Increased fodder and water costs impacted dairy farm profitability
Major supermarkets ended $1 per litre milk
The dairy industry experienced very difficult conditions during the year, suffering significant declines in productivity and farm profitability. The drought impacted production and large increases in the cost of fodder and water resulted in many farms operating at a loss. Farmers responded to higher costs by reducing their herd sizes and, in extreme cases, exiting the industry. With processors competing for a more limited supply of milk and export markets recovering, farmgate prices were stable and started to increase by the second half of the year.
Milk production was significantly impacted by the drought, falling 5.4% year-on-year43 and accelerating as the year continued. The lack of rain in northern production systems and very high costs of fodder reduced productivity. In the south, the lack of rain, zero water allocations and increasing competition for water from permanent horticultural crops limited opportunities for growing fodder. Production falls were largest in northern regions43. Overall, production was lower than at any time since 2007-083.
Farmgate milk prices varied considerably across NSW depending on the production system used, individual contracts with processors, milk quality and the final use of the raw milk. In general, farmgate prices are higher in northern NSW, and lower in southern NSW. In northern NSW, raw milk primarily supplies the domestic drinking milk market, whereas in the south, raw milk supplies processed product and export markets. As raw milk production fell, processors competed more aggressively for supply, resulting in an estimated 9.7% rise in farmgate milk prices to 55.3 cents per litre during 2018–1944.
Domestically, raw milk can and does move around the country, which means all farmgate prices are partly dependent on international prices. Northern producers typically supply the local domestic drinking milk market. However, if northern prices rise too far above southern prices, processors will start to source more drinking milk for their northern customers from southern farmers. The northern dairying regions of Australia (northern NSW and Queensland) imported at least some drinking milk from southern regions in 2018–19, as the costs of production in these regions were too high to meet all local demand.
International trade in drinking milk is small; however there is a much greater trade in processed dairy products, which is a significant driver of demand for raw milk at the farm level. As NSW is predominantly a drinking milk market, only 25% of raw milk was used for exported product (processed and some drinking) in 2017–1887.
While dairy exports grew 19% year-on-year, NSW remained a net importer of dairy87. The major imports into NSW were from New Zealand, the world’s largest dairy exporter, in the form of milk powders, butter and cheese87.
Domestic demand for dairy products remained solid, with growth in volume of all retail categories led by cheese products. The overall value was supported by increasing retail value rather than by volume, even in the drinking milk category, as the major retailers lifted prices on private label milk and introduced a drought levy. A global shortage of butter increased global prices significantly, which pushed up the price of dairy spreads by more than 12%22.
International markets stabilised somewhat. Export prices were weak in the first half of the year but recovered from November 201879, with demand from China continuing to underpin global markets. Australian exports prices were also supported by a weaker currency.
The Australian dairy industry faced significant challenges caused by ongoing drought, as farmers struggled to cover increased input costs with farmgate dairy prices.
The NSW southern dairy production system is heavily reliant on irrigated fodder crops, however the majority of NSW irrigation districts received zero allocations for general security water licences during the year. Increasingly, dairy farmers are also facing competition for water from permanent horticultural crops such as nuts and grapes, which have expanded in recent years. Reliance on the same water sources has increased competition in the trade for temporary water, pushing up prices significantly. With alternative users of water often able to pay a higher price, dairy farmers reliant on irrigation found it difficult to justify growing fodder to maintain production. In an increasingly variable climate, dairy’s ability to compete for scarce water resources will be an ongoing challenge.
Processors also faced challenges as factories cannot operate efficiently when production falls. As approximately 30% of dairy production is exported, processors must also compete in international markets, which limits the price they receive for the end product. Consequently, their own profitability is squeezed by higher farmgate prices. Dairy Australia is developing a new Australian Dairy Plan to address some of these issues and has provided a situation analysis setting out the context and challenges the industry is facing173.
The industry continues to face serious seasonal challenges, which are expected to place increasing pressure on production. Farmgate prices are correlated with supply. As processors are struggling to secure sufficient supply to operate their facilities efficiently and meet global demand they are expected to increase farmgate prices to attract additional supply. These increases may not be sufficient to cover higher dairy input costs and larger price increases may be required to prevent further farm exits. Nevertheless, processors must be able to compete on price in international markets, limiting their ability to pay materially higher farmgate prices.