australian dairy annual review - rural bank...the dairy industry. in 2017/18 australia is expected...
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Australian Dairy Annual Review2018
2
This report is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subject(s).The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Rural Bank Limited, ABN 74 083 938416 AFSL / Australian Credit Licence 238042 makes no representation as to or accepts any responsibility for the accuracy or completeness of information contained in this report. Any opinions, estimates and projections in this report do not necessarily reflect the opinions of Rural Bank and are subject to change without notice. Rural Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth therein, changes or subsequently becomes inaccurate. This report is provided for informational purposes only. The information contained in this report does not take into account your personal circumstances and should not be relied upon without consulting your legal, financial, tax or other appropriate professional.© Copyright Rural Bank Ltd ABN 74 083 938 416 and Bendigo and Adelaide Bank Ltd ABN 11 068 049 178 (RBL19146) (08/18)
About the research
The Australian Dairy Annual Review includes data and outlooks on production in Australia and globally, seasonal conditions, prices, demand and the financial performance of Australian farms.
Significant effort has been taken to secure the most recent data available.
About Ag Answers
Ag Answers is a specialist insights division of Rural Bank. Recognising that good information is the key to making good business decisions, Ag Answers provides research and analysis into commodities, farmland values, farm business performance and topical agricultural issues to enable farmers to make informed decisions.
About Rural Bank
Rural Bank has been a wholly-owned subsidiary of Bendigo and Adelaide Bank Limited since 2010. It is the only Australian-owned and operated dedicated agribusiness bank in the country, providing exceptional financial services, knowledge and leadership for Australian farmers to grow.
32
The outlook for the Australian dairy industry is largely positive however seasonal conditions over spring and summer will determine farm profitability for 2018/19. Dry conditions in New South Wales, Queensland, Northern Victoria and South Australia are currently impacting feed availability and reducing the cereal crop forecast for 2018/19. South West Victoria and Gippsland have had adequate rainfall to date however the next three months are expected to be dry. The outlook for rain is more positive in Tasmania and Western Australia over the next three months.
Australian milk supply was approximately 9.3 billion litres in 2017/18, 3.3 per cent higher than the low of 2016/17. Positive farm gate milk price growth suggests that the current level of supply is still short relative to the potential demand. This is fuelling competition for milk particularly in the southern states which is good news for dairy farmers. Farm gate milk price will be higher in 2018/19 than recent seasons and is likely to average $6.10/kg MS. The key drivers of the increase in milk price are increasing demand for Australian dairy products, low milk supply relative to demand, improving global dairy prices and strong competition from processors.
Farm profitability is strongly linked to farm gate milk price. A positive move in farm gate milk price generally leads to growth in net farm income. In 2018/19 milk prices are expected to average higher
however the concern around feed cost and the amount of feed that may be required if spring is dry could keep a lid on net farm income growth. Higher feed cost could lead to lower milk production which increases the prospect of positive price growth in 2018/19 and 2019/20 as processors will need to do more trade with less milk to continue to fulfil potential demand. This scenario may result in back-to-back years of growth in net farm income.
Global dairy prices are improving in 2018 as supply and demand re-balance. The forecast average skim milk powder price for the 2018 calendar year has been revised up 7 per cent to AUD$2,655/tonne from the original forecast in January of $2,481/tonne. Average cheese price is forecast to be $4,935/tonne, 1.1 per cent lower than 2017. This is due to more milk being used for cheese production particularly in Europe.
Milk powder exports for the 2018 calendar year are forecast to be 8.6 per cent higher by volume, driven by increased exports to China. Cheese export volume is likely to be comparable to last year.
Overall, the outlook for Australian dairy farmers in 2018/19 and beyond is positive in terms of price, demand, processor competition and a need to grow milk supply to fulfil potential demand. The challenges will be higher feed prices and a less favourable outlook for rainfall in the short term.
