Dairy Situation and Outlook
October 2014
A
Situation and Outlook – October 2014
Contents - October 2014:
Situation and Outlook
Australian Dairy value chain
1
Six key drivers of the Australian Dairy Industry
2
Executive summary
3
Key driver analysis
4
Global economy
4
Global demand
5
Australian market
8
Global supply
11
Input markets
13
Exchange rates
18
Policy updates
Murray Darling Basin Plan
19
Energy and carbon policy
19
Trade policy update
19
2013/14 Victorian Dairy Farm Monitor Project
B
19
Situation and Outlook – October 2014
21
Australian Dairy value chain
Export
Water, Grain
& Hay
Inputs
Milk
Production
Manufacturing
Marketing &
Distribution
Australia
Retail &
Food Service
Imports
Inputs
Milk Production
Manufacturing
Export market
Australian Market
> While large grain harvests are forecast
globally, the Australian harvest has been
revised downward, and forecast lower
than last year.
> A strong finish pushed Australian
milk production to 9.24 billion litres in
2013/14, up 0.4%.
> Changes of ownership reflect external
interest in the Australian dairy industry.
> The pricing correction that began in
February has continued as demand has
been outpaced by growing supply.
> Café and restaurant sales positive,
and improved supermarket retail
performance across the major
dairy categories.
> Cereal and lucerne hay supplies may
remain tight.
> Australian dairy heifer exports in 2013/14
were stronger than ever.
> Weak domestic demand has restricted
the ability of local fertiliser prices to
follow strengthening global prices.
> Temporary water prices remain
significantly above prior year levels.
1
Situation and Outlook – October 2014
> Recently announced deals suggest
> Strong international market pricing drove
ongoing interest from Chinese investors.
volume growth in 2013/14, despite a
> New MG plants open, supplying fresh
correction starting in February this year
drinking milk to the Australian market.
production momentum is expected to
continue in the absence of
> Further investments also made in
external shocks.
UHT capacity.
> 2014/15 growth is forecast at around
2%, with a production range of 9.35 to
9.45 billion litres.
> Many domestic-focused producers
in the northern and western states
continue to face challenges around
weather and production margins.
> As European production growth slows,
the long-expected US supply response
has commenced.
> Huge inventories and a recovery in
domestic milk production have slowed
Chinese import growth from April and
has been negatively affecting pricing
> Australian-based processors establishing
since then.
direct relationships with customers in
Asia to create pathways from farms
> Buyers in price-sensitive markets such
to market.
as those in the Middle East and North
Africa have purchased more dairy in
response to lower commodity prices.
> Russia’s embargo on food imports from
a number of major exporters, including
Australia, while limited in direct price
impact, has added further uncertainty
into an oversupplied market.
> Cheese and yogurt ‘premiumisation’
boosts total category value and dairy
spreads still strong.
> Private label milk regaining market share
in fresh milk category and branded
product share slipping. Average retail
selling price is $1.93/l for branded and
$1.01/l for private label milk.
Six key drivers of the Australian Dairy Industry
Global economy
Global demand
Australian market
Global supply
Input markets
Situation
Outlook
Situation
Outlook
Situation
Outlook
Situation
Outlook
Situation
Outlook
Situation
Outlook
Neutral
Neutral
Neutral
Neutral
Positive
Neutral
Negative
Negative
Positive
Neutral
Positive
Neutral
> Improved US economic situation
is encouraging some softening
of the AUD.
> China’s economic growth
slowing and credit-induced
concerns mounting despite
favourable policy reforms.
> The US recovery continues but
euro area worries around jobs,
consumption, deflation and
debt remain.
> Southeast Asian economies
benefiting from domestic
developments as well as
conditions in better performing
advanced economies.
> The biggest buyers of 2013
have slowed or withdrawn
from buying since early 2014,
particularly China. The resulting
slowdown in aggregate import
demand has seen prices fall;
futures markets suggest little
upward movement in the
short term.
> Many buyers have waited to see
where prices will bottom out
before committing to forward
purchases, wishing to avoid
getting caught with overpriced
stock.
> Attractive margins have buyers
increasingly seeking to lock in
pricing at current levels.
> Russian ban on agricultural
imports creates uncertainty as
global dairy exporters jostle to
mitigate temporary oversupply,
or adjust production schedules
to take advantage of the market
opportunities.
> Global crop forecasts are strong, > Ongoing discussion of US
but the September ABARES
central bank ‘tapering’ of
Australian crop report estimated
quantitative easing (reducing
2014/15 winter crop production
its economic support program)
> Europe has led the global supply
at 12% below 2013/14. National
creates uncertainty on the
response with its strongest
> Café and restaurant sales
wheat production is forecast
USD outlook.
growth rates in nearly three
positive, and improved
down 10%, barley 21%, and
decades, though growth is now
supermarket retail performance
> The Australian dollar has
canola 10%.
moderating as milk prices adjust
across the major dairy
weakened recently after a long
> Northern Australia continues
to global market movements.
categories.
period of stability, but it’s too
to draw hay from further south,
early to bank currency gains just
> US growth has been slower, but
> Firming prices reflected in
and low yields are forecast in
yet. AUD down on data from
is now stepping up a gear as
positive growth in CPI dairy
the region. Cereal hay may be
China and markets’ outlook on
the effects of a booming export
sub-component.
less available than usual in the
brighter prospects in US.
program boost domestic US
coming season. Lucerne hay
> Within the fresh milk category,
market prices.
> AUD still expected to weaken as
supply is expected to
branded product ceding share
US ‘tapering’ likely transforms
remain
tight.
> Moderate growth is expected
again to private label. Within
into rate rises in time.
in Oceania, with weather
the milk category, the average
> Weather conditions, soft global
conditions favourable for most
retail selling price is $1.93/litre
> Weaker dollar supports higher
commodity prices, and a
producers, but tighter margins
for branded fresh white milk, on
exporter earnings and positive
stubbornly strong AUD have
are likely to constrain expansion.
average, private label fresh white
for farmgate prices—though
dampened domestic fertiliser
milk is selling for $1.01/litre.
limited by lower commodity
demand, restricting the ability of
prices.
local prices to increase in line
with global equivalents.
> Emerging markets seeing
lower international prices boost
> Several irrigation systems
affordability despite exchange
have 100% HRWS allocations.
rate fluctuations.
However, temporary water
prices remain significantly above
year-earlier levels.
> Consumer confidence still shaky
and sentiment on financial
outlook darkening with weaker
wage growth.
> Northern hemisphere milk
production is slowing seasonally
as winter approaches.
> Strong Chinese demand has
seen dairy heifer exports 15%
above the 5-year average.
2
Exchange rates
Situation and Outlook – October 2014
October 2014: Situation and Outlook
Executive summary
International dairy markets started the 2013/14 year at near-record levels, but commodity prices have
been declining steadily since February and depending upon the product are trading some 20-40%
lower. Strong milk supply growth in major dairy regions combined with a sharp reduction in
purchasing by China, and more recently, uncertainties surrounding the impacts of Russia’s partial
import embargo has focused attention on the inherent volatility in global dairy markets.
The steady decline in global commodity prices emphasises the importance of China and Russia as
key demand regions. Demand more broadly for dairy is still steady, but just not strong enough to
absorb the current wave of milk production growth encouraged by high international farmgate prices.
Futures markets, seasonal dairy trade flows and expectations of the rate at which Chinese dairy
inventories decline, suggest a recovery in global commodity prices may not arrive until the first half
of 2015.
The impact of declining prices in international markets can be seen in the Dairy Australia Export
Region Weighted Cost and Income Index with cost squeeze scenarios likely given the reduced
optimism surrounding southern export region farmgate prices. Northern dairy regions are less
exposed to global market fluctuations and the farmgate pricing outlook remains comparatively steady.
The 2013/14 national milk production season finished strongly, ending the season up 0.4% with a
total of 9.24 billion litres. Southern export-focused regions powered this late season growth,
benefiting from booming international markets in the final months of the 2013 calendar year. Despite
the broader market deterioration since February this year, this production momentum is expected to
carry through much of 2014/15 in the absence of unexpected factors. For 2014/15, Australian milk
production growth is forecast at around 2% with a production range of 9.35 to 9.45 billion litres.
Many domestic-focused producers in the northern and western states continue to face challenges
around weather and production margins, resulting in a continued decline in milk production. A
number of processors have announced price increases and boosted production incentives for the
new season as they compete to secure milk and also attempt to stabilise supply.
For dairy inputs, Western Australia and many regions of the eastern states have experienced dry
conditions for much of winter, with a consequent fall in the average yield expected for many crops
compared to 2013/14. Globally, however, forecasts are for strong feed grain supplies, which may take
some pressure off Australian exports. Demand for fodder remains strong out of northern Australia,
and seems likely to remain firm for the near future.
Dairy heifer demand from China, stimulated by herd rebuilding and the stocking of new large-scale
farms, contributed to live dairy heifer exports ending the 2013/14 financial year up 6% on 2012/13:
15% above the 5-year average. Although this was accompanied by a trend for retaining older cattle
(cull cow sales were 5% lower in 2013/14 than the previous year).
