Australian agriculture outlook 2024: Dairy

From the field

The Australian dairy industry has changed significantly in the past few years. Processors continue to reshape businesses to adjust to a lower domestic supply environment. Farmer profitability has been consistently strong for multiple seasons, allowing for investment on and off farm. With farmgate prices expected to ease next season we can expect a renewed focus on production efficiency with input costs remaining elevated and securing labour still a challenge.

Mik Harford, Agribusiness Relationship Manager – Leongatha

Overview

Australian milk production in 2023/24 is forecast to stabilise at around 8.0 to 8.1 billion litres. Milk production in the first quarter of 2023/24 is on par with last season's 676 million litres. However, it is 5.6 per cent below the average of the past five years. Production in 2022/23 fell five per cent year-on-year to a thirty-year low of 8.139 billion litres. The trend of fewer farms with larger herds will continue to see consolidation of farming operations. But industry contraction will ease in 2024 as record farmgate prices discourage exits. Agriculture Victoria and Dairy Australia’s 2022/23 Dairy Farm Monitor Annual Report shows that dairy farms in Victoria had high profitability in the past season. Cost of production pressures have eased somewhat but remain above average. This means that farms need to be more efficient and produce more. Many question why high profitability for producers in recent years hasn't resulted in increased supply. Input costs remain elevated and labour availability continues to be an issue. This has likely impacted efficiency. Dairy Australia's In Focus 2023 report estimates the average annual milk production per cow in 2022/23 was 6,164 litres. This is a 1.2 per cent year-on-year decline, and 3.3 per cent below peak production of 6,376 litres in 2020/21. But the trend of declining production is expected to moderate at around 8.0 to 8.1 billion litres in 2023/24.

Global milk production is anticipated to remain relatively steady in 2024. Lower demand and weaker global prices have slowed growth in major producing nations. Milk production in the EU is expected to fall marginally in 2023/24 as labour availability and environmental regulations increase workloads for farmers. However, the slight increase in production from the US, New Zealand, Argentina, and Brazil makes up for it. The combined growth of major dairy exporting countries is not expected to exceed one per cent year-on-year. Current global supply is sufficient to meet demand - which remains lacklustre.

Dairy is considered a staple in Australian households which holds domestic demand steady. While there is some variability in trends according to product, consumption of dairy products remains robust. Dairy Australia's In Focus 2023 report shows per capita milk consumption has declined 8.4 per cent since 2018/19. Consumption of around 90 litres per person in 2022/23 is high in comparison to other developed countries. In that same period, cheese consumption has lifted 11.1 per cent to an average 15 kilograms per capita. While domestic demand remains stable, cost of living pressures are driving consumer buying choices. The high cost of local production is seeing increased levels of cheaper imports. Consumers who care about cost are choosing products based on price. Often, these products are imported. Australia is a net exporter of dairy products, but low local supply and high production costs are increasing imports. Australia has imported a record high $1.392 billion of dairy products year to date. This is a 20 per cent increase on 2022, and 33.5 per cent above the five-year average. In 2023, Australia has imported more cheese by value than they have exported. The trade balance (exports minus imports) of cheese is -$2 million year-to-date. That's a $170 million turnaround from the average cheese trade balance of $168 million. The ratio of imports to exports in 2023 year-to-date is at a more than ten-year low of 60.9 per cent. New Zealand is the largest origin for Australian dairy imports with a total of $763 million year-to-date in 2023. This represents more than half of Australia's dairy import value. The US is the second largest origin for dairy imports but only at value of $206 million, accounting for 15 per cent of market share. Australia's dairy consumption will increasingly rely on imports due to low domestic production. As a result, the trade balance will continue to shift.

Global demand remains, in a word, lacklustre. China has typically been the world's largest importer of dairy products. USDA statistics show around 28 per cent of global dairy imports go to China. Recently China has expanded their domestic production to reduce reliance on imported products. This resulted in China holding an oversupply of Whole Milk Powder (WMP) and Skim Milk Powder (SMP) stocks. The lack of Chinese demand on the global market has eased competition for supply. This has given major buyers in North and South-East Asia more flexibility in being able to purchase during price lulls. Tepid demand is expected to continue through 2024 until Chinese demand picks up. But the recovery of Chinese demand is a slow progress. Growth in China's dairy consumption is stymied by economic headwinds and milk powder stockpiles. As global prices have fallen, Chinese milk production is slowing, and stockpile levels are declining. But Chinese milk powder stocks are still up year-on-year. WMP stocks are estimated at 35 per cent and SMP stocks 110 per cent on September 2022. Growth in global demand is highly dependent upon Chinese consumption. Global demand for dairy products is anticipated to lift in 2024, but it is likely to be gradual and may not eventuate until later in the year.

Australian farmgate milk prices will ease from record highs in the 2023/24 season. The lowest domestic production in 30 years drove competition between processors to secure supply. Processors offered an average of a record high $9.50 to $9.80/Kg MS in 2023. Production will remain tight and competition to secure supply will support opening farmgate bids. But the disconnect between local farmgate and global dairy prices mean processors are unlikely to maintain current prices. We anticipate opening farmgate prices will be well under $9/Kg MS, and likely to be in the $8.00 to $8.50/Kg MS range.

The Global Dairy Trade (GDT) Index averaged US $1,299 in 2022. This is 24 per cent above the five-year average, and the highest annual average in almost 10 years. In 2023, the GDT Index is averaging $982, a 24.3 per cent year-on-year decline and 6.1 per cent below average. Prices according to commodity group vary. Butter and Cheddar values have held up better than SMP and WMP prices. At the same time, Australian farmgate prices have maintained record highs. Minimal growth in global dairy production means global prices are unlikely to move significantly lower than current levels. Significant uplift in prices is unlikely in the near term as Chinese demand remains subdued. Lower global prices have slowed down production growth which would lead to price resurgence if global demand outweighs supply. But recovery is likely to be slow and global prices are anticipated to remain around average in the first half of 2024.

The dairy industry hasn’t had a period of such consistently profitable returns in many years, but 2024 looks like seeing the first decline in farmgate milk prices in four years. Low local production will support prices as processors compete to secure supply. But farm efficiency will be critical for producers to maintain profit margins in the coming season.

Source: ABARES

Source: Global Dairy Trade, Dairy Australia, Rural Bank