Summary
4
Australian milk production
mill
ion
litre
s
300
400
500
600
700
800
1,000
900
1,100
JanSep Nov Dec MayOct JunMarFebJul AprAug
2016/17 2017/18
Australian production
In 2017/18 the national dairy herd was around 1.52 million and is forecast to grow modestly to 1.53 million in 2018/19. Average milk yield per cow is forecast to increase to 6,116 L/cow in 2018/19 an increase of 0.5 per cent.
Australian milk production at June 2017/18 is 3.4 per cent higher than 2016/17. Total milk production is currently 8.65 billion litres and is likely to finish 2017/18 around 9.3 billion litres.
In southern states, Tasmanian production is up by 9 per cent and is projected to end 2017/18 around 906 million litres. In South Australia production is up 8.3 per cent and will end the financial year at around 523 million litres. The current season is a return to 2015/16 volumes as a result of seasonal conditions and processing capacity in each state. Victoria is currently reporting supply growth of 3.4 per cent which would see the state record around 5.95 billion litres for 2017/18.
The first half of 2018 saw supply grow in Western Australia. Milk volume will finish 2017/18 around 383 million litres.
In New South Wales milk production increased 0.9 per cent in 2017/18. The full year volume is expected to be around 1.13 billion litres. Seasonal conditions have been difficult for Queensland dairy farmers with the state reporting a reduction in supply of 5.8 per cent as May this year.
Source: Dairy Australia
54
Manufactured products
The volume of manufactured dairy products such as cheese and milk powder is a key driver of value in the dairy industry. In 2017/18 Australia is expected to produce around 180,000 tonnes of skim milk powder (SMP), a decline of 19 per cent compared to 2016/17. SMP production has declined due to lower prices in 2017/18 as a result of increased supply on the world market.
Cheese production in 2017/18 is expected to increase by 6-8 per cent to around 350,000 tonnes. Cheese production was more profitable for processors in 2017/18 and therefore milk that would have been used for SMP production instead went into cheese to reflect global demand and price. Whole milk powder (WMP) production increased in 2017/18 following similar logic to cheese. Production of WMP will be around 82,000 tonnes in 2017/18, an increase of 29 per cent.
Annual change in milk production
Source: Dairy Australia
3%
-4%
1%
-6%-7%
0
4%
-3%
2%
-5%
5%
-2%
6%
-1%
8%7%
9%10%
TAS
VIC
QLD S
A
NS
W
WA
1.0%
3.0%
-6.2%
0.2%
9.3%8.9%
6
International production
World milk production continued to increase in 2017/18 albeit at a slower rate than in recent years.
Milk production in Europe (EU-28) is forecast to increase by 3.4 per cent in 2017/18, taking total production to over 151 billion litres. The increase in production hasn’t come from the large dairying countries in the EU-28. France and Germany produce around 36 per cent of the milk produced in the EU-28. In 2017/18 they are forecast to see an increase in production of just 2 per cent. In 2017/18 the countries that have grown milk supply strongly were the medium sized dairying countries such as Ireland (+9.4 per cent), Italy (+7.6 per cent), Poland (+4.4 per cent), United Kingdom (+4.2 per cent) and Spain (+3.0 per cent). While the Netherlands look like reporting a slight decline of around -0.4 per cent.
New Zealand milk production is likely to end 2017/18 at the same level as 2016/17 after dry weather impacted supply growth in the first half 2018. Herd size is forecast to decline further in 2018/19, with around 3.2 per cent fewer milking cows in 2017/18 compared to 2016/17. This decline in herd size is expected to be partially offset by
an increase in milk per cow of around 1.9 per cent. However, the herd could shrink more than expected under the phased eradication plan for the cattle disease Mycoplasma bovis. 126,000 cattle are to be culled, in addition to 23,000 already culled. Although this represents a small percentage of the total herd, the extent of the disease is still largely unknown.
Annual milk production in the United States (US) is forecast to increase by 1.1 per cent in 2018 to 94.8 billion litres. Herd growth plateaued in 2018 keeping the US dairy herd at around 9.4 million head. The major factor in US production growth is the improvement in litres per cow. Average annual growth for litres per cow since 2003 has been 1.5 per cent. The 2018 average was 10,085 litres per cow a rise of 0.6 per cent.
