Record world prices for manufactured dairy products and domestic procurement incentives by milk processors to maintain throughput in their factories are forecast to result in Australian farmgate milk prices averaging 30 per cent higher in 2007-08 at around 43 cents a litre. However, for many Australian dairy farmers, the ability to take advantage of higher prices will be limited. Poor seasonal conditions across some of Australia’s major dairying regions and associated water supply problems and high feed costs are expected to result in lower milk production in 2007-08.
growth in world dairy demand continues to outstrip supply
In recent years, world demand for dairy products has grown in line with rising incomes both in the developing economies of Asia and in the more traditional dairy consuming economies of the European Union and the United States. Despite this strong growth in world dairy product demand — and sharply higher world prices — supply constraints in the major exporting countries are expected to result in only a limited increase in world dairy production and trade in 2007-08. Among the key constraints will be the changed market situation in the European Union that has reduced the EU’s ability to export, and reduced production in Australia as below average rainfall continues to affect water and fodder availability in the major dairying regions.
In the European Union — the world’s largest exporter of dairy products — milk production in 2007 is forecast to rise by 2 per cent (to around the limit of production quotas under the Common Agricultural Policy) in response to strong domestic demand for dairy products and higher prices. The strong growth in domestic consumption (especially for cheese, fresh dairy products and milk) is expected to absorb all of the forecast increase in EU milk production.
With the growth in domestic consumption exceeding the growth in milk production, intervention stocks of all dairy products within the European Union have been effectively exhausted. The lack of stocks, together with reduced availability of new dairy supplies and the removal of export subsidies, will constrain growth in EU dairy product exports in 2007-08. This situation is expected to continue over the next few years, with the European Union’s share of world dairy trade projected to decline as production quotas restrict EU milk output. Growing domestic consumption of dairy products is expected to account for an increasing proportion of the European Union’s total milk production.
In addition, the changing pattern of demand for dairy products (and associated relative prices) within the European Union has resulted in a change in the mix of EU dairy product output. For example, EU cheese production has grown significantly in recent years and has accounted for an increasing proportion of milk production. This trend has reduced the amount of milk available for use in other dairy products, such as milk powders. As a result, EU milk powder exports fell in 2006-07, and are expected to fall again in 2007-08 in favour of increased cheese exports.
In New Zealand, milk production is forecast to increase by around 3 per cent in 2007-08 in response to higher world prices and increasing herd sizes. Despite the higher world prices on offer, the New Zealand dairy industry’s ability to increase production and exports quickly may be constrained by the time it takes to increase dairy cow numbers. Other issues, such as competing land use and regulations on effluent disposal, may also affect the industry’s ability to expand in the short term.
In Argentina, milk and dairy product output has been increasing in recent years following significant new investment in dairy farming and milk processing facilities. This investment has created considerable potential to expand dairy exports, particularly in the current market where demand growth has been strong and supplies from competing exporters have been growing slowly. Despite this, serious weather events in 2007 (including floods in April and May and severe frosts in June and July) have dampened prospects for growth in dairy production and exports. Dairy product exports from Argentina have also been constrained in recent times by government policies aimed at reducing exports in order to maintain low cost supplies to domestic consumers.
world dairy prices up sharply
In 2007-08, forecast continued growth in world demand for the major dairy products is expected to exceed slower growth in supplies from the major dairy exporters. As a consequence, world prices of dairy products are forecast to average sharply higher.
Prices for milk powders are forecast to rise strongly in 2007-08. Prices for skim milk powder and whole milk powder are forecast to average around 58 per cent and 63 per cent higher at US$5030 a tonne and US$4950 a tonne respectively for the year. Strong domestic demand for milk powders in the European Union, together with reduced production and the exhaustion of intervention stocks, has sharply reduced export availabilities. In contrast, growth in world import demand for milk powders remains strong, particularly for infant formulas and food processing in Asia and the Middle East. Within the European Union, most of the growth in consumption is in food processing and protein supplements in animal feeds.
In common with most dairy products, cheese prices have already risen sharply in 2007, and are forecast to average 59 per cent higher in 2007-08, at around US$4775 a tonne. Higher prices reflect growth in world consumption exceeding growth in supply. Cheese production in the European Union is expected to rise during the year, reflecting growing domestic demand and higher world prices. However, increasing domestic cheese consumption in the European Union and reduced export subsidies for cheese under reforms to the Common Agricultural Policy are expected to limit growth in EU cheese exports in 2007-08.
