Difficult seasonal conditions and ongoing cost challenges continued to create a very tough operating environment for NSW dairy farmers in the first half of 2019-20, with raw milk production experiencing another annual decline. Farmgate milk prices responded to the reduction in supply reaching record highs and helped support cash-strapped farmers grappling with significant increases in input costs. Improved seasonal conditions in autumn and early winter helped support small but encouraging steps towards supply growth.
The NSW DPI Dairy AMS Newsletter provides independent, reliable, accurate and up-to-date information on all topics dairy-related with a strong focus on precision farming technology and robotic milking for the Australian dairy industry. Managed by the DPI Dairy Team, this newsletter is sent out to almost 600 subscribers and has become a valuable resource for the Australian dairy industry.
Milking Edge is an Australia dairy industry project delivered by the DPI, in collaboration with Dairy Australia and DeLaval, to support the dairy industry to consider, invest and operate Automatic Milking Systems successfully. Milking Edge is built on a decade of successful research and the Project team has been working hard to develop training and extension programs for Automatic Milking Systems in Australia.
Total state annual production fell to 1,043 million litres 54, a decline of 4% year-on-year and the smallest volume since 2010-11. The successive gradual drop in State production over the last 3-years has been driven by numerous factors, mainly stemming from drought, such as smaller herd numbers, reduced milk yields and higher input costs including additional fodder and water.
However, there are early signs of recovery. Despite the year-on-year decline in annual production, an early autumn break in the southern inland and north coastal regions eased purchased feed demand and improved the winter cropping harvest outlook. Production reacted accordingly with NSW monthly milk supply data for February, March and May 2020 revealing the first signs of growth in over 12-months 54.
The fall in annual production was largest in the NSW north coast region, with annual production down 6.7% year-on-year. The southern and inland/central regions also recorded annual declines in production although not a pronounced as that in the north, at -3.5% and -0.1% respectively 54.
The reliance of coastal feedbase systems on rainfall provides a comparative advantage over farms that rely on irrigation, such as those in the more southern and inland dairy regions. However, these systems become more difficult to manage in years where extremes of very dry conditions limit pasture and crop growth and subsequently curb milk production.
Trade terms for total dairy exports weakened slightly with the volume of fresh milk exported from NSW falling 8% on 2018-19 volumes 94. However, supply and demand were favourably balanced for price growth with the value of fresh milk exports increased significantly up 29% year-on-year to $23 million 94. The majority of this price growth was from China including notable value growth in the markets of Hong Kong, Malaysia and Vietnam 94.
International trade in drinking milk is small, with only 8% of world milk production on average traded internationally 117. This is primarily due to the perishability of fresh milk and its high-water content which make it relatively expensive to transport. However, there is a much greater trade in manufactured dairy products which is a significant driver of demand at the farm level.
NSW is a highly strategic region for the Australian dairy industry because it services large local milk markets and effectively balances fresh milk supply and demand between the eastern seaboard states. In order to ensure adequate raw milk supply during times of high demand or low regional production, dairy processors will source and transport raw milk both within states and across state borders. The progressive annual reduction in the Eastern Australian milk pool over the last few years has seen drinking milk processors increasingly drawing on Northern Victorian milk supplies to supplement seasonal lows in milk availability in NSW and QLD.
DPI estimates suggest that NSW processors sourced almost 30% of their raw milk requirements from outside the state (primarily Victoria). Processors are being forced to pay higher prices to maintain factory utilisation and meet demand and therefore traditional drinking milk premiums are now being paid further south.
Nevertheless, a significant portion of NSW’s southern producers continue to supply processors based in Victoria. DPI estimates that 35% of NSW raw milk production was sold to processors outside of NSW, either for drinking milk in Queensland or to export processors in Victoria.
Farmgate milk prices hit record levels in 2019-20 due to drought-induced constraints on supply and a lower dollar. The NSW state average farmgate price was $8.55 per kilogram milk solids, up 11% year-on-year 56. The overall decline in supply across the eastern seaboard meant that a higher proportion of raw milk was used for drinking milk. Despite the extra costs of transporting milk, processors became progressively more motivated to secure supply and, with global dairy commodity prices relatively stable, competition between processors was the main factor driving the farmgate milk price in 2019-20. Whilst this resulted in an average increase to farmgate prices in the south of the state, traditional drinking milk suppliers were faced with increased competition from southern export focused suppliers.
Due to the seasonal nature of milk price contracts and the highly competitive domestic milk supply environment, the COVID-19 outbreak did not impact NSW 2019-20 farmgate prices. Globally, fourth quarter dairy prices showed a clearly negative trend however, the full impact of the outbreak and its effects on dairy demand and global prices will not become fully apparent in the domestic market till at least 2020-21.
There are numerous drivers of farmgate price including export prices, end-use of the milk and competition for supply. NSW farmgate prices are balanced between the price led by the southern regions, the requirement to sustain a stable year-round source of milk and the cost of transporting milk north from Victoria. Long-term, global dairy prices appear to be the strongest influencer of farmgate price but other factors such as domestic supply will be important, especially in the short term.
The outlook for 2020-21 both domestically and globally is one of mixed fortunes. Disruptions to international supply chains have had an enormous impact on global supply and demand, with flow-on impacts to the local industry. Demand for dairy products will continue to inevitably ease as discretionary spending slows and unemployment rises and, with the global food-service sector virtually shut-down, a sizeable global demand slowdown is imminent.
Domestic and global milk supply is on the increase, further compounding the supply and demand imbalance. Milk production has been expanding in three of the top four dairy exporting regions of the globe 55. This increase in supply is another factor likely to weigh on dairy prices well into 2020-21 and 2021-22.
In contrast, with the improvement in seasonal conditions input prices will begin to ease and, coupled with stronger-than-expected farmgate prices in 2020-21, farm profitability will be well-supported. Despite the current challenges, Oceania commodity prices have remained relatively resilient and long-term forecasts for demand of Australian dairy products both domestically and internationally have remained broadly positive 122.