The dairy industry in 2013: challenging convictions
(Part of a report from Dairy Australia http://www.dairyaustralia.com.au/~/media/Documents/Stats%20and%20markets/S%20and%20O/May%202013/Dairy%20Situation%20and%20Outlook%20May%202013%20-%20Full%20Report.pdf)
The 2012/13 season has proved a difficult one for many dairy farmers, as falling
farmgate prices, higher input costs and unfavourable seasonal conditions combine to challenge the profitability of farm businesses. While many farmers realise the opportunities offered in growing international dairy markets, shorttermThe 2012/13 season has proved a difficult one for many dairy farmers, as falling
oscillations in returns and profitability have strained finances and are challenging confidence.Variable seasonal conditions in south-eastern Australia, combined with reduced farmgate margins, means there has been little incentive to expand production.In northern ‘drinking milk’ regions there was once again flooding affecting
southern Queensland and northern New South Wales, although not as extensive as in previous seasons. Production has declined in both QLD and NSW, while improved farmgate prices in Western Australia have not been enough to lift production above last year.
Cashflow challenges were brought sharply into focus as many farm businesses struggled to manage milk-to-feed price ratios and variable weather reduced homegrown fodder yields. In some cases falling land prices and higher debt loadings pushed businesses beyond prearranged credit limits and into relyingon extended payment terms from suppliers.Confidence as measured in this year’s National Dairy Farmer Survey (NDFS) has taken a significant step backwards. Challenging production conditions, rising input costs and a persistent focus on the supermarket milk price war have undermined confidence—particularly in northern milk production regions.
Significant variation remains in confidence around the nation as farmers adjust to milk pricing and market dynamics.
In exporting regions, opening price announcements for the 2013/14 season are being developed in a context of elevated global dairy prices, favourable demand and challenging production conditions. While prices for some commodities
have hit fresh highs, concern is mounting around the market’s ability to bear such rapid increases in commodity prices without cannibalizing long-term demand.The outlook for indicative southern farmgate milk prices, based on current commodity price and exchange rate expectations is for an opening price around $5.00/kgMS, up from an average opening price around $4.30/kgMS in2012. This implies a potential full-year average price around $5.50/kgMS, up from $4.90 to $5.10/kgMS in 2012/13.
The two major supermarkets have announced new sourcing strategies intended to increase farmgate price transparency and improve public relations associated with milk price discounting. Long-term contracts between Coles and
east coast cooperatives and a direct sourcing trial for Woolworths suggest a changing landscape for suppliers.
Nevertheless in drinking milk focused regions, the balancing act between fresh
supply and demand continues as processors adjust their intake requirements
and pricing to meet the demands of a highly competitive retail marketplace.
While the long-term contracts in place are positive, those falling outside of new
agreements harbour some concern around how the situation will develop.
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Australian market
Australian consumers remain cautious in their overall spending on household
essentials in addition to reduced spending on discretionary or ‘premium’ items.
Consumers have maintained high household savings levels in response to a
softening housing market and unemployment fears, but have been challenged
by rising costs of health, education, energy and transport.
Retail sales have grown slowly as consumers continue to seek value in
response to a slow recovery in consumer confidence in 2012/13 following
successive interest rate cuts and improved stock market performance.
In response to these settings, intense price competition between the two major
supermarket chains and the expanding discounter Aldi remains the most
significant influences on the retail food market in 2012/13.
The shift in sales volumes from route trade to the supermarket channel has
slowed. Despite a recent recovery in branded milk sales, over the longer term, a
loss of retail sales value in the milk category has occurred due to the change in
sales mix as private label lines have increased share of sales and branded
modified milk sales declined.
There is likely to be an increase in retailers seeking additional product label
information in response to consumer concerns. Themes may include nutrition,
sustainability, environmental impact, energy use and animal welfare standards.
This follows the lead of US and European retailers.
The farm sector in 2013
Production conditions have been challenging across most dairying regions in
Australia. Many parts of south-eastern Australia have been characterised by a
dry spring, and a late or inadequate autumn break.
Western Victoria has suffered from extended dry conditions and a second
season of reduced pasture production. Gippsland experienced overly wet
conditions throughout winter and early spring, followed by a dry summer, as
well as bushfires. Good irrigation allocations in northern Victoria allowed farmers
to maximise pasture production. Whilst production growth has been slowing,
northern Victoria is the only region tracking ahead of milk production last year.