Modest growth forecasts for the major exporting regions of the world will give the dairy market time to balance supply and demand after a period of strong growth in supply. Trading conditions for Australian exporters should improve in the second half of 2018 and into 2019, this should lead to positive growth in farm gate milk prices.
EU-28 milk production is forecast to increase 3.4% in 2017/18
New Zealand milk production was unchanged in 2017/18
mill
ion
litre
s
mill
ion
litre
s
10,000 0
10,500500
11,0001,000
11,500
1,50012,000
2,00012,500
2,50013,500
3,500
13,000
3,00014,000
14,500
Jan JanSep SepNov NovDec DecMay MayOct OctJun JunMar MarFeb FebJul JulApr AprAug Aug
Data: Eurostat Data: DCANZ2015/16 2015/162016/17 2016/172017/18 2017/18
76
Autumn rainfall was below to very much below average across most of the country with the exception of south west Victoria and Tasmania. The absence of autumn rain impacted pasture growth and has resulted in supplementary feeding earlier than usual. July saw a return to average rainfall for parts of Queensland and southern states. Most of New South Wales and South Australia experienced a very dry July.
The chance of above median rainfall between August to October is below 50 per cent in the dairying regions of New South Wales, Victoria and South Australia. There is a 50 per cent chance of exceeding median rainfall in Tasmania, Western Australia and the dairy region of Queensland.
The El Niño–Southern Oscillation (ENSO) remains neutral. However, climate model outlooks and recent warming in the tropical Pacific
Ocean mean there is a greater than usual chance of El Niño forming later this year.
A lack of rainfall in the first seven months of 2018 has led to very much below average runoff in New South Wales, northern Victoria and Gippsland. This could impact stock and irrigation water as these regions face the prospect of a dry three month period from August to October.
Root zone soil moisture for July indicates that key feed growing regions of New South Wales and Victoria are below average in terms of water available to crops. Although June delivered some rainfall to these regions the outlook of dry conditions leading into spring will put feed supplies under pressure in 2018/19.
Seasonal conditions
Chance of above median rainfall from August to OctoberRecent rainfall deciles for July 2018
Runoff deciles for 2018 Root zone soil moisture deciles July 2018
Source: Bureau of Meteorology, 2018
Source: Bureau of Meteorology, 2018
Source: Bureau of Meteorology, 2018
Source: Bureau of Meteorology, 2018
Rainfall Decile Ranges
Runoff Root zone soil moisture
Highest on record
Very much above average
Above average
Average
Below average
Very much below average
lowest on record
Highest 1%
Very much above average
Above average
Average
Below average
Very much below average
Lowest 1%
Highest 1%
Very much above average
Above average
Average
Below average
Very much below average
Lowest 1%
80
75
70
65
60
55
50
45
40
35
30
25
20C
hanc
e of
exc
eedi
ng m
edia
n ra
infa
ll (%
)
10
8-9
4-7
2-3
1
8
Prices
In 2018/19 farm gate milk prices are expected to rise reflecting to improving global prices. The average farm gate milk price in Australia for 2017/18 is estimated to be around $5.70/kg MS, a 4.4 per cent increase on the 2016/17 average of $5.46. The last two years have been below the ten year average of $5.81/kg MS.
The global price for skim milk powder finished July 2018 at A$2,637/t, which is close to the 40th percentile for the last five years and 1.5 per cent higher than this time last year. The Ag Answers 2018 calendar year forecast for the average skim milk powder price has been revised upwards to A$2,655/tonne, 7 per cent above the January estimate. This is based on a better than expected first half of 2018 and the prospect of a reduction in world milk supply pushing price higher around October. The January forecast average price for 2018 was A$2,481/t, the actual average for January to July 2018 was A$2,508/t.
