The report said while global dairy market “fundamentals” remained strong and high local milk prices would support profitability, farmer margins were under pressure from increasing costs.
It said “a soft landing in global markets and a strong currency will still support record milk pricing in 2022-23”, with Rabobank forecasting an indicative milk price of $8.40/kg MS for southern Australia.
This would be a record price and 15 per cent higher than benchmark milk prices for the 2021-22 season, report author Michael Harvey said.
Commodity prices for Oceania-origin butter and cheese are trading at record levels and the milk powder complex is nearing record highs, he said.
Unchartered territory
Global dairy markets are in “unchartered territory”, with global market tightness driven by a “complete shutdown in milk supply growth across the ‘export engine’,” Mr Harvey said.
“Global dairy markets are witnessing a rare event, with the ‘Big 7’ dairy exporters (the EU, US, New Zealand, Australia, Brazil, Argentina and Uruguay) all recording lower milk production this year than last,” he said.
“This supply crunch has primarily been driven by a combination of rising costs, supply chain disruptions and weather-related impacts.”
Rabobank expects the current upswing in the global dairy market, however, to be nearing its peak in the current quarter.
Margin squeeze
“Looking back, it is hard to recall a time when so many major global and geopolitical events clouded the outlook for markets at once,” Mr Harvey said.
“Considerable cost inflation is already being felt on-farm.
“Despite the coming lift in milk prices in the 2022-23 season, rising input costs mean there is potential for squeezed farm margins.”
Supply competition
Given the complicated operating environment, dairy farm businesses should welcome the strong local guaranteed milk pricing, the report said, as processors competed for dwindling Australian supply.
“Few dairy farm businesses operating in trade-exposed dairy sectors in other markets have this security and longevity in guaranteed milk prices,” Mr Harvey said.
“There are record minimum milk price offers already in the market across southern Australia.
“This will provide a strong cash flow position for farm businesses and, given the level of price security, could provide a good risk management platform for inputs to ensure an adequate locked-in margin.”
Milk production
In terms of milk production, Australia’s national herd has fallen for the fifth consecutive year, with Rabobank expecting the 2021-22 season to finish down 3.5 per cent at 8.55 billion litres.
“There are green shoots on the horizon,” Mr Harvey said.
“Heading into the new season, farmers have a favourable level of home-grown feed reserves and access to a plentiful supply of supplementary feed.
“Solid financial footing should drive more capital expenditure and reinvestment in their dairy farms.”
Rabobank forecasts a 0.9 per cent increase in milk production in 2022-23, returning production to 8.64 billion litres, and representing “the first small steps towards stabilisation”.