Market instability that started with grains as tensions concerning Russia’s annexation of Ukrainian
territory has spread to other commodities including dairy. These instabilities have amplified since trade
3
Situation and Outlook – October 2014
sanctions against Russia were met with a Russian ban on agricultural imports for 12 months from the
EU, USA, Canada, Norway and Australia. While Russia is a large global market for cheese and butter,
the direct impact on Australia of this action is comparatively slim. However, indirect impacts resulting
from some 260,000 tonnes of EU cheese that the EU usually exports to Russia now needing to be
sold elsewhere could have some effect on Australian export returns.
Similarly, dairy demand in China has remained below expectation given the combination of a faster
than expected recovery in local milk production, and difficulty in working through imported dairy
stocks that accumulated in the first few months of 2014. China’s economic health remains a hot topic
for global markets, but the OECD has held its economic forecasts for the country steady over recent
months.
Economic recovery in advanced economies and relative strength in developing Asia has lifted
expectations for global economic growth. The US economic outlook has firmed, while parts of Europe
are weakening, suggesting mixed fortunes for domestic dairy consumption in the US and EU.
Renewed growth expectations in emerging markets should continue to support dairy demand growth
in southeast Asia. Lower commodity prices have also encouraged Middle Eastern dairy imports to
resume after buyers there had been largely priced out of the market.
On the global supply side, favourable production conditions in Europe and New Zealand have
supported milk production, with year to date production up 5% and 9% respectively. While US
appetite for a larger share of global dairy trade is supported by a surge in domestic dairy product
pricing and cheap local feed.
Australian consumer sentiment has fallen, and although wage growth is weakening households are
still spending. Milk retail sales volume and value growth are steady at 1.2% and 0.6%, with volume
growing just slightly below the population growth rate. Cheese volume growth has declined with the
continuing trend away from block cheddar offsetting increased volumes of non-block formats and
specialty cheeses. Dairy spreads are still stand-out performers with sales volume and value well up at
the category level 6.9% and 6.7%.
The US dollar is strengthening, largely due to US Federal Reserve Bank reduction (‘tapering’) of
quantitative easing (US stimulus spending) making way for higher interest rates in the United States.
Market participants have also dampened their views on the Australian dollar given mixed data on
China and the Australian economy.
Global supply overtaking dairy market demand is flowing back to the local farmgate pricing
environment. Australian processors announced quite strong farmgate prices at the beginning of the
season, and in light of market volatility are moderating expectations around any further stepups for
the current season. However, there has also been some upside with a reduction in the value of the
Australian dollar, reduced expectations of El Niño weather patterns emerging and competition for milk
supporting farmgate prices. With these factors at play, the individual commercial situations of dairy
processors will determine where Australian farmgate prices head for the balance of the season.
Key driver analysis
Global economy
Both global trade and world economic growth are yet to return to pre-global financial crisis (GFC)
average levels. The OECD’s September Interim Economic Assessment forecasts lower than expected
growth for calendar 2014 across the world’s major economies except China.
Economic conditions in many key demand areas are mixed. While the US appears to have been
managing a steady recovery including more favourable jobs growth, and both China and Japan are
growing at around trend levels despite concerns, economic growth in the EU and Brazil are trailing
behind previously anticipated levels. Weak demand and deflation threaten the euro area while weak
investment and above-desired inflation have been hampering Brazil.
Figure 1: Real GDP (%) growth
9
8
7
6
5
4
3
2
1
0
-1
7.7 7.4
7.3
5.7 5.9
4.7
3.1
2.5
2.2
2.1
1.4
0.8
0.3
1.1
1.6
0.9
1.1
-0.4
China
2013
India
2014
Brazil
US
Euro area
Japan
2015
Source: OECD
Targeting euro area deflation risks, the European Central Bank recently further reduced interest rates
and announced additional measures specifically designed to support inflation. But concerns remain
around employment and consumer spending as well as continuing debt and budget challenges for
many EU member states. An improved situation depends on increased trade flows, more favourable
financial conditions, greater confidence and rising employment.
Despite the OECD leaving its China forecasts unchanged from May, apprehensions remain about a
credit-related crisis in that country. Mid-September data suggested moderating investment and sales
as well as lower than anticipated electricity usage and growth in industrial production attributed to
lower global demand and Chinese domestic housing market conditions triggered renewed concerns.
China has since announced significant injections of funds to support the liquidity of its major banks.
Yet observers maintain that the sustained credit growth (still growing in double digits and well above
the rate of GDP) and property investment drive may yet expose China to some credit-induced
economic shock similar to that experienced by Japan.
More broadly favourable developments have been supporting key economies in southeast Asia that
are large buyers of Australian dairy exports.
4
Situation and Outlook – October 2014
Thailand’s political situation is stabilising, having slowed but not completely derailed economic
growth. Foreign investment and the country’s manufacturing sector are expected to bounce back
from the slight fall in output for 2014 with greater political stability. Thai consumers are also expected
to recover from the removal of car buyer subsidies and let their spending grow, despite growing levels
of consumer debt (off a low base).
Indonesia is transitioning to a new administration and should maintain its 5-6% economic growth
trajectory, boosted by strong 3+ million person p.a. increases in the workforce population and
10-14% p.a. wage increases that are expected to support consumption. Further government reform
and improvements to infrastructure could lift prospects higher.
Growth in the Philippines is being driven by significant fixed investment, the ongoing development of
service industries and steady growth in remittances from overseas-based Filipino workers (about 10%
of the population). Inflation and interest rates are trending up, but favourable demographics, further
infrastructure investment and foreign-investor friendly policies are expected to support higher rates of
economic growth and consumption.
Malaysia’s economy, like the Philippines,’ is being favoured by a younger demographic profile, and
government-led capital works spending is further supporting growth. Near-term challenges for the
country’s consumers include inflation, higher household debt (87% of GDP in 2013) and interest
rates, the end of subsidies and a 6% GST (from April 2015), which may combine to dampen
consumer spending.
Singapore’s economy has been experiencing a slowing housing market and a reduction in tourist
numbers, which are expected to dampen consumption on the island state in the short term. Major
capital projects and tighter labour market conditions are however expected to lift the economy and
support consumption.
Figure 2: South East Asia: projected growth in consumption, 2015-2020 (selected countries)
0.0%
Thailand
1.0%
2.0%
3.0%
4.0%
5.0%
5.9%
Malaysia
4.6%
Phillipines
Vietnam
7.0%
3.7%
Indonesia
Singapore
6.0%
6.6%
3.9%
6.6%
Source: IMA
On top of euro area and China-related risks, geopolitical conflicts in Ukraine and the Middle East pose
heightened risks with the situations in those regions having deteriorated significantly since May,
threatening the wider regional peace and stability as well as trade flows and economic growth.
Global demand
Map figure 3: International dairy market – Demand regions at a glance
Greater China:
Volume up 35%, value up 66% for 2014 to May
Powders constitute 70% of the market by volume, 82% by value.
While making up less than 5% of total exports to China, shipments
of butter and AMF increased 114%, or 24,000 tonnes.
In aggregate terms, New Zealand remains the dominant supplier,
increasing its market share for the five months to May at the expense
of Europe, the United States and South America. Australia’s share of
Chinese dairy imports to May 2014 is relatively steady at around 4%
in volume terms.
Russia:
Volume steady, value up 7% for 2014 to May
Cheese and butter remain the key products (46% and 17% by
volume respectively), with significant changes in supply origin ahead,
given the embargo on food imports from the EU, US, Canada,
Australia and Norway announced in August. Ukraine was banned
from the Russian market earlier, in July (see box page 12).
Middle East:
Southeast Asia:
Volume up 8%, value up 28%
Steady volume growth continued in 2014 to May, Indonesia and
Singapore the only major markets to show volume declines (see
chart), though value increased. Malaysia continued its strong growth,
19% above the same time last year. Cambodia also continued to
increase, up 23% albeit from a small base.
Volume up 11%, value up 29% for 2014 to May
Lower prices internationally have spurred interest from buyers who
had either been sidelined or had switched to substitutes during 2013.
Rising imports of butter oil/AMF and WMP in Q2, pushed up the total
value beyond the rising volumes, suggesting some buyers ‘traded
up’, switching back to dairy-based fats.
South America:
Volume down 26%, value down 17% for 2014 to May
New Zealand and the United States have gained market share relative
to the same period in 2013, at the expense of Europe and Australia.
A combination of recovering domestic production in Brazil, coupled
with falling purchasing power in Venezuela has reduced imports by
the region’s two largest buyers.
Saudi Arabia is the largest purchaser in 2014 to date, with total dairy
exports to the kingdom increasing 15% to 169,000 tonnes. The
United Arab Emirates (up 18%) and Iraq (up 15%) were second and
third largest respectively. Saudi Arabia and UAE saw strong value
increases too as customers ‘traded up’; 37% and 45% respectively.
