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Dairy Australia - Market News

15 February 2013

Dairy Australia: Dairy 2013 Situation and Outlook - February UpdateDairy Australia: Dairy 2013 Situation and Outlook - February Update

The Situation & Outlook process is designed to provide the Australian dairy industry and its stakeholders with an overview of the entire industry supply chain – from dairy farm inputs to consumer markets.
Dairy Australia - Market News

Australian dairy supply chain in February 2013

Deterioration of production conditions across most regions.

Water available in irrigation regions, but production margins are being squeezed.

Late season milk price step-ups slowed by persistently high Australian dollar.

The strong Australian dollar continues to constrain exporter returns and reduce international competitiveness.

Further step-ups depend on where the AUD is against manufacturer budget expectations.

US supply contracted less than expected following drought, but milk production growth has slowed.

Australian and EU production conditions have deteriorated, while NZ milk production remains strong.

International demand is steady, but buyers remain cautious in current economic environment.

Grain prices remain elevated, due to below average crop yields and strong export market demand.

Seasonally low purchasing and weaker market sentiment have kept fertilizer prices in check.

Lower cull cow prices and challenges facing the export heifer sector, despite a strong year for shipments.

Cautious consumers, but confidence is building –growth in non grocery/foodservice sales continues.

Total supermarket retail fresh white milk sales volume up 2.7%, branded sales volume increased 15.0%.

Key driver outlook


The Australian dairy industry in February 2013

  • Milk price and higher feed and energy costs have been the major concerns during the 2012/13 season. Southern export region farmers are facing a 8-10% price drop. Northern domestic producers also face negative price signals and some are now also coping with flood impacts.

  • Australian milk production is up 0.5% (28m litres) for the six months to December, to 5.3bn litres. However, production during December actually decreased 1.3% compared to December 2011.

  • Increasingly difficult seasonal conditions have prompted Dairy Australia to lower its milk production forecast for the 2012/13 season to 9.5bn litres, up just 0.2% on last season.

  • International commodity prices have improved since September and the Australian dollar has largely been stable. While the many different payment systems make a definitive forecast difficult, a range of around $4.90–$5.10 per kgMS or 36-38 c/L for southern farmgate prices is likely.

  • Many companies have forward-sold manufactured product, locking in US dollar prices, the primary downside risk to this payout forecast remains a higher Australian dollar (AUD).

  • Major Australian banks are forecasting the AUD to be 100–107 US cents by mid-2013, but expectations diverge heading toward the end of 2013 when the forecast range is 99–108 US cents.

  • A stronger US economic recovery, or a significant drop in the value of mining exports, are the factors that could send the AUD lower.

  • The IMF revised its global economic forecast down 0.2% because of ongoing uncertainty over Europe. But developing economies are expected to grow 5.5% in 2013–a positive for dairy demand.

  • An economic recovery appears to be underway in the United States. Consumer confidence and spending is increasing slowly. This is also supporting export-dependent developing economies.

Fig 1 –Indicative international dairy commodity prices

  • Despite challenging economic conditions and an increase in commodity prices, global demand has remained steady. Global dairy exports to China increased 26% in 2012, to over 1,350,000t.

  • Chinese consumer spending is expected to grow 8.5% in 2013, demand for infant formula is strong and young consumers are driving cheese consumption.

  • Australian consumers remain cautious, but confidence has improved slightly in early 2013. Although average wholesale prices for some key dairy product categories firmed slightly over the December quarter and total sales volumes were broadly stable, average per litre supermarket retail fresh white milk prices are down.

  • Major supermarkets are extending $1-per-litre milk to petrol and convenience outlets. Changes to retailers’ fresh milk sourcing arrangements may also be on the horizon.

  • On the supply side, the US drought is yet to break and poor weather is slowing EU production growth. If poor conditions continue, the northern hemisphere production peak will suffer.

February 2013

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