Insights September 2024

Commodity Overview

• Favourable seasonal conditions increasing milk supply in eastern states is offsetting lower production in dry areas of western Victoria and South Australia. This is expected to remain the case through peak production in coming months.
• Global dairy prices are expected to see some volatility but remain around average levels as supply is sufficient to cater for current demand.

Australian milk production for the 2023/24 season finished at 8.38 billion litres. This represents a year-on-year increase of 3.1 per cent but is 5.2 per cent below the five-year average. The first month of production in the new season was broadly positive. National milk production of 579 million tonnes in July was a 1.6 per cent increase on last year, but again 6.7 per cent below average. Digging into regional production gives a guide to expectations for the coming month. Positive seasonal conditions in eastern states are encouraging pasture growth and keeping a lid on fodder costs. But there are areas of concern. Dry conditions in Tasmania saw July production of 17 million litres the lowest total in at least ten years. A relatively neutral rainfall outlook for spring means below average production is likely through the peak production period. A similar result and outlook applies to South Australia. Milk output in July of 31 million litres was 9 per cent below average. Dry conditions and a neutral outlook point to flat to lower production than last year. Victorian milk production in July was up 2.5 per cent on last year. Parts of western Victoria remain dry which is anticipated to see output from that region similar to or below last season. But this should be more than compensated by better conditions in northern and eastern regions. This trend is likely to be replicated at a national level. Reduced milk production in Tasmania, South Australia and parts of western Victoria will be offset by improved production in New South Wales and eastern and northern Victoria. Overall, the forecast is for 2024/25 milk production of around 8.3 billion litres. But this will be reliant upon seasonal conditions holding up in 2025.

Global supply and demand for dairy is expected to maintain an uneasy equilibrium. Global milk production is forecast to remain flat to slightly lower. European supply is expected to record slight declines. Major European producers in Germany and France are contending with adverse weather conditions. And more broadly in the EU, high production costs and environmental regulations are exerting pressure on producers. Cow productivity continues to lift marginally. But this isn't enough to counteract declining herd numbers. Cow numbers in the US are stabilising, but this will result in a steadying of milk production rather than an increase. New Zealand produced record high production for the month of July, up 9.2 per cent year-on-year. Expectations are for production in coming months to see more modest year-on-year gains of 1-2 per cent. Overall, global supply is likely to remain relatively stable with minor lifts or declines in varying regions balancing out.

Global demand and prices are showing a similar lack of direction. The Global Dairy Trade (GDT) Index is up 31 per cent year-on-year. But current levels are only 2.5 per cent above average. Cheddar, Skim and Whole Milk Powder prices are all around five-year averages. None of these dairy products have maintained a price direction for more than three trading events this calendar year. This is reflective of global demand. Chinese demand remains subdued, so flat global production is sufficient to cover demand. There are signs Chinese milk production is declining though. Low Chinese milk prices are seeing herd numbers decline and production slow. China has also announced an anti-subsidy probe into EU dairy imports. This has potential to see Chinese imports lift from other dairy exporters including Australia. But quantities targeted in the probe are relatively small and aren't expected to result in significant uplift in imports. Global supply and demand remain balanced. While it wouldn't take much to tip this balance, there aren't any clear signs of a shift in the near term.

Processors have held farmgate prices steady season to date and step ups are unlikely. Heading into the peak production period, they don't have much pressure to lift offers. With 2024/25 farmgate prices around 15 per cent lower than last season, producer margins are tight. Easing grain prices and positive seasonal conditions are positive. But margin pressure will remain a key concern for producers, particularly in areas suffering drier conditions.

Sources: Milk Value Portal, Dairy Australia