The majority of product exported to South American destinations is
sourced within the region; 59% in the year to May. At around a
quarter of total volumes, WMP is the largest single product while all
milk powders account for just over half. Cheese is the next biggest
category at around 20% by volume.
5
Situation and Outlook – October 2014
Global dairy demand
Combined with China’s reduction in demand growth, Russia’s trade restrictions (see box page 12) are
adding further uncertainty to a weak market. Dairy exports to Russia maintained the 2013 growth rate
of 14% in the three months to March, but contracted by 20% for April and May. Reports suggest a
recovery in Russian milk production has augmented domestic supplies, after a significant shortfall in
2013. Russian consumers looked set to benefit from lower dairy prices; however inflation and supply
pressures associated with the recently announced import embargo may prove damaging to overall
demand.
Figure 4: Dairy import volume change, calendar year to May 2014
Supply gaps
300,000
Price sensitive
Mature
markets
Steady long term growth
+39%
250,000
Brazil has continued to shrink its own supply gap, with local analysts crediting increased production
with ‘reducing imports by 48% for WMP and 42% for lactose [the two largest volume imports] in the
first six months of 2014. Venezuela also saw imports tumble, as the value of its currency has fallen
and government food program funds have dried up. NZ-sourced WMP represented 20,000 tonnes of
the 22,000 tonne drop in exports to Venezuela for the year to May.
150,000
100,000
+43%
Vietnam
Indonesia
-6%
Thailand
-3%
+18% +9%
Singapore
-6%
Philippines
-1%
Mexico
Libya
Algeria
Brazil
Egypt
-4%
-38%
Russia
-50,000
Japan
+0%
0
+19% +16%
+25%
Malaysia
50,000
China
Volume change (tonnes)
200,000
Although dairy export prices started the year at near-record levels, prices have declined for much of
calendar 2014 to date. Key drivers have been strong global supply growth combined with sharp
declines in purchasing by China and more recently, uncertainty surrounding the impacts of Russia’s
partial import embargo.
Slowdown in major markets
Calendar 2014 began as 2013 ended, with China dominating global markets with record purchases
at near-record prices. Q1 2014 exports to China soared 43% above the same period in 2013.
However, as the Chinese milk production season approached its peak and the flood of early-year
export shipments arrived in Chinese ports, China’s traders largely withdrew from international
markets. The growth rate subsequently halved for the months of April and May, with volumes only
21% above prior-year levels.
Industry sources suggest that after an even slower June and July, activity has increased in recent
weeks. However, a return to the pace of early 2014 appears unlikely until late in Q4 at the earliest,
when purchases for 2015 limited low tariff quota volumes under the NZ-China FTA begin.
6
Situation and Outlook – October 2014
Active buying from price-sensitive markets
Exports to the Middle East recovered somewhat during the first five months of 2014, driven by lower
prices for key commodities. Total shipments increased 6% during Q1, then 23% for April and May as
prices continued to fall. Overall, export volumes to the region grew 11% to May, while improved
affordability also allowed customers to trade up to higher value commodities. An increase in the share
captured by powders boosted the total value by 29%. Anecdotal reports suggest Middle Eastern
buyers are continuing to take advantage of the current price slump, with significant interest in
securing product out to Q1 2015.
North African buyers have also been able to trade-up, with the total value of exports to Algeria, Libya
and Egypt jumping 45% in the year to May, outpacing the recorded 21% growth in volume. Algeria
has posted the most growth, with some suggesting the government was keen to fill milk shortages
with an ‘unusually large’ tender ahead of April’s presidential elections.
Steady growth in Southeast Asia
The growth story in Southeast Asia continues, with robust growth in both volume and value terms
across the whole region (8% and 28% respectively). In contrast to more price-sensitive markets in the
Middle East and North Africa, value growth outpaced volume increases for a different reason in
Southeast Asia. The strongest growth in volumes was during Q1 when prices were highest, with
purchases subsequently winding back as buyers waited to see where the market would settle.
Indonesia and Singapore were the only major markets to experience volume declines relative to the
same period in 2013 (see chart), though elevated pricing and a Q1 weighting produced value growth
in these markets.
Strong production growth and competitive pricing have seen the EU-28 recover market share in the
region, while the US has also continued to make inroads (particularly in the supply of powders), both
at the expense of New Zealand. Further north, Korea and Japan imported relatively steady volumes,
but increased purchasing of higher value commodities lifted values 11% and 7% respectively. Japan’s
current 1% average volume decline contrasts with 9% for the first two months of the year.
Dairy substitute and affordability analysis
Falling dairy commodity prices have rapidly eroded the near-record premiums over vegetable
substitutes that characterised much of 2013 and early 2014.
Both the dairy protein premium (relative to soy) and fat premium (relative to palm) dipped below their
respective five year averages in August, despite prices of key oilseeds easing in recent months.
Large inventories and a strong supply outlook are likely to continue to weigh on oilseeds pricing,
limiting further improvements to the relative affordability of dairy.
12
5
10
Figure 6: Dairy Australia SMP Affordability Index
3
6
2
4
Protein
Fat (RHS)
Mar-14
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
0
Sep-07
0
Mar-07
1
Sep-06
2
Butter premium ($/kg fat)
4
8
Mar-06
Milk protein premium ($/kg protein)
6
After having declined consistently since December 2013, and dropping further still since the May
report, the Dairy Australia SMP-based Affordability Index suggests affordability is below 5-year
average levels in all markets but Indonesia, Japan and Russia.
As the global supply-demand balance continues to favour buyers, without any shocks cutting supply
or triggering a substantial rise in international commodity prices on the near horizon, a period of
sustained affordability appears to have arrived. Local currencies benefiting from stronger global trade
flows and a pickup in domestic growth could still further enhance affordability, especially across
emerging markets in southeast Asia.
Figure 5: Dairy price premium vs. palm/soy substitutes
14
Dairy affordability
Lower international dairy commodity prices continue to outweigh the impact of currency movements
boosting affordability. The decline in commodity prices has improved affordability between 25-30%
across all major markets; the average per tonne SMP price in USD for August 2014’s has fallen
around 27% compared to April 2014 and fallen around 35% compared to August 2013’s.
More expensive
300.0
275.0
250.0
225.0
200.0
175.0
150.0
125.0
100.0
75.0
Less expensive
SMP benchmark
7
Situation and Outlook – October 2014
China
Japan
Mexico
Thailand
Indonesia
Apr-14
Oct-13
Apr-13
Oct-12
Apr-12
Oct-11
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
Oct-07
Apr-07
50.0
Australian market
Conditions in the Australian economy remain broadly favourable for overall demand, despite weaker
wages growth and indications of further deterioration in labour market conditions with unemployment
around 1% up on a year ago.
Available data from the ABS on retail sales to the end of July paints a more positive picture of
consumer spending. DA’s Food Service Index again reflects this trend with increasing turnover in food
and restaurants. The Food Service Index points to relatively stronger growth in turnover year-on-year
for cafes and restaurants, up 12.8%, takeaway food closer to 4.0%, and supermarkets also rising
to 6.0%.
Consumer sentiment has deteriorated since July, however, with pessimists outweighing optimists (at
94.0 in September: where 100 is neutral) according to the Westpac Melbourne Institute’s most recent
survey. Households remain concerned about potential budget issues, labour market conditions and
their own financial outlooks. Such sentiment has not translated into a sustained reduction of
consumer purchasing in the recent past—and may not in the near term without some other shock.
Nevertheless, lower real wages could motivate additional trading down in some households.
Supermarket update: major category performance
Available IRI-Aztec data covering supermarket sales value and volume for major dairy categories
nonetheless indicates improved supermarket retail performance overall for the four major
dairy categories.
Major dairy category supermarket retail performance
Milk (Fresh and UHT)
Volume
YoY %
Value
YoY %
Volume
YoY %
Value
YoY %
+1.2 %
+0.6%
-1.8 %
+2.1 %
Yogurt (inc Dairy Snacks)
Dairy Spreads
Volume
YoY %
Value
YoY %
Volume
YoY %
Value
YoY %
+6.9 %
+6.7%
+0.6 %
+3.3 %
Source: IRI-Aztec
8
Cheese
Situation and Outlook – October 2014
Milk retail sales volume and value growth are steady at 1.2% and 0.6%, with volume growing just
slightly below the population growth rate. Following branded milk’s bounce-back in share terms and
regaining of a couple of share points after the introduction of ‘permeate free’ marketing and greater
investment in advertising, private label share has returned closer to FY11/12 levels. In share of total
fresh white milk terms, branded milk accounts for 39%, above where it was for FY 2011/12, but
down from 41% in FY12/13 largely due to sustained declines in branded modified milk sales volumes.
Average retail sales prices have remained almost flat year-on-year at the category level.
