Insights February 2023
Insights February 2023
- The Global Dairy Trade index has bucked the trend of declining prices and made gains for the first time since mid-December.
- Australian milk production remains very tight and is on track for the lowest pool in 30 years should current trends continue.
- Should global prices continue to appreciate, farmgate milk prices are anticipated to remain around $10/kg MS, supported by reduced domestic production.
Australian milk production plummeted in December as flooding and wet weather took its toll. National production of 857 million litres was eight per cent below average. Calendar year production of 10.2 billion litres is the lowest in over a decade. This was driven by reduced production in flood affect Victoria and New South Wales. Victorian production came in under 500 million litres, 10 per cent below average. New South Wales production of 86 million litres was six per cent below average. Production in both states was the lowest in over ten years. Ongoing industry exits continue to contribute to the decline in Australian dairy production. Should production continue to follow seasonal trends, 2022/23 milk production is forecast to drop below 8 billion litres. This would be the lowest pool in thirty years.
The most recent Global Dairy Trade auction reversed an eight week downwards trend. Gains were stronger than expected and resulted in butter, cheddar and whole milk powder lifting. Global prices were anticipated to continue easing, but strong demand from North Asian buyers surprised to the upside. This is potentially a sign that the market is expecting prices to go up with buyers locking in low prices. But it's still too early to say whether this is a blip in downwards trajectory of global prices, or the start of an upwards trend.
Either way, this is a good result for Australian farmgate milk prices. With such a low domestic pool, processors were already going to have to compete to secure supply. Fonterra has recently stepped up their offering with farmgate prices averaging $9.55/kg MS, and Coles is offering longer term contracts at $12.05/kg MS in order to keep consumer prices steady. Contract step ups this late in the season bode well for opening farmgate prices which should start being announced in coming months. The main headwind for farmgate prices is pressure from global trade. Should global prices continue to appreciate, Australian farmgate milk prices are likely to remain at or above $10/kg MS.
Sources: Global Dairy Trade, Dairy Australia