Cheddar prices have declined recently, finishing July at A$4,842/t, which is close to the 70th percentile for the last five years and 8.2 per cent lower than this time last year. The current forecast for the
2018 calendar year is A$4,935/t, 1.1 per cent lower than 2017. As the market became aware that more EU milk was being used for cheese production in the last few months, the price has eased. Also, a strengthening Euro reduced the competitiveness of EU cheese in key markets such as Japan. Demand from Japan remains robust, indicating the decline in price could be short lived and begin to rise again later in 2018.
Domestically there is strong competition for milk, with many processors wanting to hold the supply they gained from former co-op Murray Goulburn (MG). The same is true for Fonterra, which gained significant supply of previously held MG milk. Saputo would like to recoup a large portion of the supply MG lost, which has resulted in robust pricing for 2018/19. The opening price for the 2018/19 season will average around $5.85/kg MS, with a target closing price of around $6-6.20/kg MS. This should see the average farm gate milk price in Australia hit $6/kg MS or more for 2018/19, which is 5.8 per cent higher than 2017/18.
Global skim milk powder price and forecast
Data: Global Dairy Trade and Rural Bank
AU
D$
/ton
ne
0
1000
2000
3000
4000
5000
6000
Oct
-15
Oct
-17
Oct
-14
Oct
-16
Jan
-16
Apr
-18
Jan
-15
Jan
-17
Apr
-14
Jan
-14
Apr
-16
Jul -
18
Apr
-15
Apr
-17
Jul -
14
Jul -
16
Oct
-18
Jan
-18
Jul -
15
Jul -
17
Global cheddar price and forecast
Data: Global Dairy Trade and Rural Bank
AU
D$
/ton
ne
0
1000
2000
3000
4000
5000
6000
Oct
-15
Oct
-17
Oct
-14
Oct
-16
Jan
-16
Apr
-18
Jan
-15
Jan
-17
Apr
-14
Jan
-14
Apr
-16
Jul -
18
Apr
-15
Apr
-17
Jul -
14
Jul -
16
Oct
-18
Jan
-18
Jul -
15
Jul -
17
Cheddar $/t
68% confidence interval
SMP $/t
68% confidence interval
98
Australian drinking milk sales in 2017/18 are 1.7 per cent higher at March 2018, compared to 2016/17. Growth in sales has been spread evenly across states except for a notable 3.2 per cent increase in Tasmania. The volume of fluid milk exports from Australia grew by 13 per cent in 2017 after 16 per cent growth in 2016. In 2018, May year to date figures show growth of 14.4 per cent compared to 2017. Demand is expected to rise throughout 2018 and total volume exported could exceed 228 million litres. China accounted for 39 per cent of the 199 million litres exported in 2017. Fluid milk exports to China grew 10.3 percent in 2016 and 19.7 per cent in 2017.
In 2017 Australia exported 211,932 tonnes of milk powder, which was 9 per cent lower than 2016. Global demand for milk powder eased further in 2017 as a result of world supply, notably the EU stockpile of skim milk powder and adequate inventory in importing countries such as China. However, for the 2018 calendar year we expect to see the volume of milk powder exports increase by at least 8.6 per cent.
By volume China was Australia’s largest export market for milk powder in 2017 accounting for 21.5 per cent of total export volume,
compared to 12.9 per cent in 2016. The total volume of milk powder exported to China in 2017 was 45,508 tonnes, the highest annual volume recorded. Indonesia was previously Australia’s largest export market of milk powder however volume slipped 7.7 per cent in 2017. Thailand has emerged as a growing export market for milk powder, importing 12,139 tonnes in 2017 compared to 9,659 tonnes in 2016. Japan is also increasing milk powder imports from Australia. The depth of this market is somewhat unclear, in 2017 milk powder imports were 8,976 tonnes and in 2016 just 1,178 tonnes. If Japan follow the same import pattern as 2017, October to December will be the months to watch.
Australian cheese exports were up 2.5 per cent in 2017 to 171,295 tonnes. In 2018, January – May cheese exports totalled 70,750 tonnes which is 2.9 per cent down on the same period in 2017. Cheese exports to Japan accounted for 49 per cent of total cheese exports from Australia in 2017. Volume to Japan was stable in 2017 up 1.8 per cent. Australian cheese exports to China reached a record high in 2017, up 11.9 per cent to 22,044 tonnes.