Figure 7: Average retail milk selling prices per litre
Branded
Private Label
Fresh
White
Fresh
Flavoured
UHT White
Fresh
White
Fresh
Flavoured
UHT White
Fin Year 13 / 14
$1.93
$3.79
$1.47
$1.01
$1.88
$1.02
Fin Year 12 / 13
$1.91
$3.91
$1.45
$1.02
$2.01
$1.01
YoY % as %
0.9%
-2.9%
1.5%
-0.3%
-6.3%
0.5%
Source: IRI-Aztec
Cheese volume growth has declined with the continuing trend away from block cheddar offsetting
increased volumes of non-block formats and specialty cheeses. Category value has nonetheless
increased with average per kilo retail prices up across all major sub-segments, and specialty cheeses
still benefitting from consumers’ broadening tastes and lifting cheese category value with sales prices
at $24.04 per kilo (up 3% from $23.36 in FY 12/13).
Dairy spreads are still stand-out performers with sales volume and value well up at the category level
6.9% and 6.7%. Blends are up in volume and value at 9.2% and 9.4%, underpinning the bulk of the
overall growth. Butter is still benefitting from a fat-friendly attitude shift, recording volume and value
growth of 5.1% and 4.5%, despite softer average prices (down from $8.51 in FY12/13 to $8.45 in
FY13/14).
Yogurt (including dairy snacks) volume has declined -0.5%, although volume for yogurt alone is up
1.8%. After susatained, firm growth in recent years, year-on-year yogurt volume growth is slowing;
greater penetration rather than a greater proliferation of brands seems more likely required to arrest
the slowdown. While Yogurt (including dairy snacks) value is up just 1.6%, value for yogurt alone is up
5.3% buoyed by stronger pricing: average retail selling prices are up 3.4% from $6.09 per kg in
FY12/13 to $6.30 per kg FY13/14.
Recent price increases for dairy goods may not have been as conspicuous as those for housing and
health services, but the June 2014 ABS consumer price index (CPI) data included the most significant
increase in the dairy index measure for over four years. The strongest year-on-year rise (same quarter
prior year) since March 2009 nudged the CPI’s dairy component into positive territory for the first time
since the September 2012 quarter, given firmer pricing in cheese, ice cream and other dairy products.
Specialty cheeses and increased demand for non-block formats (including shredded and sliced
cheeses) and ongoing ‘premiumisation’ in the deli cheese category have helped lift the cheese
component.
Figure 9: DA Food Service Index (YoY turnover growth to end July 2014)
20%
15.8%
15%
10%
12.8%
9.2%
10.8%
4.3%
5%
Figure 8: CPI - quarterly average prices % changes (YoY)
5.5%
6.1%
3.9%
0%
Food Service
14%
12%
12 months
10%
Takeaway Food
Cafes and
Restaurants
Supermarkets
6 months
Source: Dairy Australia/ABS
8%
Corporate developments
Significant developments since May on the industry’s corporate landscape include changes of
ownership for ice cream manufacturer Peters and yogurt manufacturer 5am.
6%
4%
R&R Ice Cream (Europe’s largest private label ice cream manufacturer and second largest ice cream
manufacturer overall) purchased Peters Ice Cream from Pacific Equity Partners (PEP), growing its
business with Peters’ brand portfolio, which accounts for just under 30% by value of the $992 million
retail ice cream market according to Nielsen.
2%
0%
-2%
PZ Cussons (the local unit of the food and household goods multinational) purchased Victorian-based
organic yogurt specialist, 5am expanding the company’s local food brand portfolio.
-4%
All Groups
Food
Dairy
Bread & cereals
Mar-14
Dec-13
Jun-13
Sep-13
Mar-13
Dec-12
Jun-12
Sep-12
Mar-12
Dec-11
Jun-11
Sep-11
Mar-11
Dec-10
Jun-10
Sep-10
Mar-10
Dec-09
Jun-09
Sep-09
Mar-09
Dec-08
Jun-08
Sep-08
Mar-08
Dec-07
Jun-07
Sep-07
Mar-07
-6%
Other notable developments include Fonterra’s deal with Chinese company Beingmate, which will see
the NZ co-op take a share in the Chinese company, and the partners form a joint venture focused on
Fonterra’s Darnum site; and the official launch of Beijing Australia Agricultural Resource Cooperative
Development Fund, jointly initiated by the Beijing Agricultural Investment Fund and Yuhu Agriculture
Investment Pty Ltd, reportedly aiming to make significant investments in Australian dairy, especially
infant formula products.
Source: ABS
One further partnership with foreign interests announced recently was the $100 million deal signed
between Bega Cheese and Chongqing General Trading Group (CGTG). The deal involves Bega
supplying CGTG with Bega branded UHT milk, produced in Australia to be sold into the Chinese
market.
Dairy Australia’s November Situation & Outlook report will provide an in-depth update of Australian
dairy corporate and product market developments. In the meantime, stay informed about local and
international dairy market news and developments through DA’s Fortnightly Update:
http://www.dairyaustralia.com.au/Markets-and-statistics/Market-news.aspx
9
Situation and Outlook – October 2014
Queensland drinking milk market and Northern Dairy Industry strategy
Farmers in fresh drinking milk focused markets outside of Australia’s southeast regions have
been confronted by a combination of challenges over recent seasons, including adverse
seasonal conditions and higher input costs. The latter partially due to a flatter production
curve and higher use of off-farm sourced feed; the Queensland beef industry also acts as a
competitor for local feed stocks.
Although raw milk production has declined, it is clear that local fresh drinking milk markets
continue to grow. Shortfalls in local fresh milk requirements have been met with milk from
other states, mostly New South Wales and Victoria.
Figure 10: QLD raw milk production versus total packaged milk sales (excluding UHT)
40
30
20
QLD raw milk production
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Jul-09
10
Oct-09
Millions
Southeastern regions may be most concerned with realising traditional and emerging
export opportunities, but Queensland’s packaged milk market is a significant local market
with population growth above most other states. In order to formulate a pathway forward
to address challenges and to capture these opportunities, Dairy Australia has agreed to
undertake analysis and facilitate to ensure that industry organisations, processors and
government can discuss the issues facing the Queensland and New South Wales dairy
industries with the aim of developing and agreeing
> a shared view of the market and industry challenges, realities, threats and opportunities
now and in the future;
> a measured and strategic approach to the future development of the dairy industry in
these states driven by market opportunities;
> an action plan to support farmers and processors to make appropriate changes to their
businesses to ensure future industry sustainability.
50
0
annual population growth rate for the 10 years to 30 June 2014 is estimated at 2.2%
(according to Queensland Government Statisticians’ Office) and packaged milk sales in the
state have grown at 2.5%. Raw milk production, however, has declined at around -4.2% per
year (over the 2004-2013 period).
QLD total packaged milk sales (excluding UHT)
The year ended 30 June 2010 was the last year in which Queensland’s total local raw milk
production exceeded its total fresh milk packaged sales (excluding UHT).
In addition to multiple flood events, the state has seen drought affect dairying regions in
Queensland’s southeast since early January 2011; and so the majority of Queensland’s
dairying regions are currently drought declared.
Unfavourable market and production conditions have accelerated farm exits from
Queensland’s industry and the decline in raw milk production. While the challenges are
significant, opportunities remain for Queensland’s dairy farmers. After all, the state’s average
10 Situation and Outlook – October 2014
As part of this process, Dairy Australia funded creation of the latest Northern Dairy Industry
report, ‘Changing Market Dynamics in the Northern Dairy Industry and their Strategic
Implications for Stakeholders’ prepared by Chris Phillips Consulting. This report aims to help
this process by
>
>
>
>
highlighting the emerging shortfall in fresh drinking milk in QLD;
identifying areas of value in the Australian drinking milk market;
opening a discussion on regional production costs; and
outlining requirements for flexible and adaptable production systems to cope with
uncertainty.
The comprehensive report will be available on the Dairy Australia website shortly to industry
stakeholders.
The NSW Government has also commissioned a study, released recently, titled ‘Growing the
NSW Dairy Industry,’ to explore on-farm and supply chain growth opportunities, alternative
marketing options and business models for investment. This study also has relevance for the
NDI strategy and the communication around market changes and opportunities.
Global supply
Overview
Global supply is going from strength to strength amid favourable weather conditions and profitable
farmgate margins. Bearish farmgate price signals have not yet proven sufficient to dampen milk
production in key exporting regions.
% milk production growth vs prior year
Figure 11: YTD and projected growth - 4 largest exporters
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Europe has enjoyed a year of favourable weather, high farmgate prices and stable to lower input
costs. The 5% growth in production for the calendar year to June is the largest for that period in at
least 30 years; with growth for the month of April almost reaching 7%, compared to April 2013. Full
year growth is expected to slow to 2.5%, as falling commodity values hit returns. The average EU-28
farmgate price is down 7% since January, with further downside envisaged in the wake of the
Russian ban.
The long-expected supply response from the US started taking shape in July, with milk production up
nearly 4%, compared with 1-2% for previous months in 2014. Drought-ravaged California managed
to exceed 4% growth, while the Midwest lagged the average (Wisconsin up 3%).
YTD 2014: 9%
YTD 2014: 5%
Fcst 2015: 3%
Fcst 2015: 2%
Fcst 2015: 2%
Fcst 2015: 2%
YTD 2014: 2%
YTD 2014: 0.4%
NZ
EU-28
US
Aust
Note: Columns denote YTD growth, points projected growth.
