abare.gov.au - Australian commodities – June quarter . volume 15 . number 2 2008

Dairy

Australian-farm gate milk prices are forecast to rise by 10 per cent to 54 cents a litre in 2008-09 after averaging around 49 cents a litre in 2007-08. Higher domestic milk prices reflect high world prices for manufactured dairy products. However, despite the high domestic prices on offer, lead times in herd rebuilding and continuing low irrigation water allocations (particularly in the Murray-Darling Basin) will limit the ability of many Australian dairy farmers to increase production in 2008-09.

Seasonal conditions have the potential to significantly affect world dairy prices in 2008-09. Drought in Australia, and more recently in New Zealand, has reduced dairy production and exports and placed upward pressure on world prices. If there is not a return to average seasonal conditions in the major producing countries, world production growth will be slower than expected and world prices could rise.

World dairy trade continues to grow slowly, despite high prices

Supply constraints in the major dairy exporting regions are expected to limit growth in world dairy trade in 2008-09, despite solid growth in global demand.

Among the key constraints on growth in world dairy supplies are market reforms in the European Union that have led to reduced surpluses and slower growth in exports, and government policies discouraging exports from Argentina. Also, continuing effects of drought in Australia have reduced milk production and the export of manufactured dairy products.

In 2008-09, milk production in the European Union is forecast to increase by around 2 per cent. While higher milk prices have provided incentives to increase production, growth in EU milk output will be limited by legislated production quotas under the Common Agricultural Policy (CAP), that will restrict output in some of the largest producers. Milk production quotas for 2008 were expanded — by 0.5 per cent to 11 member states and by a further 2 per cent to all member states from 1 April. Nevertheless, milk production within the European Union is not expected to increase to the full extent allowed by quota as industry restructuring and poor profitability of some smaller farms will prevent some member states from filling their national quotas. In addition, high feed costs and the continuing presence of bluetongue disease may reduce milk yields in some regions.

For the European Union as a whole, milk production quotas under the CAP will continue to limit that dairy industry’s supply response to higher world dairy prices, although these quotas will be increased gradually (by 1 per cent a year over the next five years) ahead of their abolition in 2015.

Changes in domestic dairy consumption will also significantly affect the outlook for the European Union’s exports in 2008-09. Increasing consumption of fluid milk and manufactured dairy products (particularly in new member states where incomes are rising) will limit growth in exports, despite increasing output. In addition, changing patterns of dairy product demand within the European Union and associated price signals have changed the dairy product mix. Cheese production has grown significantly in recent years and is using an increasing proportion of milk production. This is reducing the quantity of milk available for the manufacture of other dairy products such as milk powders. As a result, EU milk powder exports have been declining for some years, and are not expected to grow significantly in 2008-09.

In Argentina, significant new investment in dairy farming and milk processing facilities has resulted in strong increases in milk and dairy production over the past decade. Combined with strong world demand and high prices, this has created potential to expand dairy exports. However, Argentina’s dairy exports have been constrained by export taxes aimed at reducing exports and maintaining low cost supplies for domestic consumers. As a result, export growth is expected to be limited in the short-term, despite a projected recovery in production.

In New Zealand (which has overtaken the European Union as the world’s largest dairy exporter), milk production is projected to increase by around 2 per cent in 2008-09. Despite strong price incentives, that dairy industry’s ability to rapidly increase production and exports is expected to be constrained by lead-times in building dairy herds, competing land uses and increasing compliance costs associated with government regulation on effluent disposal.

Dairy production in the United States is forecast to increase by around 2 per cent in 2008-09 as higher milk prices outweigh the effects of higher feed costs. US dairy exports have increased in response to high world prices and improved export competitiveness, prompted by the lower US dollar. Exports, particularly of skim milk powder and cheese, are expected to be higher in 2008-09.

In China, both the production and consumption of milk and dairy products are expected to continue to increase rapidly in 2008-09. However, with an increasing proportion of consumption being met by domestic production, China’s dairy imports, particularly of milk powders, are expected to decline.

Dairy outlook

2006

2007

2008-09

% change

Cow numbers

’000

1 796

1 728

1 750

1.3

Milk yields

L/cow

5 336

5 266

5 286

0.4

Production

Total milk

9 583

9 100

9 250

1.6

– market sales

2 162

2 197

2 233

1.6

– manufacturing

7 421

6 903

7 017

1.7

Butter

133

125

128

2.4

Cheese

364

340

346

1.8

Whole milk powder

135

130

133

2.3

Skim milk powder

191

170

173

1.8

Farm-gate milk price

Ac/L

33.2

49.0

54.0

10.2

Value of exports

A$m

2 438

2 690

2 697

0.3

World prices

Butter

US$/t

2 023

4 010

3 750

– 6.5

Cheese

US$/t

3 004

5 065

4 875

– 3.8

Skim milk powder

US$/t

3 188

4 175

3 650

– 12.6

Whole milk powder

US$/t

3 046

4 560

4 275

– 6.3

f ABARE forecast. s ABARE estimate.

