Insights October 2023

Commodity overview

• New season milk production remains on par with 2022/23 with full season production estimate of around 8.0 to 8.1 million litres.
• The Global Dairy Trade Index has lifted in the past three sessions but still sits 13 per cent below average.
• Industry contraction continues with suggestions Saputo may close more processing plants.

Australian milk production of 571 million litres in July is almost unchanged on last year, but 6.6 per cent below average. Milk production is expected to stabilise in 2023/24 at around 8.0 to 8.1 million litres. But low domestic production, high farmgate milk prices and below average global prices continue to see industry contraction. Citing Australia's low milk production as the main cause, Saputo has refused to rule out further plant closures to 'right size' its network. There are suggestions Saputo intends to reduce the number of processing plants from eleven to five. The closure of three additional plants joins two plants currently being considered for sale to Coles. The Australian Competition and Consumer Commission (ACCC) was due to make a decision on the sale of the plants in September. That decision has been delayed as the ACCC requested further information from the parties involved.

It's not all bad news though. Agriculture Victoria and Dairy Australia recently released the Dairy Farm Monitor Annual Report. Results showed that 2022/23 average profitability in Victoria was the second highest in 17 years. Feed and fodder costs were the largest variable cost. Flooding and wet conditions resulted in higher supplemental feed requirements. High labour costs also contributed to the highest overhead costs in 15 years. With farmgate prices at similar levels in 2023/24, there is some optimism for positive profits in the coming season, though a dry outlook is weighing on sentiment in some areas.

The Global Dairy Trade Index has continued to lift, making gains in the last three sessions. Butter, Skim Milk Powder (SMP) and Whole Milk Powder (WMP) have all lifted in the past two sales. Butter prices lifted 4.8 per cent month-on-month to sit above average. The global SMP price has lifted 12 per cent in the past month but remains 14 per cent below average.

Production in the US, EU and New Zealand are starting to feel the effects of increased costs and inclement weather. This is seeing supply beginning to tighten, and buyer’s inventories getting closer to expiry. Reduced Chinese production is also weighing on supply concerns. Global production has been sufficient with reduced Chinese demand but is by no means comfortable. This is seeing some tension in global markets leading to price lifts. Global demand remains subdued, so significant lifts aren’t expected in the near term.

Record Australian farmgate prices and depressed global prices mean the returns from commodity products will be weaker than the cost of milk for processors. For Australian dairy to remain profitable and competitive, either farmgate milk prices will have to ease or global dairy prices lift significantly. Record high farmgate prices may support supplier profitability this season. But current conditions are unsustainable so suppliers should be prepared for lower prices next season.

Sources: Global Dairy Trade, Dairy Australia