The storm clouds hanging over the global dairy market are likely to clear later this year with competition for milk set to intensify in Australia, according to agribusiness banking specialist Rabobank.
Rabobank senior dairy analyst Michael Harvey said a battle for milk supply was looming between the Canadian-owned Saputo keen to revive the flagging milk intake of its expected acquisition of Murray Goulburn, and the New Zealand-owned Fonterra that was planning further capacity expansions.
Mr Harvey said while smaller and newer dairy players were set to continue recruiting milk, it would be the battle between Saputo and Fonterra that will translate into higher milk premiums being passed to farmers.
He said risks in the global dairy market in the near-term were likely to mean dairy companies would take a conservative approach with their milk prices for the opening of the 2018-19 season but the prospects for a gradual tightening in global dairy markets were bright.
Mr Harvey predicted the timing of the dairy market recovery would favour Australia by occurring during Australia’s seasonal production peak.
Based on Rabobank’s latest global commodity price forecast, and assuming a spot currency rate of US77c, the bank is forecasting the global market will deliver a base farmgate milk price of $5.40 a kilogram milk solids (kgms) in 2018-19 – down slightly from AUD5.60/kgms this season.
But Mr Harvey said greater competition for milk was likely to bring higher value-add payments to Australian producers next season, above those of this season. He predicted premiums of up to 50c/kgms would be paid in 2018-19 across southern Australia to lift the commodity value of milk to between $5.40-$5.90/kgms.
“While the southern Australian export industry often beats the commodity market, it is not always the case. But looking to the past 10 years, the average premium between the base commodity milk price and average Victorian farmgate prices has been around AUD0.40kg/MS,” he said.
On other aspects of the forthcoming 2018-19 season, Mr Harvey expected Australia’s milk production to grow for a second consecutive season.
Rabobank is forecasting domestic milk production will increase by 2.7 per cent in 2018-19 , up 170 million litres of milk. This follows a 3.2 per cent increase, or another 390 million litres, in 2017-18.
“A well-timed autumn break will be vital to setting up the season with increased purchased feed costs and lower cull cow prices expected to place some pressure on margins,” Mr Harvey said.