The Australian dairy industry continues to be one of Australia’s major rural industries with a farm gate value of production of approximately A$4.8 billion in 2019/20, up from A$4.4 billion in 2018/19 and ranking fourth behind the beef, wheat and sheep industries. Most processors opened the 2020/21 season with a base price between A$6.40 and A$6.60 per kilogram of milk solids and an average weighted price of around A$6.61/kgms. This represents a decrease of approximately 2.6% on the 2019/20 opening price of circa A$6.79/kgms, with the closing price data to be released following June at the conclusion of the season.
Total domestic milk production increased for the three decades leading up to 2002, where annual production was just over 11 billion litres. Since then, production has declined to around 9 billion litres (forecast) in 2021. Whilst the number of dairy farms in the market continues to decline, the average size of farms has increased, expanding to create economies of scale and to mediate the associated costs of milk production. Australia’s total annual milk pool declined by approximately 19 million litres (-0.22%) in 2019/20, on the back of a small decrease in the number of cows milked (YoY). A 2.01% decline was observed, sliding from 1.44 million cows in 2018/19 down to 1.41 million in the 2019/20 year.
While many farmers are now turning a profit, this more recent positivity comes too late for many operators who have already exited the industry as a result of prolonged poor conditions and unviable pricing offered by processors and supermarkets alike. Due to successive below average years and poor seasonal conditions, most farmers will now be looking to focus on paying long dated creditors, reducing debt, and building up fodder inventory where possible. Due to the cashflow constraints and lack of profitability experienced in the prior 12 to 36 months, farmer to farmer transactional activity has been be slower. Larger family farms and corporate outfits have proven to be active purchasers however, taking advantage of both the milk price and conversely smaller operations being forced to exit the industry. We anticipate that these exits are more likely to occur in areas heavily reliant on irrigation water such as eastern Gippsland, northern Victoria and the southern Riverina in New South Wales. Market sources and selling agents have unanimously echoed that the supply of medium to large scale dairy assets is exceptionally thin, particularly in south-western Victoria and the Gippsland region, with a consequential build-up of demand and favourable lending conditions resulting in record prices being paid for land.
• Favourable conditions in southern Australia and strong prices (historically) for milk at the farm gate create a positive outlook for many dairy farms in these regions with a slight increase in milk production expected.
• COVID-19 continues to evolve with resultant interruptions to export and import markets; however, dairy as a commodity has proven resilient both globally and at a national level, largely underpinned by population growth.
• New Zealand is presently enjoying a strong recovery, with year to date production 3% higher as of September following favourable seasonal conditions, while the United States and the European Union are expected to produce around 2% more raw milk this financial year, according to ABARES.
• Damaged balance sheets and slow cash flow recovery anticipated for many regions, with the paying down of debt to occur initially and reinvestment expected once business efficiencies are re-discovered, where possible.
• As milk production falls competition for supply will rise, further encouraging an uplift of pricing for raw milk and a reduction in processor loyalty, with transitions to alternate receivers expected where practicable. A 2019 survey undertaken by Dairy Australia indicated that a record 25% of suppliers had changed processor in the past 12 months, albeit with a fifth transferring due to the transition of the former Murray Goulburn Koroit site to Bega Cheese.
• Strong sheep and beef prices should continue to drive demand for lower order dairy farms (ignoring dairy infrastructure) with good levels of demand for large scale dairies, which appear to be tightly held. Several smaller operators have been forced to sell both their farms and water amidst long periods of financial pressure and negative cashflows.
• Domestic grain prices are currently favourable from a feed perspective, following a strong 2020 harvest. The La Nina event is translating to wet conditions and continued strong production volumes, and will likely aid a steady state in the short to medium term.
• The outlook for irrigation water prices remains favourable, with temporary water decreasing by over 50% in many areas. This will aid the production of pasture and drastically reduce the need for purchase feed in areas reliant on irrigation for production.
• A stronger Australian dollar (0.77 USD in March 2021) relative to the year prior makes an Australian product less attractive in the global marketplace; however, a strong Chinese Yuan has buoyed demand out of Asia.
• Demand for milk continues to increase as the Australian population continues to grow and at an exponential rate, particularly in major eastern seaboard cities Melbourne and Sydney, and it is our view that the dairy industry offers excellent capital growth prospects over the medium term, particularly as domestic dairy production is at decade lows