Dairy: September quarter 2020
Farmgate milk price to fall
The farmgate milk price in Australia is forecast to average 47.9 cents per litre in 2020–21, down 9% from high levels in 2019–20. This is above the 5-year average of 46.9 cents per litre.
Demand for dairy products is expected to weaken in the short term, reflecting the effects of COVID-19 control measures on the economies of Australia's major dairy export markets. Growth in global dairy production will also continue to place downward pressure on global prices, which will flow through to the Australian farmgate milk price. Increased Australian milk production in 2020–21 is forecast to ease some of the competition for milk supply between domestic processors.
Global demand dampened by economic disruptions
The COVID-19 pandemic continues to affect Australia's major trading partners. The economic disruption caused by containment measures has reduced consumer spending and lowered consumer confidence in many economies (see Economic overview). Rising unemployment and low consumer confidence is likely to have made consumers more cautious about discretionary spending. This has lowered demand for luxury dairy products.
The butter price continues to fall from a high of US$6,111 per tonne in 2017–18, and is forecast to average US$3,746 per tonne in 2020–21. Prices of cheese (US$3,850 per tonne), whole milk powder (US$2,867 per tonne) and skim milk powder (US$2,521 per tonne) are expected to remain under pressure and continue to gradually fall. A more rapid than expected appreciation in the value of the Australian dollar has also added downward pressure to domestic farmgate prices. This has reduced the likelihood of step-ups to the minimum price in 2020–21.
US cheese volatility will not affect Australia's exports
US cheese prices were extremely volatile between March and August 2020. This was caused initially by food service and school shutdowns. The price fell significantly and US cheese became the cheapest in the world, leading to rapid growth in exports. Then on 17 April 2020, the US Department of Agriculture announced US$3 billion in funding to purchase fresh produce, dairy and meat for food banks – beginning with US$100 million a month for dairy products. In July, these factors, combined with an easing of COVID-19 restrictions, caused domestic consumption of cheese to rise between 20 and 30% above the previous year's level and the price of 40-pound block cheese to rise to over US$2.80 per pound. US exports lost their competitiveness and decreased substantially. With an increase in COVID-19 cases, restrictions tightened and the price fell to pre-pandemic levels in August 2020.
Australia's cheese exports have not been affected by the volatility in the American market. Japan is Australia's single-largest export market for cheese. Japan is expected to continue purchasing about 6,000 tonnes a month, accounting for 48% of Australia's cheese exports. Subsequent waves of COVID-19 in Japan and related falls in GDP pose potential risks to future cheese demand, but demand for Australian cheese exports remains robust.
Demand from China high but expected to soften
Australian exports of whole milk powder and skim milk powder experienced a slight dip in February 2020 due to a lack of passenger planes available to transport freight, particularly to China. However, milk powder exports to China have remained reasonably stable since that time, as have exports of cheese and butter to other markets. High export levels in June across all products have been supported by increased milk production in Australia.
At the first Global Dairy Trade auction in July 2020, Chinese demand was high for milk powder imports. Food service and retail demand in China has temporarily contracted, but demand has been supported by businesses increasing their buffer stocks against possible supply-chain disruption. September to November is the peak production period for New Zealand. This means that China's demand for milk powders from other sources, including Australia, is likely to soften, and that the price for Australia's milk powder exports is likely to fall.
Global production to increase steadily
World milk production is forecast to increase by 1 to 2% in 2020–21. New Zealand production recovered from dry conditions to finish 2019–20 only slightly down. Major dairy regions in New Zealand's north-west have a high chance of 'normal' or 'above normal' rainfall from August to October, and milk production is expected to be higher in 2020–21. Milk production in the European Union has remained high and is expected to rise slightly in 2020–21. Production growth in the United States has averaged 1.7% since 2011–12 and this is expected to continue into 2020–21.
Australian production improving with seasonal conditions
Australian milk production is forecast to increase by 2.5% in 2020–21 to 9.0 billion litres. This is an upward revision from Agricultural commodities: June quarter 2020 and is a result of a sustained improvement in seasonal conditions and a positive September to November rainfall outlook. The expected increase in milking yields after drought-induced culling of less productive cows has already been achieved. Of the forecast increase in production in 2020–21, 88% is expected to come from higher cow numbers and 12% from gradual improvements in yields. Lower hay, grain and water allocation prices will support herd rebuilding and the recovery of the Australian milk pool.
Sources: ABARES; Australian Bureau of Statistics; Dairy Australia
Opportunities and challenges
Non-milk value-add opportunities
Dairy farms are a complex system of inputs and outputs, and many diverse inputs are used to produce dairy cows and milk. The cost-price squeeze of the recent drought has provided an incentive to revisit options for using secondary products. For example, rearing bobby calves is costly, but some farms have increased the value of their bobby calves through crossbreeding with meat breeds. Wagyu-cross calves in particular, are worth much more than standard bobby calves of the same age. However, this requires careful breeding management to secure replacement females for future years and to produce calves for dairy meat.
Potential risks in milk powder market
High milk production and food service shutdowns in China have led to large volumes of milk being dried into powders. Inventories of whole milk powder in China are growing at a time when consumer demand is uncertain, and consumers could easily substitute away from high-quality imports towards cheaper domestic products. However, the preference for high-quality imported whole milk and skim milk powders has remained strong due to ongoing concerns over domestic food safety and regulation. China's domestic stockpiles are unlikely to be consumed in the short term. This will constrain rises in whole milk powder prices into the medium term.
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