Improvements in national dairy outlook

That is the view of senior analyst John Droppert in Dairy Australia's October Situation and Outlook report released yesterday.

Mr Droppert said international dairy commodity prices had "staged a significant recovery" in recent months, increasing by more than 20 per cent as global supply and demand slowly returned "to a more balanced outlook".

Another "positive" factor in the outlook included falling global dairy production across three - Australia, New Zealand and Europe - of the world's four major exporting regions, reducing downward pressure on dairy commodity prices due to oversupply, Mr Droppert said.

The value of global exports fell by 19pc, with falls across all major markets, but this largely reflected lower global prices for key dairy commodities, he said.

There were still large stockpiles to be reduced and future demand appeared mixed and subject to continuing price volatility, with sluggish growth and price sensitivity in many markets, he noted.

On the upside, China has returned to growth.

"Total global dairy import volumes by Greater China increased nearly 20pc over the 12 months to June 2016," Mr Droppert said.

"Australia-China export volumes grew by 30pc, from around 136,000 tonnes to 178,000t, whilst their USD (United States dollar) value increased by over 65pc year-on-year, from US$350 million in 2014-15 to US$579m in 2015-16."

But global dairy exports to Japan fell by 1pc in volume over 2015-16 and overall demand had also slowed in South East Asia, with 2015-16 import volumes also falling 1pc year-on-year as the USD value fell 27pc.

Australian export volumes to the region grew by 2pc.

While export volumes to the Middle East had eased 3pc in 2015-16, Australia's dairy export volumes to the region had plunged by 17pc, from 71,000t in 2014-15 to around 59,000t in 2015-16, he said.

The Australian dollar remained buoyant for the first quarter of 2016-17, but "the general consensus", Mr Droppert said, was it will depreciate against the USD over the course of the season improving Australian dairy's competitiveness on international markets.

Within Australia, better seasonal conditions this year, particularly in Western Australia, would result in lower input costs for feed, fertiliser and water, helping offset some "farmgate price pain", he said.

Mr Droppert said while total national milk sales volumes had grown 1.5pc to 1358 million litres over the 12 months to September, milk intake by processors was down on average 9pc year-on-year for the first two months of 2016-17 and milk production was forecast to ease by 5pc for the whole season.

Too much rain in large parts of northern Victoria, NSW, Tasmania and South Australia was impacting on dairy production volumes, milk quality, fodder conservation, and in some cases causing direct damage by flooding, he said.

This might provide further "short-term opportunities" for WA's two national processors to send surplus spring flush milk interstate, like Parmalat is already doing trucking Harvey Fresh milk to Darwin and Lion Dairy and Drinks is about to, trucking milk to South Australia, Mr Droppert said.

He believed the cost and distance would make trucking milk across Australia on a regular production and delivery schedule uneconomic.

While milk production in WA and Queensland increased last season, Mr Droppert said there was "not the scale" or a willingness to invest in a local milk powder plant in WA to soak up some of the production surplus.

While better international prices, good local season and lessening over supply conflicted with variable margins, mixed demand and limited export opportunity, it was difficult to define an "overall" outlook for the dairy industry, Mr Droppert said.

"This season's low farmgate prices will continue to squeeze farmers and there may be some who ultimately leave the industry," he said.

"The pain many farmers experienced last season, and the ongoing challenges around margins will prove significant obstacles for some processors in securing supply - in the short term at least.

"Overall milk production will remain constrained as farmers defer investment and focus on management to breakeven points, and conserving equity where margins are negative.

"The capacity and inclination of processors to offset this by passing market upside through in the form of higher farmgate prices will be influenced by the inherent risks in a largely sentiment-driven recovery.

"In terms of the supply/demand balance, the market is in a much better place than this time in 2015, but downside risks remain.

"The perennial challenge for both processors and farmers is to secure adequate milk flows to capitalise on market opportunities, maximising profitability while protecting against damaging price shocks.

"This will remain top of mind as the industry finds its feet in 2016-17," Mr Droppert predicted.