Analysts say the corner could be turned as early as next season with annualised farm revenue set to grow almost two per cent for the next five years.
Commonwealth Bank of Australia (CBA) is tipping farmgate milk prices will end the current season at about $5.50 a kilogram for milk solids (MS), but “the price rise journey may be slow”.
New Zealand farmgate prices were tipped to be even better at $6.10/kg MS ($NZ6.50) with NZ production quite likely to keep falling because of a North Island dry season.
“There’s plenty of evidence global supplies are now materially tighter, particularly in the European Union and NZ,” said CBA agri commodity strategist, Tobin Gorey.
“Only in the US is dairy production holding up.”
However, any response to increases in farmgate prices will be dependent on input costs staying low and the lift in volumes produced will more likely be a slow burn, said Dairy Australia senior analyst, John Droppert.
Milk price step-ups to the tune of 40 cents/kg MS in the south had already assisted cash flow for some, but production margins still remain tight or negative and rebuilding equity after such a tough 12 months will be a significant task, he said.
Dairy Australia’s February Situation and Outlook report, shows the year-on-year drop in Australia’s milk production has eased from over 10 per cent in the first four months of last year to 8.5pc for the July to December period.
The gap was tipped to narrow further but full season production would still be down 6pc to 8pc on the 2015-16 total of 9.5 billion litres.
Business analytics group IbisWorld has forecast the global pressure on Australian farmgate prices was likely to depress industry revenue by 5.6pc in 2016-17 after the previous year’s 13.1pc fall.
It estimated total farmer revenue was likely to be down to $3.9 billion – an annualised drop of about 0.7pc over the past five years.
However, given average seasons, industry revenue was set to grow by 1.8pc until 2021-22 to reach $4.3b.
Dairy Australia’s Mr Droppert said the current huge variation across companies in milk price had been among the largest seen in recent times.
However, it should converge more towards the end of the season as companies find they need to catch up in order to hang onto milk, he said.
Nobody was was expecting massive production growth any time soon and as the lifts in volume came through, the variance between regions would be strong, he said.
Large numbers of cows were culled as the devastating margin situation coincided with record beef prices and dairy herds take a long time to rebuild.
“Anecdotally we are hearing there are heifers around, and lower export numbers would support that, so there is potential for a bounce in production next season,” Mr Droppert said.
However, some dairies had been decommissioned and many people had look to other income streams, such as running more beef cows, taking on contract work and selling hay.
He said those still dairying, but milking fewer cows, should come back to dairy when the numbers stacked up,” he said.
“That said, it takes time and it certainly won’t happen this season.”
The report shows the volume of global dairy products traded over 12 months to the end of October rose by just over 7pc, with a recovery in demand from Greater China accounting for around a third of that growth.
In addition to robust export demand, dairy sales in the Australian supermarket channel outgrew the rate of population increase (1.4pc) for each of the major categories except yoghurt.
Mr Droppert said on a long term basis, that was unusual.
“Butter sales have continued to increase for many years, driven by health messages,” he said.
“But it appears the washup from the publicity of price step downs has seen consumers put more dairy overall in their trolley in a bid to support farmers.”
Cheaper unit prices, particularly where cheese is concerned, also perhaps played a part, he said.
Source: NorthQueenslandRegister
Link: http://www.northqueenslandregister.com.au/story/4484963/dairy-profit-tide-outlook-turning-slowly-for-farmers/?cs=4784