World dairy prices to fall, but remain relatively high in 2008-09

While remaining relatively high, world dairy product prices are forecast to average lower in 2008-09 as limited increases in production and exports from the United States and European Union improve the availability of dairy products on world markets.

In 2008-09, world prices for skim milk powder and whole milk powder are forecast to average around 13 per cent and 6 per cent lower at US$3650 a tonne and US$4275 a tonne respectively.

World import demand for milk powders continues to grow, particularly in parts of Asia and the Middle East where income growth is high. Demand for milk powders also remains firm in developed countries such as the United States and in the European Union.

Despite this, growth in supplies of milk powders is expected to be limited, in line with slow growth in global milk production. In addition, changing patterns of dairy demand (particularly in the European Union) are expected to result in more milk going to cheese production. Slow growth in production, together with the exhaustion of EU intervention stocks, will limit the amount of milk powder available for export and contribute to world prices remaining at relatively high levels.

Prices for skim milk powder and whole milk powder are projected to diverge somewhat in 2008-09, largely as a result of an expected increase in exports of skim milk powder from the United States.

Cheese prices are forecast to average 4 per cent lower, at around US$4875 a tonne in 2008-09 as world supply grows more rapidly than demand. Cheese production in the European Union is expected to increase, reflecting solid growth in domestic demand and relatively high world prices. However, increasing domestic cheese consumption in the European Union is expected to limit growth in exports in 2008-09.

Cheese exports from Australia are expected to be slightly higher in 2008-09 in line with a forecast relatively small increase in milk production, while exports from the United States are expected to increase as a result of strong world prices and a weak US dollar.

Butter prices are also forecast to fall by more than 6 per cent in 2008-09 to average US$3750 a tonne. Butter consumption has been increasing as incomes in the Russian Federation, Egypt and parts of the Middle East have risen. In the United States and the European Union, butter consumption is growing more slowly. Rising butter production in the European Union and increased exports from the United States are expected to put some downward pressure on world prices.

Australian milk production beginning to recover

After falling by an estimated 5 per cent in 2007-08, Australian milk production is forecast to rise by 1.6 per cent to around 9.25 billion litres in 2008-09. Dairy cow numbers are expected to increase for the first time in seven years.

Milk production has been affected by low rainfall in major catchments which has prevented water allocations in irrigation-dependent regions from increasing significantly. As a result, milk production costs have increased because farms have become more reliant on expensive purchased feeds rather than irrigated pasture. However, for many less affected farms, higher farm-gate milk prices have contributed to improved profitability. As a result, Australia’s total dairy herd has been recovering slowly in the first half of 2008, with milking cows attracting relatively high prices at market.

Underlying this trend, cattle numbers on individual farms remain mixed, with some dairy farmers increasing their milking herds while others have sold their cattle and water allocations.

In 2008-09, Australian milk production will be strongly linked to rainfall patterns, improved water allocations for irrigation and the cost of supplementary feeds. With an assumed return to average seasonal conditions, fodder availability is expected to improve in most dairying regions. However, pasture availability in irrigation-dependent regions of inland Australia is expected to remain difficult, as catchments will require sustained, above-average rainfall before water allocations can return to more normal levels. With feed grain prices forecast to remain relatively high over 2008-09, improving fodder supplies from on-farm and off-farm sources in spring will be the key factor allowing continued herd rebuilding and increased milk production.

Farm-gate milk prices to average higher in 2008-09

In 2008-09, Australian farm-gate milk prices are forecast to rise by more than 10 per cent, to average around 54 cents a litre.

Forecast higher farm-gate milk prices reflect high world prices for dairy products and the need for processors to maintain milk supplies for their factories. Higher farm-gate prices are expected to encourage farmers to maintain milk production despite high purchased feed and water costs which might otherwise result in further herd reductions. Although grain prices are forecast to decline, dairy farm profitability in 2008-09 is likely to be affected by relatively high feed grain prices.

Dairy export earnings higher in 2007-08, relatively flat in 2008-09

The value of Australian dairy exports is estimated to have increased by 10 per cent to around $2.69 billion in 2007-08. In 2008-09, the total value of Australian dairy exports is projected to be relatively stable at $2.7 billion as higher export volumes are offset by lower world prices.

In 2008-09, the value of skim milk powder exports is forecast to decline by 3 per cent to $516 million. Export earnings from whole milk powder are expected to be down marginally to $355 million. The value of butter exports is forecast to remain around $216 million, while export earnings from casein and cheese are expected to be down by 8 per cent and 1 per cent, to $102 million and $918 million respectively.