Demand
Annual change in drinking milk sales, year to date March 2018
Source: Dairy Australia
-2%
1.5%
.5%
0
-1.5%
2%
1%
-1%
2.5%
-.5%
3%
3.5%
TAS
VIC
QLD S
A
NS
W
WA
1.4%
0.7%
1.9%
1.1%
3.2%
-1.6%
10
Monthly milk powder exports indicate there could be an increase in volume exported from Australia in 2018. Exports to all reported countries totalled 211,932 tonnes in 2017 which was 9 per cent below 2016. Since the beginning of 2018 monthly exports have been higher than 2017. For the period of January to May 2018, milk powder exports totalled 94,969 tonnes, 11.6 per cent more than the same period in 2017. The majority of the increase in volume exported in the first half of 2018 has been to China and Thailand.
The seasonal heat map indicates high volume months in green and low volume months in yellow relative to the corresponding twelve month period. The tables show that milk powder and cheese exports are not constant from month to month and have a seasonal pattern.
Historically, Australian exports of milk powder to China have occurred in the first half of the calendar year. However in 2017 the purchasing pattern evened out with the exception of May to August which was an unusual time for China to be recording high monthly imports of milk powder from Australia. It is likely that Australia had a stock pile of skim milk powder due to high world supply and low price. This meant China could purchase Australian milk powder when it usually wouldn’t, indicating China has a strong appetite for Australian milk powder. At the time of writing the latest export statistics are current to May 2018 and they show that China has imported 26.5 per cent more milk powder between January and May 2018 compared to the same period in 2017. The first half of 2018 looks set to record the highest ever volume of milk powder exported to China in a six month period. If this momentum continues in the same way as it did in 2017, the twelve month record will be broken again for the second consecutive year. Using a three year average to forecast imports from June to December would result in a total yearly tonnage of 41,189 tonnes which is below the 2017 volume. Given the current momentum of export to China there could be significant upside to this forecast for the second half of 2018, especially if supply tightens around the world.
Another growth market in 2018 is Thailand. Australian milk powder exports to Thailand increased by 133 per cent for the January to May period compared to last year. Although volume is small compared to China, the surge in the first half of 2018 is significant. Over the past five years Thailand has imported up to 16,000 tonnes of milk powder per year from Australia. If the current monthly trend continues, volume in 2018 could reach 19,000 tonnes which would be a 58 per cent increase on 2017. Other large markets such as Indonesia and Singapore have stabilised after a period of contraction. Growth in the Chinese and Thai markets is beneficial for the Australian dairy industry reducing the risk of dependency on few markets and gives multiple options to processors which then improves demand for milk at the farm gate.
Demand - milk powder
Australian milk powder exports (tonnes)
World 2014 2015 2016 20172018
YTD + forecast
Jan 27,982 21,530 23,907 24,363 15,688
Feb 25,085 28,561 18,663 14,690 20,832
Mar 19,789 23,538 22,357 14,001 22,579
Apr 16,718 22,154 18,686 13,394 19,811
May 16,589 17,487 23,267 18,635 16,059
Jun 22,168 28,870 13,631 21,983 21,495
Jul 11,708 14,304 14,961 21,179 16,815
Aug 13,906 16,917 13,858 12,321 14,365
Sep 17,448 18,920 15,460 14,019 16,133
Oct 17,878 24,732 22,361 19,142 22,078
Nov 24,046 20,688 22,492 18,355 20,512
Dec 30,996 27,988 23,329 19,850 23,722
Total 244,313 265,689 232,972 211,932 230,089
Data: GTIS
Australian milk powder exports to China (tonnes)
China 2014 2015 2016 20172018
YTD + forecast
Jan 8,476 675 2,472 3,301 2,560
Feb 4,348 1,489 2,390 2,942 4,599
Mar 2,906 2,481 3,522 2,616 5,442
Apr 3,180 1,586 3,144 2,769 4,639
May 1,590 1,740 4,459 5,089 3,910
Jun 1,937 6,057 2,630 5,908 4,865
Jul 527 2,039 1,258 4,747 2,681
Aug 696 936 1,087 4,705 2,243
Sep 880 1,161 1,190 4,149 2,167
Oct 1,345 3,061 2,335 3,134 2,843
Nov 1,060 1,723 1,938 2,649 2,103
Dec 1,848 2,238 3,674 3,499 3,137
Total 28,793 25,186 30,099 45,508 41,189
Data: GTIS
1110
Cheese exports to all reporting countries totalled 171,295 tonnes in 2017 which was 2.5 per cent higher than 2016. Since the beginning of 2018 monthly exports have been lower than 2017. For the period of January to May 2018, cheese exports totalled 70,750 tonnes, 2.9 per cent less than the same period in 2017.