Width of column represents export share in MEQ
Figure 12: Farmgate price indices: major exporters
250
Most of the growth is coming from increases in per-cow production. The national herd has nearly
stopped growing as farms reach capacity, but cautious producers have been wary of ambitious
expansion projects. Excellent weather and favourable margins are supporting yield gains, while higher
quality grains from this year’s bumper corn crop should also support milk production growth.
Year-to-date growth now looks well on track to hit the USDA’s 2.4% forecast. A record 17% of US
milk production was exported in the year to June, driving domestic commodity prices to multi-year
highs, the opposite to international commodity prices.
Southern Hemisphere
New Zealand ended the 2013/14 season with 9% growth in milk production compared to 2012/13.
The 2014/15 season has commenced with generally favourable weather and winter production above
last year (however this represents a fraction of total season collections). Despite a sharp fall from
2013/14, this season’s forecast milk price is still regarded as profitable for most farmers, though
further reductions will begin to stretch more highly geared enterprises. Lower milk returns may also
encourage farmers to dry off cows earlier in the season, especially if climatic conditions deteriorate
during summer and autumn.
Australian milk production also finished the 2013/14 season strongly, with growth exceeding 8% in
May and June, although the slow start to the season limited the full year expansion to 0.4%. July data
suggests 1.5% growth nationally. Farmers in southern, export focused regions are facing tighter
margins this season with reduced milk prices and a bearish near term market outlook. However, at
current price points many will still have a profitable season. Challenges persist in the domestic
focused northern states and WA: with milk volumes continuing to decline, processors have offered
modest increases to farmgate prices and production incentives to shore up supply. Dairy Australia’s
current forecast of 2% growth nationally implies a range of between 9.35 to 9.45 billion litres
for 2014/15.
200
150
Index: 2005 = 100
Northern Hemisphere
Milk production is beginning to slow as the northern hemisphere moves closer to winter. As year-onyear growth in European output moderates, the US is seeing expansion ramp up.
100
50
0
2005
2006
2007
2008
Australia
2009
NZ
2010
2011
US
*Note: NZ & Aust years represent ‘season commencing’
11 Situation and Outlook – October 2014
2012
EU-27/28
2013
2014
Milk production in Argentina has suffered in recent months due to wet conditions and lower farmgate
prices, with industry sources suggesting a full year drop of 3 to 4% is likely relative to 2013. Internal
consumption has reportedly fallen due to the country’s ongoing economic issues; suggesting that
export availability may be proportionally less impacted. Dairy farmers in Uruguay have also
experienced challenging weather conditions, driving production below 2013 levels from March
onwards: year-to-date growth (to July) is around -2%.
Russia’s import embargo: what does it mean?
Indirect effects of this ban are the greater concern. Market uncertainty and the potential
for large volumes of European product spilling onto global markets are unhelpful at a time
where sentiment is already weak due to excess supply and reduced demand from China.
So far, the European Commission has opened the Private Storage Aid (PSA) scheme to
cheese and extended the intervention period, but has not raised intervention prices or
resorted to export subsidies.
The ban will also create issues for Russian authorities. Some 84% of Russia’s 2013 dairy
import volume came from countries that are now banned: a significant gap to fill at short
notice from alternative sources in South America, Turkey and New Zealand. Many
exporters do not have significant surpluses available, though some may increase imports
or partially vacate other markets in order to fill Russian orders, creating new opportunities
for displaced product. Other scenarios such as the processing of some EU milk into
Russia-bound products in Belarus further suggest that the net effect of the embargo may
be more modest than it initially appeared.
Rapid food price inflation and consequent demand destruction are outcomes that
Russia’s government and the world’s dairy exporters will be jointly hoping to avoid.
Collective incentives to minimise the actual disruption caused should help keep the
embargo a contributor to the current bearish market sentiment, rather than becoming the
primary cause of prolonged market weakness.
Figure 13: Total exports to Russia - by source
700,000
600,000
500,000
400,000
300,000
200,000
tonnes
Russia’s embargo caused a stir in dairy markets, which is unsurprising given the country
is the world’s second largest dairy importer after China (taking nearly 629,000 tonnes in
2013). However, with Australian exporters having such a small exposure to the Russian
market (3% of total exports in 2013/14), direct impacts on Australia are likely to be
relatively limited.
100,000
0
2009
Rest of world
2010
2011
2012
Australia
Figure 14: Exports to Russia by source - 2013
4%
4%
8%
EU-28*
0.1%
0.5%
Australia*
Ukraine*
11%
US*
70%
3%
Norway*
South America
New Zealand
Other
*indicates banned suppliers
of September 1, 2014
12 Situation and Outlook – October 2014
2013
Input markets
Wheat
Melb del
Feed Grain
$/t
-7%
Lucerne
Central Victoria
Hay
N7
-11%
$/t
Barley
Melb del
$/t
-3 %
Pasture
Central Victoria
$/t
-32 %
K19
Urea
(granular
Middle East)
P15
Fertiliser
US/t
price
10% YoY
Cull cows
4 % YoY
volume13 % YoY
c/kg
Cows
Water
Temporary water price
DAP
(US Gulf)
US/t
price
14% YoY
Live exports
volume
6 % YoY
2013/14 FY
Northern
Victoria
Murray
Irrigation
System
70 % YoY
86 % YoY
* Changes year-on-year August 2014
13 Situation and Outlook – October 2014
MOP
(granular
Vancouver)
US/t
price
-30% YoY
Input markets
Dairy Australia Export Region Weighted Cost and Income Indices
The weighted cost and income indices consider the near-term outlook and highlight the net impact of
market changes.
An update of the indices introduced in the May Situation and Outlook report suggests the following:
> As foreshadowed in the earlier analysis, margins have begun to tighten.
> Over the outlook period, forward indicators suggest that margins are likely to remain challenging for
the 2014/15 season.
> Key income factors include limited upside potential for current farmgate milk prices, as a result of a
significant deterioration in dairy commodity prices since February 2014.
> Increases in the cost index are driven by higher prices for fodder, fuel and irrigation water, and
somewhat mitigated by softer grain prices.
> Figure 15,above, shows the Export Region Weighted Cost and Income Indices with seasonal
averages of the cost and income lines plotted. The size of the shaded area provides a whole
season perspective, indicating how relatively good (blue) or bad (yellow) a year was
(or is expected to be).
Figure 15: Export Region Weighted Cost and Income Margin Model
120
Firmer global benchmark prices saw DAP rise US$55/tonne above year earlier levels, with steady
demand for phosphates from Asia and South America, as well as supply issues in China and the
Middle East. But good inventories in Brazil, and currency pressures coupled with poor monsoonal
rains in India could reduce near term demand.
Global benchmark potash prices remain relatively soft (US$128/tonne below year-earlier levels), aided
by slow demand. Heading into 2015, global supply capacity is set to increase, which could reduce
the potential for upward price movement.
Weather conditions, soft global commodity prices, and a stubbornly strong AUD have dampened
domestic fertiliser demand, restricting the ability of local prices to follow the global uptick. Much of the
fertiliser used in Australia is imported, and consequently, if the recent weakening of the AUD persists,
this could apply upward pressure to prices moving forward.
As of the 15th of September, seasonal determinations for all northern Victoria river systems regulated
by Goulburn Murray Water had 100% allocation against High Reliability Water Share (HRWS). The
Bullarook Creek and Broken systems also have 100% and 37% LRWS allocation, respectively. Murray
Irrigation Ltd. general security (Class C) allocations are at 28%.
100
The Bureau of Meteorology’s ENSO (El Niño-Southern Oscillation) tracker (updated September 9th) is
set at WATCH level. Although temperatures in the tropical Pacific Ocean remain neutral, models
surveyed by the Bureau suggest at least a 50% chance (around double the normal likelihood) of an El
Niño developing by the end of 2014.
80
Cost index
Income index
14 Situation and Outlook – October 2014
Jan-15
Sep-14
Jan-14
May-14
Sep-13
Jan-13
May-13
Sep-12
Jan-12
May-12
Sep-11
Jan-11
May-11
Sep-10
Jan-10
May-10
Sep-09
Jan-09
May-09
Sep-08
Jan-08
60
May-08
Index value
International benchmark urea prices have risen: up US$50/tonne month-on-month (to end August),
and US$35/tonne year-on-year. Production issues in Egypt and the geopolitical situation in the
Ukraine have affected availability, while seasonal domestic Chinese demand has put upward pressure
on prices. India will be a key influence for near-term global demand.
Water
The average temporary water price for both Northern Victoria ($95/ML in August) and Murray
Irrigation system ($101/ML in August) remains significantly above year-earlier levels. Despite this, the
volume traded was up 54% in Northern Victoria (but down 21% in the Murray Irrigation system).
