Dairy-farming profits to continue for fourth year straight, forecast suggests

The nation’s dairy farmers can look forward to yet another profitable season this coming fiscal year, though the latest forecast from agribusiness bank Rabobank suggests it will ease from the record profits of 2022-23.

The bank’s annual Australian dairy seasonal outlook, released last week, indicates that despite a current downturn in the global commodity price cycle, the bank’s analysts believe Australia’s southern export region can look forward to a ”firm landing zone” for profits in 2023-24.

The forecast suggests continued profits in the coming season will arise due to stronger domestic market returns, a weak Australian dollar, and ”aggressive recruitment and retention strategies” by the major dairy processors.

Rabobank senior dairy analyst Michael Harvey said those factors were providing a buffering effect to the full extent of the current global pressures, and with the 1 June deadline for minimum milk price offers approaching, the bank forecast minimum offers for new-season milk in southern Australia to be between 8.50kgMS (kilogram milk solids) and 9.00kgMS.

“At worst, this represents a 10 per cent decrease from 2022/23 prices and a farmgate milk price that is well above the medium-term average for southern Australia since the introduction of the industry’s Dairy Code of Conduct in January 2020,” Mr Harvey said.

“Another season of historically elevated milk prices will support farmgate margins.”

The outlook said the new season would bring with it ”welcome relief” for dairy farmers, from a recent record-high cost base, with lower prices for purchased feed and fertiliser flowing through to producers’ balance sheets, and even if some farmers saw an easing in minimum price offers, it should come with cost relief.

Mr Harvey said global feed benchmark prices were down compared with last year, though still above medium-term averages, while local wheat prices were tracking close to global trends.

“Locally, grain supplies are high after several bumper winter crops, with the prospect of another decent winter crop this year meaning feed supply will be adequate for buyers and will help to dampen feed supply risks,” he said.

Australian dairy farmers would already be seeing the benefits of a significant correction in global fertiliser prices and, therefore, a boost in affordability, Mr Harvey said.

“Looking forward, Rabobank expects the underlying fundamentals in the fertiliser market to lead a period of price stability, which will assist Australian dairy farmers as they prepare their nutrient management programs for the year ahead.”

Despite the continued positive outlook, the forecast warns farmers should still expect some headwinds in 2023-24, particularly higher interest rates in the wake of the recent Reserve Bank decision to hike the cash rate for the 11th time in a year, and the cost of labour.

Mr Harvey said producers would still “have to deal with a high-cost-of-production environment in the 2023/24 season, as inflationary pressures flow through in overhead costs, particularly the cost – and availability – of labour”.

Globally, the report showed milk prices across several dairy-exporting regions had already fallen after the drop in commodity prices since the peak in the first half of 2022, and those were largely due to a shift in the ”underlying fundamentals” including a return to growth in milk supply across most dairy-exporting regions and softer domestic demand.

One of those key factors was sluggish import appetite from the globe’s largest dairy importer, China, and widespread demand ”rationing” in several dairy markets across the retail, food-service and ingredient market channels.

Mr Harvey said ”indicative stream returns” for Australia’s dairy product mix had already fallen between 30 per cent and 40 per cent compared with the same time last year and were now at, or below, average returns of the previous five years.

The outlook said rising growth in milk production in export regions this year and ”largely absent” Chinese buyers until the second half of the year would keep downward pressure on global dairy commodity prices.

“However, at some stage the cycle will turn and global commodity prices will begin to increase, but this will depend on when China returns as a meaningful buyer in export markets,” Mr Harvey said.

The domestic market was already experiencing rising consumer prices, which Mr Harvey said was largely driven by dairy processors passing through record-high farmgate prices and other input costs, which would lead to stable prices over multiple seasons for producers supplying the domestic market.

But the domestic supply chain was still being challenged by a declining milk pool, the report said, with the annual availability of milk for manufacturing in 2022-23 falling below six billion litres for the first time since 1990.