Key points:

• Global dairy markets have faced very difficult conditions since plummeting in the first half of 2014, reflecting a combination of increased supply and sluggish global demand. However, the full force of the downturn was not fully felt by Australian dairy farmers until earlier this year when major processors Murray Goulburn and Fonterra substantially downgraded farmgate milk prices.
• Recent Global Dairy Trade auction results, combined with a step-up last month from Australia’s largest dairy processor Murray Goulburn and generally favourable seasonal conditions suggests that the situation is stabilising.
• We upgraded our forecasts for dairy last month to reflect lower international supply conditions, with recent data from the European Union and New Zealand showing raw milk deliveries falling in August compared to the same time last year. While New Zealand is the world’s largest dairy exporter, EU production levels are particularly important given the uncertain impact of the removal of milk production quotas last year on more efficient EU production regions (see page 7 for further details).
• Although our forecasts do not point to major upside in global markets in the coming year, we expect a small deprecation in the AUD which should provide some upside. It remains to be seen whether this will flow through to farmgate prices. Dairy Australia’s latest forecasts point to Victorian farmgate milk prices remaining below $5/kg milk solids in 2016-17, although South Australia is expected to fare better. Input costs should provide some respite, with feed and fertiliser unit costs below last season.

For further analysis download the full report.

• In focus – dairy October 2016