140
40
Fertiliser
Electricity
Dairy Australia in late 2013 commissioned analysis of dairy shed power bills over three to five years,
including the first 12 months after the carbon price was introduced on 1 July 2012. The analysis
examined the power bills for 59 representative dairies of varying sizes and farming systems across
Australia. Energy costs on dairy farms are estimated to have risen between 18% and 100% between
July 2010 and 2013, attributable to increases in tariffs, service fees, and some cases usage. In 2014,
energy prices are expected to plateau overall, but continue to rise in some states, including
Queensland. By having an on farm energy assessment many farmers have identified strategies to
manage energy costs via increased energy efficiency. The Smarter energy use on Australian dairy
farms project is delivering 1400 on farm energy assessments nationally. To sign up for a personalised
assessment contact your local RDP, details available from
http://www.dairyaustralia.com.au/Industry-information/Dairy-regions.aspx
Cows
Cull cow sales were 5% lower in 2013/14 than in the previous financial year, which is unsurprising
given the favourable milk price. Cull cow values were 3% below average. So far for 2014/15 (to end
August), sales volumes are up 9% (to 12,275 head), and the average price up 1% (283c/kg).
Figure 16: Dairy cattle exports, last 5 years
100,000
In recent years, as a result of strong prices and cashflow considerations, many farms have begun to
see rearing and selling heifers for export as a good source of non-milk income. At 92,340 head, live
dairy cattle export volumes were up 6% for the 2013/14 financial year: 15% above the 5-year
average. Herd rebuilding and the stocking of new large-scale farms saw strong demand from China
(Australia’s dominant customer since 2008/09), which took 85% of total exports. Chinese quarantine
restrictions regarding Bluetongue is also one influence in the majority of exported cattle originating in
Victoria (97% in 2013/14). Other destinations included Pakistan (7%) and Russia (4%). In total,
400,000 dairy cattle have been exported from Australia over the past five years, with the number
exported each year being roughly equivalent to 5% of the national milking herd.
5.2%
5.1%
90,000
5.5%
4.7%
80,000
5.0%
3.8%
70,000
4.0%
60,000
50,000
3.0%
40,000
2.0%
30,000
20,000
1.0%
10,000
0
0.0%
2009/2010
China
2010/2011
Russia
2011/2012
Pakistan
Other
2012/2013
Russia 4%
Pakistan 7%
China 85%
92,340 head, equivalent to
5.5% of cows in milk and
Indonesia 1%
Other
destinations
3%
dry nationally
2% 1%
Tasmania
Queensland
97%
2013/2014
Equivalent to % of national herd
Figure 17: Live dairy cattle exports from Australia 2013/14
15 Situation and Outlook – October 2014
6.0%
Victoria
Feed Grains
Domestically, old crop grain stocks are tightening and continue to trade at a premium to international
values. However, the average prices for feed wheat and barley during August was below year-earlier
levels for Melbourne (wheat 11% and barley 10% lower), Perth, Adelaide, Sydney and Northern
Tasmania port zones.
The September USDA WASDE (World Agricultural Supply and Demand) report raised the 2014/15
global supply estimates for wheat and coarse grains, placing production at 719.95 and 1,269.19
million tonnes, respectively (compared to 714.05 and 1,276.67 million tonnes in 2013/14). In contrast,
falls in expected yields resulted in downward revision to Australian production estimates by both the
USDA and ABARES. The September ABARES Australian crop report estimated 2014/15 winter crop
production at 38.6 million tonnes: down 12% from 2013/14. National wheat production is forecast to
fall 10%, barley 21%, and canola 10% (to 24.2, 7.5 and 3.4 million tonnes, respectively). While the
season started well, Western Australia and many regions of the eastern states have experienced dry
conditions for much of winter, with a fall in the average yield expected for many crops compared to
2013/14. Appropriate spring rainfall is required to ensure that these forecasts are realised. The Bureau
of Meteorology’s October to December rainfall outlook indicates that drier than normal conditions are
likely for much of eastern Australia, with hotter than normal days over most of the country, Tasmania
in particular.
The 2013/14 Feed Grain Supply and Demand Report, produced by The Feed Grain Partnership (FGP)
(of which Dairy Australia is a member) identifies some longer term shifts in production of feed grains
traditionally favoured by the Australian dairy industry. Annual production of triticale has fallen over
time, and when the generally lower market price of triticale is considered in conjunction with falling
yields relative to wheat or barley, this trend seems likely to continue. ABARES estimated production of
triticale for 2014/15 is 251,000 tonnes, 6% below 2013/14.
Lupin production has also declined, and while demand remains within the Victorian dairy feed market,
production outside of Western Australia is now relatively low. While 625,000 tonnes were produced
nationally in 2013/14 (ABARES), 65% was grown in Western Australia. Limited supply has resulted in
other protein meal sources being utilised, particularly given that canola production and crushing
capacity has increased significantly. Minor amounts of cotton meal are also used by the dairy industry,
while a major shortfall in soybean meal supply (one of the dominant plant proteins available to the
feed industry), saw over 630,000 tonnes imported in 2012/13.
16 Situation and Outlook – October 2014
Southeast Queensland is Australia’s heaviest user of feed grains, at 2 million tonnes annually. While
the region produces a small surplus of grain in an average year, recent dry conditions have highlighted
its exposure to grain shortage, and the need to rely upon supply from southern Australia during times
of drought. The FGP report also identified large and increasing grain deficits within Gippsland (1.3
million tonnes) and Tasmania (250,000 tonnes), largely lead by demand from the dairy industry. The
Tasmanian deficit is supplied from mainland States, either as grain, or increasingly as manufactured
feeds.
Figure 18: Feed grain (Melbourne) and Hay (Shepparton)
450
400
350
300
250
200
150
100
50
0
Jan
Feb
Wheat (2014)
Mar
Apr
May
Lucerne (2014)
Jun
Jul
Wheat (5yr av.)
Aug
Sep
Lucerne (5yr av.)
Oct
Nov
Dec
Hay
The hay market has been relatively quiet, with buyers and sellers waiting for quality and quantity
signals for the coming harvest. Queensland and northern New South Wales continue to draw hay
from further south, with this demand expected to continue for fodder of all types (cereal, lucerne and
pasture hay, as well as straw), with low forecast yields in the region.
As the cereal hay harvest begins in southern regions it appears that yields will be lower than average
in most areas, due to a combination of moisture-stress and frosts. Many growers in New South
Wales, Victoria and South Australia are weighing up their options regarding cutting cereal crops
(wheat and barley) for hay, versus taking them through to harvest for grain. This is likely to see some
crops intended for grain become hay, boosting fodder supplies. While it is too early to comment on
the quality of the coming harvest it is likely that prices will be higher than last season. While it is also
still too early to make a call on the production of pasture hay in southern regions, the favourable
growing conditions to date have set the potential for an average or better harvest providing rain
continues.
Lucerne hay supply will continue to be tight throughout the coming season, particularly in the eastern
states and Western Australia. Key factors contributing to the tight supply are the availability and price
of irrigation water, as well as continued strong demand. This suggests that lucerne prices for the
coming season will remain firm with the possibility of further price rises. Vetch hay will continue to
offer an alternative to lucerne for some buyers, however dry conditions are indicating that crop yields
may be lower than expected, seeing supply remain tight and prices higher than last season.
Conditions in Western Australia are reported as being good to average; however oaten hay plantings
are lower than last season. While there is some carry over cereal hay from last season, demand from
exporters combined with lower plantings may see less hay available this coming year. The season for
pasture hay in southwest Western Australia looks promising after good growing conditions in 2014.
Pasture hay and silage has been in short supply all year due to the low yielding 2013 crop and strong
demand earlier this year. Dairy farmers, livestock producers and hobby farmers in the region will be
keen to rebuild their hay and silage reserves.
Dairy Australia provides two publications to keep up to date with input markets. The Grain & Hay
Report provides a comprehensive overview of the market and indicative pricing by dairying region,
and is published most weeks at:
http://www.dairyaustralia.com.au/Pastures-and-Feeding/Supplements-and-nutrition/
Supplementary-feeds-2/National--Grain-Hay-summary.aspx
The Production Inputs Monitor provides statistics and commentary for grain, hay, fertiliser, weather,
water and cull cows on a monthly basis:
http://www.dairyaustralia.com.au/Markets-and-statistics/Farm-inputs-and-costs/ProductionInputs-Monitor.aspx
17 Situation and Outlook – October 2014
Global feed grain supply
Input costs, of which feed grains form a major
part, are one of the key drivers for global dairy
supply. Global markets have been pushed
down by the expectation of good availability of
feed grain this year – likely becoming another
supporting factor in the ongoing strength of
milk production growth in the northern
hemisphere.
Large US corn and soybean crops are
expected, with the USDA raising their forecast
2014/15 US production to 365.7 and 106.5
million tonnes, respectively (compared to
353.7 and 89.5 last year) (September WASDE),
along with their forecast for wheat (720 million
tonnes, compared to 714.1 last year). Growing
conditions for corn and soybeans are
exceptionally good (72% good/excellent for
soybeans, 74% for corn), with early yield
reports generally positive regarding harvested
corn in the southern US.
