Australian dairy producers are enjoying steady improvements in global prices and local seasonal conditions, a far cry from the dire situation early last year, according to the National Australia Bank.
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In NAB’s latest “In Focus: Dairy” report, the NAB weighted dairy export price indicator shows AUD denominated dairy prices at their highest level since March 2014.
NAB’s agribusiness head Roger Gaudion said the speed of the recovery had exceeded the bank’s expectations, noting export prices were now nearly 30 per cent above the long run average level from 2010 to 2016.
“A key driver of the recovery has been falling milk production in most major exporting nations,” Mr Gaudion said.
“In New Zealand and the European Union, the world’s two largest dairy exporters, production in late 2016 was down 4.5 and 2.4 per cent respectively, year on year.
“However, the United States bucked the world-wide trend by increasing production at the end of last year, largely due to an abundance of cheap feed corn underpinning lower input costs,” Mr Gaudion said.
National milk production in Australia has also plunged, with October 2016 deliveries down 11.4 per cent year on year.
Mr Gaudion said the ongoing impact of lower farmgate prices had been the major influence.
“While the rally in international markets should see some further upside at farmgate, it is unclear whether production will respond as the seasonal peak is now over.
“We also have some doubts about the ability for production to recover quickly, given recent herd thinning driven by low farmgate milk prices combined with good cull cow prices,” he said.
If domestic milk deliveries continue at the pace set last year, 2016-17 seasonal production will be down 8.2 per cent to 8.7 billion litres.
Even if production recovers this year, production will still be down about five per cent.
Feed prices in Australia remain very low in the wake of a bumper grain and hay season across eastern Australia, and NAB’s weighted feed grain price index currently stands at its lowest level since April 2010.
NAB is forecasting USD gains in 2017 as President Trump’s economic plans unfold, but only single-digit percentage gains as the USD cycle is already quite mature.
NAB is continuing to predict the Reserve Bank will cut rates by 25 basis points in each of May and August 2017 because of a weak growth outlook for 2018, a possible rise in unemployment and ongoing low inflation.
A 70 cent AUD in 2017 was not dependent on RBA cuts but if these eventuated, they would make a sub-70 cent USD more likely, the NAB forecast.
