Dairy: March quarter 2021
Farmgate milk price to rise with stronger demand and slower supply growth
The Australian average farmgate milk price is forecast to increase by 2% to 48.8 cents per litre in 2021–22. Imports of dairy products are returning to pre-pandemic levels for Australia's major trading partners. Global supply growth is forecast to decline slightly in 2020–21 following strong growth in 2019–20. Competition among domestic milk processors for supply will continue to ease as production recovers from historically low levels, with international demand playing a bigger role in determining farmgate prices.
An upward revision of prices from the Agricultural commodities: December quarter 2020 reflects stronger than expected international demand for dairy products. Butter, cheese and whole milk powder prices are forecast to remain relatively unchanged in 2020–21. The skim milk powder price is expected to rise by 10% due to a combination of a strong rebound in demand from China and lower than expected spring milk production in New Zealand.
Medium-term scenarios for forecasts
Medium-term forecasts from 2022–23 to 2025–26 for Australian dairy are based on the average outcomes of 4 possible seasonal climate scenarios. A very dry season in the wheat-sheep zone is likely to occur in one of the 4 years. Each scenario places this dry season in a different year, with other years assumed to receive rainfall of about deciles 3 to 4. For a more detailed explanation see the Agricultural overview.
The range of outcomes forecast to result from each scenario are then averaged. Unless otherwise indicated, these average forecasts – or their ranges – are discussed in this note.
Upside and downside scenarios are also considered. The upside scenario combines a faster economic recovery from the COVID-19 pandemic with another high rainfall year in 2021–22. A very dry year is still assumed in 2022–23. Because it follows an assumed wetter year, negative effects on production are reduced. The downside scenario combines a slower than expected economic recovery with very dry years in 2021–22 and 2025–26.
Over the medium-term, the farmgate milk price is projected to remain relatively steady at around 49.0 cents per litre in 2025–26. It is expected to range between 48.9 and 51.3 cents per litre under the forecast scenarios considered in this outlook.
Global dairy prices are expected to converge and remain relatively flat over the medium term, following a significant period of diversion between butter and skim milk prices over the 5 years to 2020–21. Assuming no significant shocks to the dairy market, global milk supply is forecast to grow at the same rate as global demand, as it has done for the past 20 years. Dairy markets are sensitive to shocks, so even small changes in either supply or demand can create price volatility. Under the assumptions of the downside and upside scenarios, butter prices are expected to range from US$3,900 to US$4,100 per tonne, cheese from US$3,700 to US$3,900 per tonne, skim milk powder from US$3,200 to US$3,300 per tonne and whole milk powder from US$3,400 to US$3,600 per tonne.
Demand to strengthen due to global economic recovery
Global dairy markets were resilient throughout 2020 despite the disruption caused by the COVID-19 pandemic. Export volumes to China dipped slightly in February and March 2020 at the peak of COVID-19 control measures. The relative containment of the virus in China from April led to an easing of control measures and higher economic activity. Export volumes subsequently improved to exceed pre-COVID-19 monthly volumes in the last 4 months of 2020. China is one of the few economies that reported economic growth in 2020, up by an assumed 2.1%. Most economies are expected to recover in 2021 after significant contractions in 2020. An assumed growth in the Chinese economy of 8.1% in 2021 is expected to support strong import demand for Australian dairy products (see Economic overview).
China is Australia's largest export market for dairy products, accounting for an average of 30% of total dairy exports by value over the 5 years to 2019–20. Between July and December 2020, the volume of Australia's dairy exports to China was 31% higher year-on-year, including a 49% increase in exports of skim milk powder. Although butter exports only make up a very small proportion of these exports, between July and December 2020 they were 265% higher than in the same period in 2019. This was predominantly due to a reduction in the supply of butter from New Zealand, China's largest source of butter and all other dairy products.
International milk supply growth steady in 2020–21
Milk supply growth from major exporting regions is expected to remain relatively unchanged at 1.5% in 2020–21, but with variations across regions. The production of milk in the United States between July and December 2020 was 2.6% higher compared with the same period in 2019. This has largely been due to government support programs, such as the Farmers to Families Food Box Program. This stimulus, which is expected to continue until the United States recovers from the effects of the COVID-19 pandemic, is likely to result in further strong growth in US milk supply.
New Zealand has had lower than expected milk production during the spring peak season. Below average rainfall, particularly in the North Island, restricted spring pasture growth and reduced milk supply in October, November and December.
International milk production is expected to continue to grow by 1% to 2% each year over the projection period. Supply growth is expected via increasing yields through improvements in technology, feeding, management and genetics. Growth in US milk supply is expected to slow down once the current level of government stimulus is wound back.
Domestic milk production to improve slightly from historic lows
Australian milk production is forecast to increase by 1% in 2020–21. Milking cow numbers are forecast to rise by 2.7% but average yield is expected to fall after 3 years of strong growth. The expected yield decline is the result of forecast restocking, which involves retaining older cows and a higher proportion of young heifers as replacements. The heifers will yield less in their first few milking years. Wetter than average conditions in 2020 led to increased pasture production, lower grain and hay prices and increased on-farm feed reserves.