Although the USDA did not change its wheat
production estimate for Canada (28 million
tonnes, compared to 37.5 last year), crop
progress this season is behind schedule due to
cold, wet conditions, and there are reports that
unharvested wheat in Alberta has been
flattened by snowfall. The USDA’s coarse grain
production forecast to 21.8 million tonnes
(compared to 28.7 last year).
Record wheat exports from Russia in recent
months, combined with the distance between
Ukrainian ports and the disputed eastern
regions, have added further downward
pressure to international prices as concerns
regarding Black Sea exports have eased. The
USDA production estimate for Russian wheat
is 59.00 million tonnes (52.1 last year), and
24.0 million tonnes for the Ukraine (22.3
last year).
Harvest rains in areas of France are reported to
have impacted on wheat quality. Estimates
from FranceAgriMer suggest that only 46% of
the crop will make the grade for many major
importers, as it will not pass falling number
tests (a measure of sprouting). Last year 99%
of the crop made the grade. Britain, which
exports mainly feed wheat, is reported to be
heading for one of the largest crops in several
years. Both these factors are likely to add
further downward pressure to international
feed wheat prices. The USDA estimate for EU
wheat production has been raised to 151
million tonnes (143.1 last year).
Soybean acreage has replaced significant
amounts of wheat planting in Argentina (the
major grain exporter in South America), in
recent years, and significant flooding has
occurred in wheat producing areas this
season. The USDA has revised its estimate for
Argentinian wheat production downward by
200,000 tonnes, to 12.3 million tonnes
(compared to 10.5 million last year). Brazil,
traditionally the largest consumer of Argentine
wheat, will likely need to import their estimated
6.5 million tonne requirement from elsewhere
this season.
Exchange rates
The Australian dollar (AUD) dipped in mid-September, reaching a six-month low of around US 0.89c,
after having long hovered around US 0.93c. As at end-September, the AUD hit close to a four-year
low nudging below US 0.87c.
Currency market participants have been responding to a range of factors affecting their sentiment
towards the AUD:
Indications of stronger recoveries in the economies of both the United States and the United Kingdom
encouraged market participants to sell off the AUD and move back into the USD and the pound in
anticipation of benefitting from increases in interest rates in those countries. The AUD is typically
expected to weaken when the US economy strengthens; so, the combination of the US Federal
Reserve ceasing its asset purchasing program in October and introducing higher interest rates in the
United States in 2015 remain potential catalysts for further material declines in the AUD.
Lower iron ore and coal prices as well as lower than anticipated industrial output in China (at a
post-GFC low) have also recently put downward pressure on the AUD. Lower prices for these
commodities, significant contributors to export earnings, may also contribute to a lower AUD despite
this linkage appearing weaker in recent times.
Just as a stronger US economy and weaker commodity prices could still drive the AUD lower, so too
could a greater than expected economic slowdown in China, especially given the AUD’s role as a
proxy for exposure to the fortunes of China’s economy.
Although a lower AUD around the US0.90c level offers some slight relief to Australian dairy exporters,
the extent of that relief is limited while commodity prices remain at significantly lower levels. And at
least at the time of writing, exporters in competing supply regions are also seeing their currencies on
favourable downward trajectories against the USD.
New Zealand’s dollar (NZD) has also weakened recently against the USD as, just in the case of the
AUD, market participants sold off the currency to move back into the USD ahead of anticipated
cessation of asset purchases and the introduction of rate rises. The NZD softened further (to a
15-month low) in response to news of NZ central bank measures and government calls for a
weaker currency.
Meanwhile, European Central Bank (ECB) rate cuts, asset purchases and policy focus on fending off
deflation in the euro area are all expected to support a lower EUR/USD rate.
Rapid fund flows and accompanying foreign exchange rate movements (with attendant shocks to
purchasing power) resulting from an early introduction of higher interest rates in the United States
present additional risks that could disrupt economic growth, particularly in emerging markets and
southeast Asia’s trade and export-focused economies, and the global outlook more broadly.
18 Situation and Outlook – October 2014
Figure 19: AUD and EUR: forecast to go lower against the USD
$1.40
$1.38
$1.36
$1.34
$1.32
$1.30
$1.28
$1.26
$1.24
$1.22
$1.20
$1.18
$0.96
$0.94
$0.92
$0.90
$0.88
$0.86
$0.84
Q3 13
Q4 13
Q1 14
Q2 14
Q3 14
Historical EUR/USD (LHS)
Major Euro Banks Forecast EUR/USD (LHS)
Bloomberg Forecast AUD/USD
Source: Bloomberg
Q4 14
Q1 15
Q2 15
Q3 15
Forecast EUR/USD (LHS)
Historical AUD/USD
Aus' Big 4 Banks Forecast AUD/USD
$0.82
Policy Updates
Murray Darling Basin Plan
The Water Recovery Strategy to accumulate 2750GL of environmental water was finalised and
released in June 2014. The Strategy prioritises water recovery through infrastructure investment over
water buybacks, which are capped at 1500 gigalitres. The Murray Darling Basin Authority (MDBA) on
11 December 2013 published a constraints management strategy setting out the plan to determine
whether large volumes of environmental water can be delivered without unacceptable third party
impacts. As of 30 June 2014, a total of 1904GL of water (annual average yield) has been recovered
for the environment; this represents 17.4% of the historic annual average of water diverted for
irrigation, urban and other uses. In the southern connected Basin, including the Murray Dairy Region,
a total of 1578GL has been recovered for the environment; this represents about 20% of historic
annual average volume diverted for consumptive use.
Energy and carbon policy
Dairy Australia in late 2013 commissioned analysis of dairy shed power bills over three to five years,
including the first 12 months after the carbon price was introduced on 1 July 2012. The analysis
examined the power bills for 59 representative dairies across Australia.
The study focused on energy use and cost at the dairy shed. It does not look at other energy-related
costs faced by dairy farmers, such as energy use for irrigation or carbon price costs passed back to
farmers by dairy manufacturers through the farm gate milk price.
The analysis sought to separate drivers behind rising costs, such as network charges, and
environmental fees associated with the Renewable Energy Target and carbon price.
The carbon price was repealed on 17 July 2014. Within 60 days, all energy retailers were to provide
customers with an estimate of savings. The carbon price effect on dairy shed energy costs was
difficult to determine because it was included in overall tariff rates rather than itemised separately.
In general, however, if the savings are passed on in full, dairy farmers could expect to save $0.80$6.40 a day, or 1.5-13% of total bills (Tasmania and Victoria representing either end of the spectrum).
The Coalition Government is also considering the report from a review of the Renewable Energy
Target. The RET accounts for 1-5% of total dairy shed power bills, but depresses wholesale electricity
prices and reduces the cost of renewable energy systems such as solar panels and solar hot water
by around 30%.
Trade policy update
China Australia Free Trade Agreement
With negotiations completed on the Korea Australia Free Trade Agreement, and the Japan Australia
Economic Partnership Agreement the trade policy focus turns to Free Trade Agreement talks
with China.
A comprehensive and commercially meaningful FTA with China is currently the Australian Dairy
Industry’s number one trade policy goal.
FTA negotiations with China commenced in 2005. The 21st round of negotiations was held in
Canberra on 5-8 May 2014.
19 Situation and Outlook – October 2014
The round followed Prime Minister Abbott’s visit to China in April. The Prime Minister has indicated the
Government is aiming to bring FTA negotiations with China to conclusion by the end of this year.
China’s leaders have said they also want to bring negotiations to a conclusion this year.
The Australian Government is aware of the commercial advantage that the New Zealand dairy
industry enjoys over Australia since implementation of its FTA with China in October 2008. The value
of New Zealand’s preferential access in 2013, was estimated by Dairy Australia at around US$30
million. This gain was tempered by the safeguard volume limits on New Zealand origin product –
designed to prevent import surges that could harm China’s domestic dairy industry. Once the
safeguard volume limits on dairy products are lifted, in various time frames up to 2024, the value of
New Zealand’s preferential access, based on 2013 import volumes, will exceed US$230 million per
annum – provided no other major dairy exporting country gains a similar quality of access.
The Australian dairy industry is pressing the Australian Government to achieve a comprehensive ‘New
Zealand plus’ dairy outcome. This means that if/when a bilateral agreement enters into force the
tariffs on Australian origin products will immediately fall to the New Zealand level and phase to zero on
exactly the same calendar year timeline. With the most favoured nation (MFN) or WTO tariffs ranging
between 10% and 15% for dairy products this outcome will provide a major competitive advantage
compared to non-Oceania origin product.
Trans Pacific Partnership (TPP)
On 10 September Trans-Pacific Partnership chief negotiators completed 10 days of meetings in
Hanoi (Vietnam).
Negotiators made progress on rules on State-owned enterprises, intellectual property, investment,
rules of origin, transparency and anti-corruption, as well as labour rights and environmental
protections. They also continued to move forward work on preferential access to each other’s
markets for goods, services/investment, financial services, and government procurement as well as
commitments to facilitate the movement of business persons.
