Dairy: September quarter 2019

Andrew Duver

Farmgate milk price increased to 51 cents per litre.

Competition for milk supports farmgate prices

The 2019–20 farmgate milk price forecast is 51 cents per litre. This is a 3 cents per litre upwards revision from Agricultural commodities: June quarter. The 2019–20 season opened with comparatively high Australian farmgate milk prices compared with recent years.

A forecast fall in global prices is expected to put pressure on processor margins. This is mitigated by export price premiums for some commodities and higher skim milk powder prices. A lower exchange rate also makes Australian dairy products more competitive in export and domestic markets. Competition among major processors for fresh milk provides an incentive to offer dairy farmers higher prices.

Australian dairy imports, 2017–18 to 2018–19
Cheese imports in 2018-19 fell by 15% to 94kt.
Source: Australian Bureau of Statistics

Growth in demand to slow

Demand for dairy products is forecast to grow at a slower rate in 2019–20. An assumed slowdown in global economic growth is expected to put downward pressure on demand. This will be partially offset by the continuing shift in consumer preferences toward dairy products in emerging Asian economies.

The European Commission reported in June that public stocks of skim milk powder are empty. Lower global stocks of manufactured dairy products will support demand from buyers seeking to maintain inventory.

Global production growth expected

Growth in the global production of dairy products is expected to continue in 2019–20. Combined milk production across New Zealand, the European Union and the United States is forecast to grow around 1% in 2019–20.

New Zealand milk production grew around 2% in 2018–19 and high opening milk prices in 2019–20 are encouraging production to increase further. Recent falls in the New Zealand dollar against the United States dollar have improved the competitiveness of New Zealand's export-oriented industry.

In the European Union, dry conditions in some regions will limit production growth and constrain pasture productivity. Uncertainty surrounds production in the United States as seasonal conditions and global trade issues increase volatility of domestic prices.

Australian milk production is forecast to fall in 2019–20, reflecting less favourable seasonal conditions. The latest seasonal outlook from the Bureau of Meteorology suggests dry conditions will continue during spring 2019. This will put continued pressure on production in some regions. The forecast for south-western Victoria, Gippsland, Tasmania and Western Australian dairy-producing regions is more optimistic.

The exportable surplus of manufactured dairy products in Australia will be constrained by the shrinking domestic fresh milk pool and a reduction in imports.

Mixed outlook for world prices

Butter, cheese and whole milk powder prices are forecast to average lower in 2019–20 than in 2018–19 on the back of higher global production and weakening global demand.

The butter price continues to fall from a high in 2017–18. The forecast price for 2019–20 has been revised down since the Agricultural commodities: June quarter 2019 to US$4,450 per tonne.

The forecast price for skim milk powder in 2019–20 has been lifted since the Agricultural commodities: June quarter 2019 and continues to climb from low levels. Strong import demand from Asia is providing support for prices.

World dairy prices, 2007–08 to 2019–20
f ABARES forecast. s ABARES estimate.
Sources: ABARES; Dairy Australia

Opportunities and challenges

Australian drought conditions

Australia's milk production in 2018–19 was around 5.7% lower than in 2017–18. Dry conditions drove up the price of water and fodder in 2018–19 and constrained profitability in some dairy-producing regions. The fall in production was less than estimated in Agricultural commodities: June quarter 2019.

The latest ABARES water market outlook showed that surface water allocation prices in the southern Murray–Darling Basin are likely to remain elevated under the dry conditions that have been forecast.

Feed prices remain high but have declined in recent months. A high opening milk price will encourage milk production in businesses with a lower reliance on purchasing inputs such as feed and water. If seasonal conditions improve, farms with sufficient feed will look to restock. A movement of dairy cattle from the northern irrigation regions to southern regions could limit a fall in milk production.

End of season (April to June 2019) cow-culling rates were 31% higher year‑on‑year in Victoria. High domestic beef prices are forecast to continue into 2019–20. Farms facing cash-flow pressures are expected to continue to sell cows to reduce feed costs and support cash flow.

Year-on-year change and total milk production, 2000–01 to 2019–20
Production is forecast to fall in 2019-20 by 1.3%.
f ABARES forecast. s ABARES estimate.
Sources: ABARES; Australian Bureau of Statistics; Dairy Australia

Import demand from China could increase rapidly

The outbreak of African swine fever (ASF) in China is expected to contribute to an improvement in beef prices. Continued demand for protein in China could increase the Chinese domestic beef price and lead to culling of their dairy herd. This would reduce milk production in China and could increase demand for dairy imports.

China–US trade tensions could create short-term opportunities for Australian dairy products in China. In the medium term, there is a risk that the United States will establish a presence in alternative markets, disrupting the diversification efforts of Australian exporters.


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Last reviewed:
17 Sep 2019