Falling water allocation prices and a relatively high farmgate milk price are forecast to improve dairy farm profitability in 2021. This is expected to improve industry confidence and allow dairy farmers to continue replenishing depleted herds. In 2021–22 cow numbers are expected to increase by 2%, with the rate of rebuilding expected to be limited by structural change and high live export numbers. Yields are still expected to be about 1% lower, reflecting a return to drier seasonal conditions. On balance, milk production in 2021–22 is forecast to rise by 1%.
Over the outlook period to 2025–26, milk production in Australia is projected to decline to 8.6 billion litres. With a return to drier seasonal conditions from 2021–22, herd numbers are projected to decline to 1.3 million head. Improved farm management is expected to support an increase in average yields rising to over 6,500 litres per cow. Herd numbers are influenced by competing demands, such as the live export of heifers, structural change in the industry and an increasingly drier and hotter climate. The forecast for herd numbers to 2025–26 depends on the timing of the assumed very dry year. This projection considers the average of 4 assumption-based combinations of possible seasonal conditions.
Uncertain environment influences milk production
Continued favourable seasonal conditions to support faster herd rebuilding
Under an upside scenario, a very wet year in 2021–22 would support faster herd rebuilding and higher average yields, leading to significantly higher production. The prompt control of COVID-19 and subsequent economic recovery assumed for this scenario would lead to an earlier return in food service demand in Australia's export markets. Many of Australia's major export markets are emerging and developing economies in South-East Asia that are assumed to have strong economic recoveries in 2021. The faster economic recovery assumed in the upside scenario would be expected to underpin stronger export demand in these markets and place upward pressure on Australian dairy prices. An appreciation in the Australian dollar would marginally reduce export competitiveness but not enough to offset the positive effect on prices.
A very dry year is assumed for 2022–23, which would cause modest destocking, a fall in average yields and hence lower milk supply. The rate of destocking is expected to be buffered by accumulated on-farm feed reserves and low input prices from the 2 previous wet years. From 2023–24 to 2025–26, assumed dry seasonal conditions would result in a longer-term downward trend of production continuing.
Prices resilient through slower global economic recovery
The downside scenario involves a very dry year in 2021–22, which would stall herd rebuilding and reduce cow numbers by 2.5%. This decline would be slightly stronger than the long-term downward trend of 2.3% a year between 2000–01 and 2018–19. The expected fall would still be buffered by accumulated on-farm feed reserves and low grain prices. However, the assumed prolonged COVID-19 outbreak and slower global economic recovery would delay the return of food service demand in Australia's export markets. Global demand for Australian dairy products would be supported by emerging and developing economies in South-East Asia that are expected to maintain relatively strong growth compared with other regions, but at lower rates than the medium-term forecast. Demand is expected to be similar to the medium-term forecast, leaving prices relatively unchanged.
Milk production is projected to trend lower over the medium term. The return of drier seasonal conditions for the 3 years to 2024–25 is assumed to deplete feed reserves and cow numbers. A very dry year is assumed for 2025–26, which would cause production to fall more significantly and put upward pressure on farmgate milk prices because processors have to compete for limited milk supply. Based on these scenarios, Australian milk production is expected to range between 8.3 and 9 billion litres over the outlook period.
Opportunities and challenges
Live exports as an alternative income stream versus herd rebuilding
Live exports of Australian dairy heifers were at an all-time high during the drought of 2018–19 and 2019–20. Dairy farmers hit by drought and high feed prices used live exports as a lucrative avenue to reduce herd numbers. This was a useful risk management option and is compatible with long-term structural adjustment to an industry with fewer, much larger and more globally competitive farms. Australia's dairy farming businesses will continue to weigh the profitability of producing and exporting heifers against the profitability of increasing herd size to produce milk. Favourable seasonal conditions and intentions to rebuild herds are expected to reduce live export numbers by 23% in 2020–21. High import demand for dairy heifers in China suggests that live exports will continue to be an attractive option over the outlook period.
Favourable irrigation conditions in the short-term
Irrigated dairy farms reduced their water entitlement holdings during the wet years (2010 to 2012) that followed the drought years of the late 2000’s. As a result, their reliance on temporary water markets has increased, and most dairy farms tend to be net buyers of water. Dairy farms are also able to use purchased fodder in place of irrigated pastures when water prices are high, but greater reliance on fodder could lead to higher input costs and reduced profitability.
Water allocation prices are expected to remain low for the remainder of 2020–21 due to recharged storages and high rainfall. Inter-valley trade limits are expected to remain binding, which will lead to price gaps, particularly between regions above and below the Barmah Choke. Dairy farms in regions above the choke, where water supply is expected to be greater, are benefiting from lower prices this year. Unused water balances, which can be carried forward into the next year, are currently quite high. These are likely to further boost water supply next year, contributing to downward pressure on prices (but this remains dependant on seasonal conditions).
However, water prices are expected to rise over the projection period to 2025–26 due to higher competing demand from horticultural farms, and because of a hotter and drier outlook. If high water prices eventuate, the profitability of irrigated dairy farms is likely to decline.
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