Butter prices are forecast to increase by 56 per cent in 2007-08, to average US$3150 a tonne, as global demand rises faster than supply. Of particular importance is lower butter production in the European Union that, together with the effective exhaustion of EU butter intervention stocks, means that EU exports will fall in 2007-08.
Australian dairy production to decline in 2007-08
Milk production in Australia is forecast to fall by 4 per cent in 2007-08 to around 9.23 billion litres as a result of the severe and persistent drought conditions in 2006-07 that have cut the availability of irrigation water and reduced pasture growth in most major dairying regions. In response, some dairy farmers in the more drought affected regions have reduced herd numbers and cut production in order to contain fodder costs.
dairy outlook
2005-06
2006-07
2007-08
f
% change
Cow numbers
’000
1 870
1 800
1 780
– 1.1
Milk yields
L/cow
5 395
5 324
5 183
– 2.6
Production
Total milk
ML
10 089
9 583
9 225
– 3.7
– market sales
ML
2 066
2 161
2 197
1.7
– manufacturing
ML
8 023
7 422
7 028
– 5.3
Butter
kt
146
130
131
0.8
Cheese
kt
373
360
331
– 8.1
WMP
kt
158
143
143
0.0
SMP
kt
212
191
198
3.7
Milk price
Ac/L
33.1
33.1
43.0
29.9
Value of exports
A$m
2 574
2 444
3 156
29.1
World prices
Butter
US$/t
1 998
2 023
3 150
55.7
Cheese
US$/t
2 792
3 004
4 775
59.0
SMP
US$/t
2 175
3 188
5 030
57.8
WMP
US$/t
2 192
3 046
4 950
62.5
See statistical tables for details. f ABARE forecast.
Dairying regions where production was most affected by the widespread drought in 2006-07 were northern Victoria and New South Wales along the Murray River (where irrigation allocations were cut substantially) and in southern Queensland. Other regions also suffered the effects of drought to some degree, including Western Australia and parts of South Australia. In contrast, seasonal conditions were generally favourable in the coastal regions of New South Wales and in Tasmania.
In 2007-08, Australian milk production will be strongly linked to rainfall patterns and associated pasture conditions. Improved rainfall across many of Australia’s dairy farming regions, however, will not result in better water allocations in areas dependent on irrigation. Nevertheless, improved seasonal conditions relative to last year would increase the availability of nonirrigated fodder supplies, both from on-farm and off-farm sources. Although grain prices escalated sharply in winter, improved fodder supplies will be important in helping to moderate the decline in milk production at a time of high world dairy prices.
The most vulnerable region in terms of irrigation water is the southern Murray Darling Basin, where dairy farms depend on irrigation for a substantial part of their fodder production, for water supplies in milking sheds and for stock water. With water storages currently very low, several years of above average rainfall are required before the major dams are replenished and full irrigation allocations can be restored.
farmgate prices to rise sharply in 2007-08
After averaging 33 cents a litre in 2006-07, Australian farmgate milk prices are forecast to rise by 30 per cent to 43 cents a litre in 2007-08. This forecast reflects higher world prices for dairy products as well as higher payments by dairy processors seeking to maintain milk supplies in the face of high feed costs resulting from poor seasonal conditions in many parts of Australia. Although the cost of hay and roughage may fall a little in 2007-08, the effect on overall feed costs may be offset by the substantial rise in feedgrain prices since mid-2007.
dairy export earnings to rise in 2007-08
The value of Australian exports of dairy products is projected to rise by 29 per cent to around $3.2 billion in 2007-08, as a result of sharply higher world dairy prices outweighing the effect on earnings of a decline in export volumes.
In 2007-08, the value of Australia’s skim milk powder exports is forecast to rise by 36 per cent to $688 million and whole milk powder exports by 59 per cent to $437 million. Similarly, the value of cheese exports is forecast to rise by 26 per cent to $1.0 billion and casein by 42 per cent to $161 million, while the value of butter exports is forecast to be flat at $178 million.
pberry@abare.gov.au