Australian milk output 'to stay weak' despite price revival


Australian milk output this season will show a sharp decline, despite the incentive from reviving dairy prices, which on one key measure are "nearly 30% above" average levels, National Australia Bank said.

The bank highlighted reasons for reviving sentiment among producers, after a 2014-16 downturn which saw Australian dairy prices, as measured by weighted export values, touch among their lowest levels since 2009.

A market recovery has taken dairy export prices, in Australian dollar terms, to "nearly 30% above the long-run average level from 2010-16", NAB said.

Meanwhile, on the costs side, "feed prices remain very low I the wake of a bumper grain and hay season across eastern Australia", NAB said, with the bank's own feed grain price index, denominated in Australian dollars, at its lowest in nearly seven years.

"We see little upside in global grain markets this year, amid exceedingly strong supplies," the bank said, although adding that US Department of Agriculture data last week showing US winter wheat plantings at their lowest since 1909 "may have some impact".

Spring flush over

Nonetheless, the bank was sceptical of the improved dynamics for milk producers feeding through into a recovery in output, which "plunged last year", notably in October, when deliveries recorded an 11.4 decline year on year.

The hangover from weak farmgate milk prices is "clearly a major factor in lower Australian production.

"While the rally in international markets should see some further upside at farmgate, it is unclear whether production will respond as the seasonal peak [in output] is now over," said Roger Gaudion, head of agribusiness for the bank in the major milk-producing state of Victoria.

Milk output typically peaks in a so-called "spring flush", as cows are put out to fresh pasture.

Herd reductions

Furthermore, Australia's production capacity was suffering from herd reductions forced by the period of low prices, and encouraged by elevated beef values too.

"We have some doubts about the ability for production to recover quickly, given recent herd thinning driven by low farmgate milk prices combined with good cull cow prices," Mr Gaudion said.

The recent pace of output would suggest production falling 8.2% in 2016-17, which ends in June.

"Even if production recovers this year, seasonal production will likely still be down around 5%."

Global trend

The comments underline the expectations of weak output in many major milk producing and exporting countries, ideas which have supported a revival in prices, which soared 47% last year at GlobalDairyTrade, the twice-monthly auction – of which the next is occurring on Tuesday.

Fonterra, which processes the vast majority of New Zealand milk production, last week reported a 4.8% decline year on year in its collections in December.

European Union milk output in September, the latest data available, fell by 2.8% year on year.

In Britain, data show a soft start to 2017 too, with deliveries, at 31.73m litres a day, down 5.6% year on year in the first week.

The US, where output rose by 2.4% in November, "remains an outlier as cheap feed corn continues to underpin lower input costs", Mr Gaudion said.


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