The majority of the decrease in volume in the first half of 2018 is due to decreased cheese export to China, down by 3,678 tonnes compared to the first half of 2017. In contrast, exports to Japan increased by 6.9 per cent for January to May compared to 2017. Cheese exports from Australia have kept a consistent monthly pattern, with the majority of exports occurring in May – June and October – Dec. These periods correspond with Japan’s top importing months for cheese. Forecasting out to the end of 2018 using a three year average suggests total cheese exports will finish at about the same level as 2017.
Japan is the largest cheese importer in the world and is Australia’s largest market. Australia accounts for over 30 per cent of the cheese imported by Japan. The size of the market in Japan and Australia’s established market share justify the dependency risk of having 50 per cent of Australian cheese exports in one market. Volume has been consistent in recent years with monthly volume following a similar year in year out pattern indicating a mature market. In 2017 volume was marginally higher than 2016 and growth looks set to continue
in 2018. The latest statistics for January to May 2018 indicate that volume was 6.9 per cent higher in 2018. Using a three year average to forecast the remainder of 2018 could see cheese exports to Japan reach 89,199 tonnes which would represent an increase of 5.3 per cent.
Despite a drop in cheese export to China in the first half of 2018, the emergence of China as an importer of Australian cheese shouldn’t go unnoticed as it has gone from just 11,874 tonnes in 2013 to 22,044 in 2017. Double digit growth in volume of 24.5 per cent and 11.9 per cent was achieved in 2016 and 2017. Imports have started slowly in 2018 and volume isn’t likely to reach double digit growth this year. For the January to May period China reduced imports of Australian cheese by 35 per cent or 3,678 tonnes. In percentage terms this sounds significant however the volume of cheese imported by China from all countries slipped 5 per cent for January to May 2018. Unfortunately for Australian exporters February to June is historically when China has purchased most of its annual volume of cheese from Australia. May did show signs of returning to normal volumes but the performance of key months such as June – July and October – November will shape the final volume of 2018. The forecast for 2018 using a three year average is currently 18,120 tonnes which is a decrease of 17.8 per cent compared to 2017.
