Drought-affected milk supply is driving a bump in the price paid to Australia’s dairy farmers as processors scramble to secure product.
Paul Mumford, president of United Dairyfarmers of Victoria, said a reduction in milk supply, driven by the drought, had pushed up farmgate prices.
He said it was a relief for farmers that milk prices were now fair and equitable, but the increased price highlighted the Australian dairy industry was going through a tumultuous time.
“Because we have seen so many farmers leave the industry, the pressure is now on the processors,” Mr Mumford said.
“They are scrambling for milk, which is good for dairy farmers but it is showing the stresses of the Australian dairy industry.”
New Zealand-owned dairy giant Fonterra revealed in May that the reduction in the Australian milk pool had forced a planned closure of its plant in Dennington, in the Western District of Victoria, near Warrnambool.
Fonterra said that like many processors and farmers across Australian dairy, it continued to feel the impact of industry structural challenges and a reduction in the milk pool, which led to excess processing capacity across the industry.
Mr Mumford said it was a “farmers’ market” right now as processors were already offering a counter-offer to their recent record opening milk prices.
Fonterra recently raised its opening milk price for the new season by 20c to $6.80 a kilogram of milk solids. Bega Cheese increased its new season’s opening price by 15c to $6.75/kg MS.
Local farmers are now getting about 50c/kg MS more than the global price.
Investment bank Morgans outlined that it appeared that processors were overpaying for milk supply. Morgans analyst Belinda Moore said that on the back of dry conditions and significantly increased farming costs, Australia’s milk supply was expected to decline again in fiscal 2020, following a particularly challenging season in fiscal 2019.
“Falling milk supply and excess manufacturing capacity is leading to fierce competition for milk and causing dairy manufacturers to once again offer a farmgate milk price in excess of what it should be under more normal circumstances,” Ms Moore said.
Specialist agribusiness bank Rabobank recently lifted its milk price forecast. It outlined in its latest Global Dairy Quarterly report that tightening global milk supply, reduced stocks and solid demand meant market fundamentals remained strong for dairy exporters.
Rabobank senior dairy analyst Michael Harvey said in the report that despite the improving outlook for milk pricing, the challenge to begin rebuilding milk supply would linger into the new Australian season.
“Many dairy farm operators will need time to rebuild herds. With a return to profitability as milk prices improve, an immediate focus will be on repairs and maintenance ahead of major expansion projects,” Mr Harvey said.