Do we care whether Australia makes less milk?

Could Australia be running out of milk? Dairy identity Darryl Cardona told the senate inquiry that we could be importing milk in two years, according to media reports. Wondering if this really could be possible and what difference it would make, I turned to Rabobank senior dairy analyst, Michael Harvey, for insight and am really grateful for his guest post below. Thanks Michael!


Michael Harvey, Rabobank

The Australian dairy industry is staring down the barrel of one of its largest annual falls in milk production and would follow a 2% decline last season. This season has begun with three consecutive months of double-digit falls and is forecast by commentators (including Rabobank) to finish the season down between 7-10%. One of the country’s worst droughts in history was the catalyst for a contraction in supply of 8% back in 2002/03 – a clear indication of how difficult it is right now.

The collapse in milk production is not surprising given the challenges being endured on-farm. Some producers are exiting the industry and the producers who remain are making strategic decision to quickly bring down their breakeven levels through reducing herds and cutting costs. Just to make matters worse, seasonal conditions present challenges for the second consecutive season (but for complete opposite reasons). Some dairying regions are faring better with seasonal conditions and less global market impact on milk prices – the steepest declines in production are from across the southern export regions.

Losing supply is risky for processors
So, what are the implications for the industry beyond the farmgate when facing a collapse in milk supply? For processors, losing a large volume of milk supply is risky business.

A loss of milk can have a material impact on profitability. This is through reduced efficiencies and higher overhead costs associated with running processing plants at less-than-optimal rates. The financial impact will depending on how much milk is lost, where from, and what the manufacturing footprint is to be able to spread the impact.

As has been well publicised, there is active recruiting of milk supply across southern Australia leaving Murray Goulburn the most exposed processor. For a processor the size of Murray Goulburn, a short-term loss of milk supply can be managed. However, losing a large quantity of milk in a rising price environment is not ideal. Furthermore, a more permanent loss of milk supply may require a review and resize of its manufacturing footprint (existing and planned) to meet the new supply realities.

Will Australia remain self-sufficient for milk?
Looking more widely, given the scope of the reduction this season, concerns are being raised at the ability of Australia to remain self-sufficient in milk and dairy. Entering this season, Australia was a net exporter of dairy and sold around 3.5 billion litres of milk (in liquid milk equivalents) into the global market.

But Australia is actively engaged in global trade and is an open economy. In the same year, Australia imported over 1 billion litres (in liquid milk equivalent) of dairy products and ingredients. A large portion of this was either cheese or butter for a use across retail, industrial and foodservice. Australia also imports ingredients that are in short supply locally. Examples include whey, casein and lactose for production of nutritional powders.

For most dairy processors, a drop in supply will mean an immediate reduction in exports because the domestic market delivers higher and more stable returns and supply is tied to contracts.  If Australia’s milk supply falls 10% this season that would equate to a loss of over 1 billion litres in just two seasons – a worrying trend for the entire industry.

Long-term a continued fall would trigger a spike in imports of more cheese, butter and ingredients to meet shortfalls and cover the loss of milk as processors focus on utilising local milk in the most profitable streams. But Australia would need to lose a lot more milk before needing to import liquid milk from New Zealand to meet the local consumer market for fresh dairy products.

What the future holds
So what can we expect moving forward? Firstly, better seasonal conditions over the remainder of the season would help to stem the loss of milk. Secondly, there are positive signs in global markets which have seen some improvement in farm-gate returns. Rabobank is confident of a sustained price recovery which will flow back to the farm gate. While it might be too late to have a more material impact of farmer margins this season, 2017/18 is shaping up well and should see a return to profitability on-farm. This would go a long way in stopping further bleeding of milk supply.

There is a risk for the whole of industry that Australia’s milk pool will remain stagnant or shrink further. Collectively the industry needs to re-ignite profitable milk supply growth. Australia needs at least 1% growth in milk production each year just to meet growing, albeit modestly, domestic market requirements.

Incentivising milk supply long-term to maximise help existing and planned processing capacity is more demanding. Restoring confidence and appetite for investment at the farm gate, which history shows for Australia, is an element difficult to attain and will require a sustained period of farmer profitability.

Without more milk supply, Australia will become less export focused, reducing its commitment to fast-growing global dairy markets, and potentially importing more ‘milk’.

9 thoughts on “Do we care whether Australia makes less milk?

  1. Thanks Marian. Rather than running out of milk, I think the danger is the big processors or small boutique producers will all look to capture the high priced Chinese market for Aussie dairy – whether infant formula or fresh milk flown direct to Shanghai – leaving Aussie consumers who aren’t prepared to pay so much with UHT milk in their lattes, imported from NZ or South America.

    • Hi Sue,
      There’s certainly a lot of UHT in European supermarkets, isn’t there? Not sure about Australia in the next couple of years though because Coles and Woolies have locked in supply with those 10 year contracts with MG and Fonterra.

  2. Marian. Thanks for organising this article for dairy farmers and the community. And Michael thanks for your thoughtful words

  3. How much more of the total MG milk pool can go into the domestic fresh market? How much of the market can it take from its competitors, as they did with the Coles deal? Is this limited in its scope? Can MG new flavoured ready-to-consume beverage products displace the established players? What will it take or cost to achieve some sort of scale to be profitable with no franchise or route trade system in place?

    The question for me is, how much milk achieved outside the traditional seasonal calving pattern does MG need from its farmers (the most profitable period it now seems according to industry consensus farm perspective) to meet the requirements of its fresh market needs? And once this is met seasonal pricing can be applied to send the correct market signals.

    Trying to understand the need to chase shoulder milk if you are not in the flat milk world. You cannot have a foot in both camps. Can MG be in both camps but be pushing supply in to the flat supply curve with such large disparity in pricing?

    For me, MG did not ask the right question when it started down this value added strategy. It is all about the products and no thought about the farming systems and their resilience and profitability and how they relate to the strategy.

    MG seems to be turning itself into a flat milk supply company like Parmalat by stealth with its milk pricing when there is no real need to. Its product mix is too wide and is still mainly various value adds of commodity products.

    This new strategy involved three components and they seem to be seasonally focused.

    Cheese with more value add and packaging versatility. Has been completed and does not require new milk. Low risk.

    UHT requires new milk and new markets. Can this happen with Victoria milk supply? High risk

    New dryers. First it was one 63-ton dryer, now it is two 45-ton dryers built in two stages. This is the biggest investment of its type in Australian dairy history. Is there enough milk within MG just to feed one of these dryers? Let alone with MG current supply loss. Very high risk

    So, with a declining or at best stable Vic total milk pool is any of this possible without a whole of industry response now that Canberra is paying attention. My view right now is they have no chance of going ahead with out a growing Australian milk pool or a rationalization of the processing sector. At this point in time it seems to be fracturing even more into smaller and smaller players doing nothing for processor efficiency.

  4. While I cannot comment on the question of how the Australian dairy industry needs to respond to the issues confronting milk production/consumption, I wonder at the extent to which farmers might consider alternatives? ABC recently featured an article on Landline about the growth in alternative “milks” – that is, plant-based sources of dairy-like products. Apparently Australian demand is increasing and in the US in particular this is a rapidly growing sector.

    When one considers the marginal health benefits and the not inconsiderable ethical concerns about dairy, as well as growing awareness about such matters, perhaps farmers might think of where the future lies?

  5. Highly likely.
    We had a peak production of 12 billion litres, now under 9 billion and falling without consideration of direct supply by foreign interests and our population growth to 50 million people by 2050 when we already consume over 70% of our domestic production is consumed in Australia. Queensland already imports around 120 million litre per year from southern states

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