Pastures struggled amidst dry conditions in Tasmania, while SA has been
heavily exposed to high feed and fodder prices. Flood events set back
production in southern QLD and northern NSW, while high grain prices and
challenging conditions early in the season reduced WA milk production.
Confidence as measured by the NDFS was significantly lower in 2013 with just
43% of farmers positive about the future of the industry. This compares with
66% of positive farmers in 2012, and is the lowest level of confidence recorded
since the inception of the NDFS in 2004 – a year that followed a significant
market downturn and a widespread, severe drought.
Asked to compare the current season’s profitability with the average of the past
five years, 4 out of 5 farmers surveyed in this year’s NDFS expected lower profit
Executive Summary
Dairy 2013:
Situation and Outlook 5
in 2012/13. SA had the greatest proportion of farms expecting lower profitability
(92%) while WA had the lowest (57%).
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In line with lower expected profits and declining confidence, the proportion of
surveyed farmers intending to invest on farm over the coming year has declined from 38% in 2012 to 28% in 2013.
ABARES Farm Survey estimates for 2012/13 indicate average farm cash
incomes fell to $95,300, down 33% from the 2011/12 average of $143,000,
but close to 2% below the preceding 10-year average.
Milk production outlook
Australian milk production is expected to reach 9.35bn litres in 2012/13 – down
1.4% on 2011/12 output of 9.48bn litres.
The outlook for 2013/14 is for modest production growth to between 9.4 and
9.6bn litres, based on surveyed herd growth intentions, cow condition and
assuming normal seasonal conditions provide an offset to limited fodder
reserves. Southern exporting regions should lead growth given positive global
prices. Production in domestic supply regions is likely to be flat in response to
market signals and uncertainty around supply contracts.
Based on production intentions for three-year growth recorded in the 2013
NDFS and assuming reasonable seasonal conditions and prices, milk
production could range between 9.8 and 10.2bn litres by 2015/16.
Medium-term prospects
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Global markets continue to hold significant potential for the future of the
Australian dairy industry. Population growth and increasing incomes in
developing countries paint a positive picture for dairy demand. However,
questions persist about the most effective way to seize the market opportunity
given the Australian industry’s resources and structure and translate it
effectively into a prosperous farm sector.
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Challenging production conditions and declining profitability have drawn
attention to the immediate problems on farm. However, the key question of
what role Australian processors want to play in global markets in the medium
term remains.
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A renewed focus on production costs, equity levels, flexible farming systems
and farm business and risk management skills (to manage volatility) will be
critically important to surviving and thriving in future global dairy markets.
Successfully balancing cyclical dairy markets with profitable and sustainable
production systems is fundamental to future dairy industry prosperity.
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Major global food corporations are expanding into more ‘traditional’ dairy
categories through innovation and leveraging supply chains and brands. As
transparency around production costs and retail prices improve, efficient supply
chains are becoming the new battle-front for improving profit margins. For the
processing sector, this is likely to mean more right-sizing, optimisation, new
business models and attempts to leverage the improved investment
environment.
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In anticipation of the removal of production quotas, expansion of EU milk supply
and future consumption expectations, more than $1.2bn US dollars has been,
or is planned for processing investment in Europe. Initial expectations were for
this to go into cheese production facilities for the domestic market. However, it
would appear that large investments are being made in powder drying facilities
for export markets.
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Each of the major supply regions has challenges and impediments to further
growth. Be it political contests or production cost structures in the US,
turbulence surrounding the removal of production quotas in the EU, logistics
and infrastructure challenges in South America or environmental constraints
linked with production intensification in NZ.
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Additionally, key demand regions including China, India and Russia are trying to
build self-sufficiency, balancing sustainability and securing food to feed growing
populations.
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Policy settings will continue to play an important role in Australian dairy farmers
continuing to be competitive and profitable into the future. Not only in terms of
competitive access to key demand markets, but to maintain the social licence
to farm and sell dairy.
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While decisions on these topics are being made at present, the persistent
volatility of a tight global market balance for dairy will challenge the convictions
of dairy leaders around the globe.
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