Concerns exist for Australian dairy that the USA will give preference to concluding a bilateral trade
deal with Japan, easily their largest trading partner in the TPP group. The US could then use this deal
as leverage to advance their trade policy goals on intellectual property, state owned enterprises,
labour, the environment and financial services including investment with the other ten participants to
secure an outcome (highly) advantageous to their commercial interests.
Vested and politically influential agricultural interests in Japan continue to resist liberalisation of trade,
especially in the five “sensitive” products of dairy, rice, meat (beef and pork), sugar and grains.
Australia and Japan are engaged in bilateral intercessional negotiations including on market access
for agricultural products.
At time of writing it appears that the TPP countries are in the process of firming up plans to hold their
next negotiating meetings in Australia in mid-October, amid strong pressure from the United States to
deliver a substantial outcome in the talks by early November when President Obama visits Asia.
Despite this, the short-term future of the negotiations is unclear as several recent deadlines for
completion have been missed.
Research on Technical Barriers to Trade (TBTs) complete
Dairy Australia recently commissioned a report titled: ‘Comparative evaluation of technical barriers to
trade for Australian dairy products’, prepared by D.N. Harris and Associates that examines the impact
of all TBTs such as onerous product testing, red tape and excessive supply chain requirements.
This expert report finds that the total value impact of all technical barriers to trade on Australian dairy
sector is an enormous $1.57 billion annually.
Higher production costs, reduced product returns and restricted export demands all combine to
lower milk returns for dairy farmers due to these unnecessary barriers.
The report highlights the importance of addressing these technical barriers to trade in key dairy export
markets and the potential for this agenda to produce gains that in some markets may be even more
beneficial to our industry than tariff reductions.
A strong free trade agreement outcome with China is currently the dairy industry’s number one
priority. But there is an emerging consensus that the economic rewards to the industry in the years
ahead could potentially be just as significant if these superfluous technical barriers are removed.
Whilst the industry recognises there are legitimate minimum requirements such as quarantine
inspection, sensible product testing and other such regulation, the Dairy Australia report clearly
identifies a wide range of barriers that are effectively beyond reason and necessity, particularly in light
of the stringent food safety standards that already exist within Australia’s domestic regulatory system.
The report demonstrates that technical barriers to trade are not just border entry issues and come in
many forms, including market access restrictions, production costs, shipment costs, unnecessary
compliance levels and administrative red tape.
20 Situation and Outlook – October 2014
2013/14 Victorian Dairy Farm Monitor Project
Dairy Farm Monitor Project - Northern Victoria
Key Information:
In 2013/14, Victorian dairy farm profitability improved markedly on the previous year’s performance as
a result of favourable operating conditions. The milk price reached an average of $6.79 per kilogram
of milk solids (kg MS), its second highest level recorded in real terms in the eight year history of the
project and while grain prices were above last year’s high prices, marginal feeding decisions
were attractive.
Following the challenging 2012/13 year, the last 12 months has enabled many farmers to repay
creditors, attend to delayed capital purchases and repairs. All farm participants recorded a positive
return on assets, compared to only 43 of the 75 participants last year. An analysis over the history of
the project shows farms in the North recorded their strongest performance, while farms in the South
West and Gippsland recorded their second highest since 2006/07.
Northern Victoria
Total cows
332
Milk production
181,118 kg MS
Price per unit
$6.83 /kg MS
Milk production
522 kg MS/cow
Milk income (net)
$1,257,175
Livestock trading pro
$76,221
Feed inventory change
$17,232
All other income
$19,102
Other income
Gross Farm Income
$1,369,731
Herd costs
$53,204
In 2013/14 whole farm earnings before interest and tax increased five-fold to $394,000 while return
on assets rose to 11.3% from 2.2%, and return on equity increased to 14.7% from -2.9% in 2012/13.
The strong performance of the region was a result of a 35% improvement in average milk price to
$6.83/kgMS. Further, the region experienced favourable seasonal conditions with above average
rainfall, 100% allocation of high reliability water shares on all northern systems and good availability of
temporary water. This saw irrigation costs increase by 27% to $0.47/kgMS. Expenditure also
increased on concentrates as a result of the higher grain price. This led to a higher average cost of
production at $5.34/kgMS.
Variable costs
Feed costs
$576,017
Gross margin
$706,256
Cash overheads
$194,390
South West Victoria
Imputed operators
Overheads
The South West region experienced a turnaround in farm profitability as average return on assets rose
to 7.9%, up from 0.2% in 2012/13, and return on equity increased to 9.9% from -12.7%, and
earnings before interest and tax increased to $425,000. An improvement in operating conditions in
the south west was a welcome change to the previous challenging 12 months. The region recorded
the highest milk price of all the regions at $6.91/kgMS, increasing 41% from 2012/13. The better
seasonal conditions meant farmers were able to directly graze more pasture per milking hectare and
reduce their reliance on purchased fodder. Despite this decrease in fodder costs, there was an overall
increase in cost of production to $5.34/kgMS in 2013/14.
Gippsland
Gippsland farms also had a large improvement in farm returns with average earnings before interest
and tax increasing six-fold to $285,000 in 2013/14. Return on assets increased to 6.4%, up from
-0.2% in 2012/13 and return on equity increased to 10.2% from -6.2%. South, west and east
Gippsland experienced variable growing conditions despite receiving average to above average
rainfall in 2013/14. The Macalister Irrigation District had a good season finishing the year with 100%
allocation of high and 5% allocation of low reliability water shares. Grazed and conserved pasture
increased by 16% to 8.6 t DM/ha and incurred higher home grown feed costs. Purchased feed costs
increased on the back of higher grain prices. Farmers controlled expenditure on overhead costs
thereby decreasing total cost of production to $5.16/kgMS. Milk price rose 39% to $6.62/kgMS.
21 Situation and Outlook – October 2014
Shed costs
$34,254
allowance for labour and
management
$87,085
Depreciation
$31,081
Earnings before
interest and tax (EBIT)
$393,700
Interest and
lease costs
Assets leased
$288,057
Assets owned
$3,002,480
Net farm income
$303,825
Equity
$1,942,677
59%
Assets managed
$3,290,537
Return on assets managed
11.3%
Interest and lease costs
$89,875
Return on equity
14.7%
Liabilities
$1,059,803
Dairy Farm Monitor Project - South West Victoria
Dairy Farm Monitor Project - Gippsland
Total cows
284
Total cows
390
Milk production
199,296 kg MS
Milk production
134,945 kg MS
Price per unit
$6.91 /kg MS
Milk production
503 kg MS/cow
Milk production
468 kg MS/cow
Milk income (net)
$1,404,032
Milk income (net)
$899,377
Livestock trading pro
$64,238
Livestock trading pro
$86,933
Feed inventory change
$43,557
Price per unit
$6.62 /kg MS
Feed inventory change
$16,760
Other income
All other income
$12,543
All other income
$15,875
Gross Farm Income
$1,547,064
Other income
Gross Farm Income
$996,250
Herd costs
$45,659
Herd costs
$52,610
Variable costs
Shed costs
$44,608
Variable costs
Feed costs
$366,705
Feed costs
$615,387
Gross margin
$834,460
Gross margin
$555,630
Cash overheads
$257,926
Cash overheads
$147,893
Imputed operators
Overheads
Imputed operators
allowance for labour and
management
Overheads
$101,433
$96,929
Depreciation
$25,861
Earnings before
interest and tax (EBIT)
$424,647
$284,948
Interest and
lease costs
Assets owned
$4,512,094
Assets managed
$5,238,054
Return on assets managed
7.9%
22 Situation and Outlook – October 2014
Interest and lease costs
$145,853
Net farm income
$278,794
Equity
$2,590,154
60%
Interest and
lease costs
Assets leased
$1,011,258
Liabilities
$1,921,940
Assets owned
$3,459,597
Return on assets managed
6.4%
Interest and lease costs
$96,561
Net farm income
$188,387
Equity
$2,280,632
66%
Assets managed
$4,470,855
Return on equity
9.9%
allowance for labour and
management
Depreciation
$50,454
Earnings before
interest and tax (EBIT)
Assets leased
$725,959
Shed costs
$28,256
Return on equity
10.2%
Liabilities
$1,178,964
ISSN 1839- 0781.
Published by Dairy Australia Limited.
Whilst all reasonable efforts have been taken to ensure the accuracy of the Situation and Outlook 2014, use of the information contained herein is at one’s
own risk. To the fullest extent permitted by Australian law, Dairy Australia disclaims all liability for any losses, costs, damages and the like sustained or
incurred as a result of the use of or reliance upon the information contained herein, including, without limitation, liability stemming from reliance upon any
part which may contain inadvertent errors, whether typographical or otherwise, or omissions of any kind..
© Dairy Australia Limited 2014. All rights reserved.
Dairy Australia Ltd ABN 601106227
Level 5, IBM Centre
60 City Road Southbank VIC 3006
T + 61 3 9694 3777 F + 61 3 9694 3888
www.dairyaustralia.com.au
23 Situation and Outlook – October 2014