HIGHER feed prices continuing for the foreseeable drier future have eroded dairy farmer confidence inspired by better farmgate returns for milk this year, according to Dairy Australia's latest situation and outlook report.
Milk production continued to decline over spring and Dairy Australia has reaffirmed its full-season forecast national milk production will drop between three per cent and 5pc to between 8.3 and 8.5 billion litres, with Western Australia's volume reducing in line with that prediction.
A drier than average remainder of the season and poor grain harvests predicted in the report were not what WA dairy farmers wanted to hear.
"High costs of production continue to affect profitability, despite the strong farmgate milk price and milk production will likely decline further," the December situation and outlook report released last week said.
"In WA feed prospects have diminished due to dry conditions and severe frosts.
"Fodder costs (in WA), in combination with steady-to-slightly lower milk prices, have compressed margins and are weighing on production," it said.
The report said in south-west WA the average cost of feed grains - primarily wheat - was $263 a tonne, down 22pc for the year, but offset by the cost of good quality shedded hay increasing 14pc to an average of $335t.
While the WA feed grain price fall was equal biggest - along with the central districts of South Australia - for the 12 national dairy regions, the hay price increase was second biggest behind only Atherton Tablelands in Queensland.
Although hay and grain prices had eased up to 32pc and 22pc respectively year-on-year nationally, prices still remained above the five-year average in most dairy regions, the report pointed out.
"WA accounted for a large proportion of the recent harvest downgrade, as climatic forces damaged crops and harvest failed to meet expectations," it said.
"With a smaller volume of feed made in this region (WA) and an above average harvest in Victoria, it is unlikely this year will see the same volume of transhipments to the Eastern States."
The report acknowledged many dairy farmers now received a better return for their milk after major supermarkets dropped $1 a litre pricing policies on own brand milk and agreed to pass back some of the price increase earlier in the year.
While sales of milk contracted 1.4pc in volume in the past year, value of the sales grew 3.5pc, predominantly due to the higher average price of supermarket own brand milk, it acknowledged.
The average retail price of other products, such as cheddar cheese and UHT milk, has also increased, it said.
But the report acknowledged some WA dairy farmers, coming off longer term supply contracts, were faced with lower prices in new contracts.
Those on shorter contracts had seen "modest increases", it said, but "for most, inflation of feed costs driven by local and east coast demand have compressed margins".
The report pointed out the dairy processing industry also continued to consolidate, with Mengniu's proposed acquisition of Bellamy's Organic and Lion Dairy & Drinks the latest developments in a shrinking industry.
The national herd also continued to shrink, it pointed out, with higher than average cull rates continuing through saleyards and likely to impact on the industry's recovery rate.
A 6pc smaller national herd is expected by the end of this season.
With global dairy exports to China growing 10.5pc in the year to September, it remained the shining light for export growth for the Australian industry, the report said.
China, South East Asia, Mexico and Japan were the main destinations for Australian dairy products this year, with only China and South East Asia showing growth.
Dairy Australia industry analyst Sofia Omstedt said high purchased feed costs had affected milk production in Australia for two consecutive years and were "having a significant impact on the capacity for Australian milk production to recover".
"For some farmers, expensive feed will be a nuisance in an otherwise good year, for others it will represent a significant and ongoing burden as they wait for the drought to break," Ms Omstedt said.
This week Rabobank's dairy quarterly report also predicted reduced national milk production volumes.
In the first four months of the 2019-20 season, milk production fell by 5.5pc, a loss of 190 million litres, with falls recorded in all States and regions except eastern Victoria, the report said.
Rabobank senior dairy analyst Michael Harvey said the bank had revised down its milk production forecast by 5.8pc to 8.3b litres based on the Bureau of Meteorology's latest outlook suggesting conditions could remain drier than average over summer.
As reported in Farm Weekly last month, WA dairy farmers received 1.2 cents a litre more on average for their milk last financial year, but paid out the equivalent of 4.9c/l more - mostly for stock feed - to achieve it.
"In a nutshell, for all the hard work, we can say we got an extra cent for milk and paid out 5c, so we went backwards by 4c/l," numbers cruncher Kirk Reynolds told last month's Western Dairy Spring Forum at Busselton.
Mr Reynolds was running through the latest data set from the Dairy Farm Monitor Project (DFMP) which involved 27 WA dairy farms last financial year, the sixth year Western Dairy has recorded actual figures and with 14 of the farms providing data from the beginning.
Cost of feeding the herd - both purchased and home grown feed - plus labour cost comprised 70pc of the average WA dairy farm's total cost of production (CoP), Mr Reynolds said, with grain and other bought-in feed the "big one" in terms of CoP increases.
