A GLOBAL dairy price rally which has Australian exports now trading at close to 30 per cent above the average for this decade has given milk producers cause to expect stronger opening farmgate prices.
However, it is unlikely even a substantial upward shift in their returns would turn around the pattern of decreasing Australian milk supply in 2017, farm leaders and market analysts say.
Given the degree to which herds have been trimmed and the severe lack of cash flow on dairy farms, it could be two years before the production decline levels out, they say.
Rabobank’s latest Dairy Quarterly shows the rocketing of global prices, which saw whole milk powder prices increase by more than 45 per cent in the last half of 2016, has come on the back of a sharp production drop in the key dairy export regions of Australia, New Zealand and Europe.
That has coincided with stronger demand from the United States and Europe.
The National Australian Bank’s weighted Australian dairy export price indicator is up 57 per cent since July last year, showing prices are at their highest level since March 2014.
The speed of the recovery appears to have exceeded expectations.
NAB’s Head of Agribusiness for Victoria Roger Gaudion said in NZ and the European Union, the world’s two largest dairy exporters, production late last year was down 4.5 and 2.4pc respectively year-on-year.
Australia, of course, is also in the midst of a low farmgate price fuelled milk production plunge.
The latest Dairy Australia figures show national production was down 9.4pc year-on-year at the end of November, with Tasmania, South Australia and Victoria showing the largest declines.
NAB agribusiness economist Phin Ziebell said while this season had seen some step-ups, Australian farmgate prices had not risen to the extent of global prices.
“However New Zealand, which is much more export focused, has seen the forecast farmgate price reach NZ$6 per kilogram milk solids via Fonterra,” he said.
All forecasts are for Australian milk production to be well down this season, settling at a level which will be the lowest in more than 20 years.
“If we see higher farmgate prices, it is likely that production will at least partly recover, particularly with the low cost of feed at present,” Mr Ziebell said.
“However, the combination of low farmgate prices and high cull cow prices saw a thinning out of herds and these will take some time to replace.”
Farmer group president with industry advocate Dairy Connect Graham Forbes said the heavy cow cull rate courtesy of high meat prices over the past year, and the fact a big number of export heifers were sold off prior to that, would put a big dent in the turnaround in production.
“Farmers will also be looking to get money in the bank and will likely be reluctant to move ahead until they are in a positive cash flow situation,” he said.
“Even next year, any production increases will be subdued. A significant kick-up is probably two years away at least.”
Given that, and the likelihood that any significant recovery in exportable volumes out of New Zealand will not come until the latter half of 2017 - and combined with forecasts China is set to make a meaningful return to the international market - Rabobank believes the current world price rally has further upside to come.
However, senior dairy analyst Michael Harvey warns the recovery will be ‘bumpy’, as prices across the dairy complex become increasingly divergent.