Dairy: December quarter 2020

Damien Thomson

Milk prices to fall due to increased global production and demand shocks.

Farmgate milk price to fall

The farmgate milk price in Australia is forecast to average 47.9 cents per litre in 2020–21, down by 9% from high levels in 2019–20.

Increased milk production in Australia is expected to ease competition between processors for milk supply. Domestic prices will fall in 2020–21, in line with lower world prices. Global demand for dairy products has recovered following the dampening effect of COVID–19 containment measures. However, increasing global supply is expected to outweigh a better than expected recovery in demand.

The world butter price is forecast to fall by 13% to US$3,879 in 2020–21, revised upward since the September forecast. This is due to a reduction in the quantity of butter sold on the Global Dairy Trade platform by Fonterra New Zealand and a subsequent lift in prices. Whole milk powder is forecast to fall by 4% to US$3,179. The cheese price is forecast to fall by 5% to US$4,021, and skim milk powder is forecast to rise by 2% to US$2,798.

World dairy prices, 2007–08 to 2020–21
f ABARES forecast.
Sources: ABARES; Dairy Australia

Global demand recovering in key export markets

Demand for dairy products has remained relatively resilient despite the significant changes in buying habits in response to COVID–19 containment measures. Australia's exports of milk powders and cheese to key markets such as China and Japan have stayed firm. Butter exports are at their highest level since May 2019. Year-to-date exports of butter as of September are 75% higher than in 2019–20 and monthly September exports were 120% higher than in September 2019. This significant rise in export volumes has been driven by demand from Singapore, China, and Thailand as well as higher production of butter in Australia. Stronger than expected demand from China is due to a COVID–19 related strengthening of consumer preferences for food sourced from countries with strong food safety reputations and more cautious inventory management. Since August, demand has also been supported by an appreciation in the Chinese yuan.

Global production forecast to grow in 2020–21

Global milk production is forecast to increase by between 1 and 2% in 2020–21. Favourable seasonal conditions in New Zealand have supported a strong recovery with year-to-date production 3% higher as of September. These conditions are likely to result in an exceptional spring flush of pasture growth for New Zealand dairy farms and record production for 2020–21. The United States and the European Union are expected to produce about 2% more raw milk this financial year.

Australian milk production to bounce back

Total milk production in Australia is forecast to increase by 2% in 2020–21 to 9 billion litres. This is a small downward revision from the September forecast and is due to drier than average conditions in September in most dairying regions except for South Australia and Tasmania. 2020–21 production up to September was 2% higher than the same period in 2019–20. Subsequent above average rainfall in October associated with a La Niña event has supported high pasture growth in most dairy regions except Western Australia.

Improved seasonal conditions, and low hay and grain prices, have led to higher retention and restocking of cows despite the highest cull cow prices for 5 years. If realised, expected higher pregnancy rates will assist herd rebuilding. Yields increased significantly in 2018–19 due to drought-induced culling which brought yield gains forward. As a result, yields are forecast to increase by only 0.2% in 2020–21, below the average annual increase of 1.3%. Hay prices in Gippsland, Goulburn Murray Valley and south-west Victoria are below the 5-year average and well below 2019–20 levels. Hay prices are low following increased production of fodder crops and diminishing demand because of increased pasture availability. The production of cereal hay is expected to return to pre-drought levels, with a smaller proportion of this year's expected crop cut for hay. Irrigation prices in northern Victoria are forecast to fall further due to water storages being replenished.

Milk production, yield, and cows in milk and dry, 2000–01 to 2020–21
Milk production has been decreasing an average 0.8% each year. Influenced by yield increasing 1.3% each year and milking cow numbers falling 2% each year.
f ABARES forecast.
Source: ABARES; Dairy Australia

Opportunities and challenges

Dairy markets resilient through pandemic

Despite initial concerns, demand for dairy products has remained resilient despite the COVID–19 pandemic. Prices have seen a much smaller fall than seen during the Global Financial Crisis (GFC). From November 2007 to February 2009 real Australian dairy prices fell by an average of 44%. In the first 9 months of the GFC alone, prices fell by 20% compared with just 12% in the 9 months from February 2020 to October 2020. World dairy prices increased rapidly in 2006–07 due to elevated demand outpacing subdued supply growth. Higher consumption exhausted intervention stocks in the EU and US, further supporting record high prices. Demand contracted in the economic downturn and prices plummeted. The resulting imbalance between supply and demand meant that stocks also returned to pre-2006–07 levels in June 2009.

Despite significant disruptions to supply chains and foodservice channels, international dairy markets have operated effectively to redirect product to meet underlying consumer demand. While foodservice shutdowns disproportionately impacted demand for butter and cheese, milk powder markets were supported by strong demand from China and prices remained relatively steady. Supply has also remained unaffected because producers have successfully managed minor labour issues and hygiene requirements.

World dairy prices, October 2000 to October 2020

Sources: ABARES; Dairy Australia

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Agricultural commodities – December 2020 PDF 80 7.59 MB
Agricultural commodities: December quarter 2020 - Commodities - data tables XLS 12 149 KB
Agricultural commodities: December quarter 2020 - Statistics - data tables XLS 32 576 KB

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Last reviewed: 4 December 2020
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