market near its peak when the 2021/22 season gets underway.

“However it should be a soft landing as global milk supply growth remains moderate, demand dynamics look set to improve and manageable inventory levels are held across supply chains,” he says.

Mr Harvey cautions that while the global outlook is favourable, there are some downside risks associated with Chinese buying behaviour.

Both in terms of potential trade disruptions and inventory levels – or if there was a renewed wave of COVID-19 infections in key markets before widespread vaccination occurs.

Trading conditions to support farmgate margins

The report says Australian dairy farmers are looking at a very favourable supply of home-grown feed in the 2021/22 season.

While improved water availability will give irrigators increased flexibility as they plan for the season ahead.

Livestock trading conditions are also expected to remain buoyant with cull cow prices forecast to continue to trade above the long-term average.

This will stabilise non-milk income – while the livestock export sector, for dairy heifers into China, is set to continue at pace for the next three years or more.

Mr Harvey says given the stable milk price outlook, feed prices may pose the key risk to farmers’ margins ahead of the new season.

While another big local winter grain crop is anticipated for season 2021-22, following the good autumn break.

There is upside risk to the local price outlook with weather-related production issues in offshore markets, robust global demand and low stocks in key regions, he says.

“The global fertiliser price spike is also a watching brief,” he says, “as the global market has been hit by a demand-led rally, exacerbated further by some short-term supply issues.

“While prices are expected to peak by mid-year, dairy farm businesses will need to budget for a lift in fertiliser spend.”

Milk supply outlook

Mr Harvey says sustained profitability of the Australian farmgate sector will flow through to milk production, with signs of recovery evident in the current season despite some hurdles.

In 2021/22, Rabobank is forecasting Australian milk production to expand by 1.3% to 8.8 billion litres, with Tasmania to lead this growth.

“That said, yield improvement will be the key driver across the sector as herd constrains remain,” he says.

“And with the cautious response to rebuilding the low national herd, it could constrain production in the short to more medium-term.”