Demand - cheese
Australian cheese exports (tonnes)
World 2014 2015 2016 20172018
YTD + forecast
Jan 9,658 11,113 11,781 13,313 11,368
Feb 12,407 12,759 14,649 14,187 13,993
Mar 13,773 14,647 13,300 15,525 14,835
Apr 12,934 13,560 12,901 13,737 13,839
May 12,780 15,850 15,197 16,129 16,715
Jun 15,679 17,467 18,680 13,520 16,556
Jul 10,588 11,180 11,416 11,233 11,276
Aug 10,524 13,239 9,722 10,871 11,277
Sep 12,443 13,559 12,274 11,663 12,499
Oct 13,223 15,330 13,382 15,693 14,802
Nov 12,763 15,283 16,891 17,402 16,525
Dec 13,754 16,839 16,844 18,022 17,235
Total 150,526 170,826 167,037 171,295 170,920
Data: GTIS
Australian cheese exports to Japan (tonnes)
Japan 2014 2015 2016 20172018
YTD + forecast
Jan 5,283 7,064 6,468 6,265 6,481
Feb 6,087 7,347 7,003 7,530 7,230
Mar 6,873 8,255 6,789 7,669 7,681
Apr 6,027 7,604 6,281 5,656 6,871
May 5,799 7,930 7,554 8,046 9,331
Jun 8,393 9,114 9,598 6,746 8,486
Jul 5,165 6,072 4,816 4,781 5,223
Aug 5,134 7,530 4,569 4,411 5,503
Sep 6,534 7,693 5,669 5,461 6,274
Oct 7,496 8,236 6,181 8,483 7,633
Nov 7,097 7,831 7,808 10,115 8,585
Dec 7,074 9,581 10,397 9,483 9,820
Total 76,962 94,257 83,133 84,646 89,119
Data: GTIS
12
Financial performance
Over the past 5 years gross farm income (includes livestock trading profit and other farm income) in Victoria, Australia’s largest milk producing state has averaged $6.41/kg MS. After gross farm income fell to an average of $5.80/kg MS in 2016/17 (10% below the 5 year average) with milk prices expected to increase to around $6.10/kg MS across Victoria, gross farm income is expected to be higher again in 2018/19. Based on long term average production numbers for yield and herd size, milk income on an average farm could increase by around $50,000 as a result. The increase in average farm gate milk price is likely to bring gross farm income including livestock trading profit and other farm income for an average dairy farm in Victoria to $6.62/kg MS.
According to the Victorian Dairy Farm Monitor, the average cost of production including interest for the five years to 2016/17 was $6.18/kg MS. In 2016/17 the cost of production fell to an average of $5.68/kg MS, largely due to a reduction of 25 per cent in feed costs. Variability in grain price can have a significant and often unavoidable impact on the cost of production on a dairy farm. Since July 2017 feed wheat prices have increased significantly, moving past the three year average and hovering around the five year high mark of between $280-300/t. The prospect of smaller grain stocks in Australia in 2018/19 it is expected feed costs and therefore cost of production on dairy farms will increase. We expect an average cost of production including interest for Victoria of $6.24/kg MS.
Dairy farm financial performance (average Victoria)
20
07 -
08
201
5 -
16
201
1 -
12
201
6 -
17
201
2 -
13
20
09
- 1
0
20
08
- 0
9
201
7 -
18
E
201
3 -
14
201
0 -
11
201
8 -
19
F
201
4 -
15
$1.0
$-
$3.0
$2.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
$10.0
Data: Victorian dairy farm monitor Gross farm income $/kg MS Cost of production + interest $/kg MS
$/k
g M
S
1312
Looking out over the medium term, Ag Answers expects more stable returns for dairy farmers than in recent years. The analysis in the financial performance outlook table (over the page) explores patterns in net farm income, milk price and exports using twelve years of data from the Victorian Dairy Farm Monitor report, Dairy Australia and the GTIS. Until the 2015/16 season net farm income and average milk price followed an annual pattern of ‘high’ – ‘medium’ – ‘low’ repeating in 3 year cycles with some correlation to the value of skim milk powder and cheese exports. However the pattern has changed with back to back low periods in 2015-16 and 2016/17 and a disconnect with export value. Forecast average farm gate milk price for 2017/18 and 2018/19 is likely to be $5.70/kg MS and $6.10/kg MS, which will continue to be a departure from the pattern that was apparent over the past decade.
