Dairy: December quarter 2018

​​​Andrew Cameron

The Australian milk price is forecast to rise in 2018–19 by 1% to 47 cents per litre. 

Domestic dairy herd and milk production forecast to fall

Poor seasonal conditions and rising input costs are forecast to lead to the Australian dairy herd shrinking and milk production falling in 2018–19. As a result of the drought in eastern Australia, prices for dairy feed inputs have increased considerably. Dairy Australia reports that hay and feed grain prices are well above average levels in most dairy regions.

For many producers, the increased costs will not be offset by higher forecast milk prices. Cow culling has increased and is likely to remain high as producers look to turn off less productive animals. The Australian herd is forecast to fall by 3% and milk production by 4% in 2018–19. If realised, this would be the lowest level of production in over 20 years.

The Australian farmgate milk price is forecast to rise slightly to 47 cents a litre in 2018–19. An assumed fall in the Australian dollar and strong competition among processors for milk supply are expected to support milk prices.

Production forecast to rise for competing exporters

Milk production in New Zealand and the United States is forecast to be higher in 2018–19, placing downward pressure on dairy commodity prices. New Zealand has experienced a better start to the 2018–19 season than last year. US milk production has grown virtually uninterrupted for over 5 years due to productivity improvements and is expected to continue to do so. Global prices for cheese, whole milk powder and butter are forecast to fall as a result.

Income growth to support dairy demand

Global dairy product demand is expected to be supported by broad-based economic growth. In 2018–19 lower milk production in China is likely as the dairy farm sector continues to consolidate. This will contribute to increased import demand.

Australian dairy herd and milk production, 1994–95 to 2018–19f
The number of dairy cattle in Australia is forecast to fall to 2.6 million head in 2018–19. The amount of milk produced is forecast to fall to 8.9 billion litres, the lowest level since 1995–96.

f ABARES forecast. s ABARES estimate.

Opportunities and challenges

EU intervention stocks limit upside for skim milk powder prices

The skim milk powder stockpile in the European Union stood at an estimated 160,000 tonnes in early December. Monthly sales volumes indicate that demand for the discounted powder has been variable. Sales are now occurring twice monthly, but it is likely to take at least another 12 months to eliminate the stockpile. A faster than expected reduction in the stockpile would place greater short-term downward pressure on skim milk powder prices.

EU skim milk powder intervention stockpile estimate, 2018
The combined cost of fodder and water charges as a share of milk income for Australian dairy farms has been steadily increasing since 1990. In drought years, the share can increase sharply. For example, in 2003 and 2007, the share exceeded 40%.

Source: EU Milk Market Observatory

Industry intensification increases drought risk exposure

The Australian dairy industry has increased its use of material inputs like fodder. This increases the risk of farmers being exposed to large input price rises in times of drought, when these inputs are in high demand. Farms that do not have sufficient buffer stocks will have their profitability severely impacted because these costs can account for a large share of revenue. In the short term this will result in a fall in Australian milk production in 2018–19. Prices for cull cows are also forecast to fall as US beef production expands, putting further pressure on Australian dairy farm incomes.

Fodder and water charges as share of milk receipts, Australia, 1990 to 2017
Sales since January have reduced the stockpile level by over 200,000 tonnes, to an estimated 160,000 tonnes at the beginning of December. The amount sold in each tender has been highly variable. The sales price of stockpiled skim milk powder has been discounted by around 20%.

Source: ABARES AGSURF Database

Download

DocumentPagesFile size
Dairy outlook – December 2018 PDF3809 KB
Forecast data – December 2018 XLS1265 KB
Historical data – December 2018 XLS​451.4 MB

If you have difficulty accessing these files, please visit web accessibility.

​​
Last reviewed:
11 Dec 2018