Dairy sector remains strong, with steady milk production forecast

The December Dairy Australia S&O report forecasts milk production will remain steady over the 2023/24 season, despite the anticipated impacts of the El Nino.

Record profits were expected in some regions but there were also headwinds, according to DA industry analyst Eliza Redfern.

"High production costs, Australia's competitiveness in dairy products and economic constraints on consumers are emerging risks," Ms Redfern said.

"What we have been seeing from a milk production perspective is some modest growth over the spring months, as a result of that difference in weather conditions in spring this year, to spring last year.

"We have also seen cow culling rates have noticeably reduced, with the decline in beef prices having a part to play."

She said lower beef prices, throughout the year, appeared to have slowed farm exits.

"Each season we do see a decline in farm numbers - obviously there is a lot that weighs into that decision - but the cow cull numbers are a solid indication the decline in beef prices has slowed that rate of destocking," she said.

On the positive side, while several northern dairying regions had already dried out, some moisture had been retained in areas across southern Australia, she said.

The report found Australian dairy farmers in several regions made record profits during the 2022/23 season.

That strengthened progress towards Dairy Australia's target of at least half of farming businesses achieving $1.50/kilogram Milk Solids EBIT (earnings before interest and tax) over a five-year average.

Ms Redfern said the El Nino was forecast to bring drying conditions, resulting in a greater demand for supplementary feed and irrigation water.

"The strong profits made by farmers, over last season have helped set them up for the challenges that do lie ahead," she said.

DA was forecasting milk production would remain steady, relative to last season's volumes, despite emerging challenges, she said.

"In some regions, hay costs are below last year, but ultimately those feed costs do remain quite high and we have seen temporary water prices have been increasing since the start of the water year, despite that really strong water availability," she said.

Geopolitical tensions also continued to weigh on farm inputs, with both grain and fertiliser markets still influenced by the Ukrainian conflict.

That was despite the increased fertiliser supply which had seen global indicative prices drop between 20 and 40 per cent below October 2022.

"Dairy export commodity prices have seen some recovery in recent months, led by a contraction in exportable product globally," the report said.

"Global demand remains quiet however and will likely limit further price increases.

"Local demand across both Europe and the US has increased in the lead up to the end of year holidays, diverting tighter milk supplies to respective domestic markets."

The report also confirmed that Australia was becoming a much more prominent dairy importer, shipping in the largest volume of overseas dairy in a single season during 2022/23.

In 1999/2000, imported products accounted for 11pc cent of Australia's dairy consumption, whereas last season, 27pc of dairy consumed was from overseas.

With Australian farmgate prices keeping prices of the local product high, imported dairy had proven increasingly attractive to businesses and consumers looking to limit cost pressure.

The report found growing pressure from overseas dairy products was a sign that deviation from global markets was a temporary phenomenon and would likely have implications for next season's farmgate milk prices.

"In terms of price competitiveness of Australian dairy products we have seen that our products have been under pressure from that competition, whether that has been on the global stage or domestically, with increased imported products coming into Australia.

"We are part of a global market and can feel the impact - we don't operate in isolation to what is happening overseas," Ms Redfern said.

Consumers were constantly adapting to cost of living pressures and ultimately looking to save costs.

In a retail setting, dairy continued to see significant total value growth, ranging between 9 to 14 per cent depending on the category.

But total volumes sold in most key dairy categories continued to fall, with Australian households shopping more frequently but buying less product in each shop

"We are still seeing that significant revenue coming through in terms of the total value of products sold across the dairy categories, but that volume sold is still adapting," Ms Redfern said.

"Consumers are shopping more frequently, but purchasing less product - they are adapting by choosing the right product size, to get the most out of their money."