A likely explanation of the disrupted pattern is the ratio between export volume and milk production shown in the table. Note how the ratio varied more widely from year to year between 2007/08 and 2013/14, reflecting the variability in export volume. However, between 2014/15 and 2017/18, the ratio becomes much more consistent. Demand has become more constant, average annual export volume between 2014/15 and 2017/18 was 9.4 per cent higher. Supply dropped in 2016/17 but demand didn’t fall at the same rate. The
scenario for Australian exporters is essentially doing more trade with less milk. The price decline in 2015/16 and 2016/17 resulted in decreased supply beyond what processors needed to meet the full demand potential, which is apparent because the ratio didn’t fall in line with supply. That creates a problem for processors, there isn’t enough milk to produce the quantity of milk powder and cheese to fulfil the potential demand. Farm gate milk price now needs to grow out of sync with the previous pattern to prompt farmers to increase supply, hence the 2017/18 and 2018/19 increase. Therefore the longer the ratio between export volume and milk production stays consistent or increases the better the prospect for higher farm gate milk price as a result of strong competition between processors to secure in demand milk from a smaller pool. The outlook for demand from key markets such as Japan and China is positive and the current volume of milk production is below the long term average with a mixed seasonal outlook. This suggests processors will need to increase farm gate milk price beyond 2018/19 to incentivise an increase in production to meet the potential demand for Australian dairy products from established and emerging markets. The impact would likely be more stable returns for dairy farmers as the established relationship between higher farm gate milk price and net farm income would go through a period that isn’t the usual high, medium and low cycle.
Financial performance
Total tonnes of SMP and cheese exported: total milk production ratio
20
07 -
08
201
5 -
16
201
1 -
12
201
6 -
17
201
2 -
13
20
09
- 1
0
20
08
- 0
9
201
7 -
18
E
201
3 -
14
201
0 -
11
201
4 -
15
22
20
26
24
28
30
32
34
36
38
40
Data: Dairy Australia and GTIS
14
Gro
ss fa
rm
inco
me
$/k
g M
S
Cos
t of
prod
uctio
n +
in
tere
st $
/kg
MS
Net
farm
inco
me
$/k
g M
S
Ave
rage
farm
ga
te m
ilk p
rice
$/k
g M
S
Pat
tern
Aus
. ave
rage
S
MP
exp
ort p
rice
AU
D $
/t
Aus
. ave
rage
C
hees
e ex
port
pr
ice
AU
D $
/t
Tota
l val
ue o
f S
MP
and
Che
ese
expo
rts
Tota
l vol
ume
of
SM
P a
nd C
hees
e ex
port
s
Aus
tral
ian
m
ilk p
rodu
ctio
n
Rat
io e
xpor
t vo
lum
e:
prod
uctio
n
2007-08 9.43 7.30 2.13 6.68 High 4,324 4,234 1,501,595,194 269,385 9,223 29.21
2008-09 7.24 6.57 0.67 5.14 Med 3,447 5,458 1,348,929,688 365,524 9,388 38.94
2009-10 5.97 5.94 0.03 4.49 Low 2,725 3,918 1,073,827,857 294,505 9,084 32.42
2010-11 7.21 6.12 1.09 5.58 High 3,252 4,260 1,235,327,909 318,918 9,180 34.74
2011-12 6.58 6.11 0.47 5.46 Med 3,394 4,404 1,225,686,304 302,796 9,589 31.58
2012-13 5.65 6.31 - 0.66 5.05 Low 3,113 3,992 1,252,118,913 321,112 9,334 34.40
2013-14 7.78 6.34 1.44 6.81 High 4,918 4,585 1,473,325,173 293,937 9,421 31.20
2014-15 6.80 6.14 0.66 6.24 Med 3,822 4,776 1,505,265,330 345,206 9,806 35.20
2015-16 6.02 6.43 - 0.41 5.68 Low 2,876 4,549 1,382,998,262 354,046 9,681 36.57
2016-17 5.80 5.68 0.12 5.04 Low 2,942 4,519 1,306,852,587 320,900 9,016 35.59
2017-18 E 6.10 5.90 0.20 5.70 Med 2,915 5,265 1,375,273,534 333,193 9,300 35.83
2018-19 F 6.67 6.38 0.29 6.00 High
Data: Victorian Dairy Farm Monitor, Dairy Australia, GTIS 2017-18 E: estimate 2018-19 F: forecast *figures are derived from the Victorian Dairy Farm Monitor and relate to a state average. Region specific averages will vary from the state average.
Financial performance outlook
1514
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AG ANSWERSP 1300 796 101 E [email protected]
For banking enquiries:
RURAL BANK P 1300 660 115 W ruralbank.com.au
ELDERSP 1300 618 367E [email protected]