Milk processors Saputo and Fonterra are set to face a fierce battle for milk supply, driving up prices according to one analyst.
Rabobank senior dairy analyst Michael Harvey expects competition for the two large processors, as well as smaller and newer dairy players’ desire to continue their recruiting efforts, will assist domestic producers in achieving a profitable 2018-19 season.
In a recently released report Australian Dairy: Let the big milk battle begin, Mr Harvey said competitive pressures for milk supply, which are likely to intensify next season with Saputo’s acquisition of Murray Goulburn, would translate into higher premiums being passed to farmers and help compensate for the lower commodity price.
With the Murray Goulburn asset footprint having an excess capacity of more than one billion litres, Saputo will be looking to win back that lost milk supply.
‘‘And then you have a number of dairy companies that have already taken up the lost milk from Murray Goulburn and they will be determined to retain their recently-acquired milk suppliers,’’ he said.
Mr Harvey said during the next two years Australia’s dairy processing capacity was likely to increase further, with an estimated 900million litres of capacity to be built over that time, leading to greater needs to ensure sustained milk supply growth continues.
‘‘This comes off the back of one billion litres of commercially-viable processing capacity coming on board in the past two seasons,’’ he said.
‘‘Without a growing milk pool, the industry risks carrying too much surplus processing capacity, fuelling manufacturing inefficiencies with the margin pressure just pinballing from one processor to the next.
‘‘And this is a looming risk for the sector because if it faces another sustained period of aggressive milk pricing, it could potentially transform into an unsustainable squeeze on processors’ margins and profitability.’’
With trust between farmers and dairy processors damaged and in need of rebuilding, Mr Harvey expects to see a lack of loyalty and the threat of milk supply losses through supplier churn each season.
‘‘It will be fascinating to see who emerges as the new price leader, but there is no doubt an improved mechanism for price discovery is needed to ensure sustainable returns throughout the sector.
‘‘And this is likely to give processors renewed impetus to offer innovative tools, services and support to milk suppliers to facilitate future milk supply growth,’’ he said.
Source: Country News