Rural Bank is forecasting 4-5 per cent higher farmgate milk prices and increased dairy exports in the second half of 2021.
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DRIVER: Good seasonal conditions are forecast to drive a dairy industry resurgence.

The bank released its Australian Agriculture Mid-year outlook 2021 report on Tuesday, analysing the performance of six industries – cattle, cropping, dairy, horticulture, sheep, and wool, and the broader economy.

Dairy – along with lamb and mutton, horticulture and wool – is expected to strengthen in the second half of 2021, while cattle and cropping prices are anticipated to remain steady.

The bank is forecasting the mid-point farmgate milk price to be 4-5pc higher than in 2020/21.

“Australian milk processors have reacted to a buoyant global dairy market and highly competitive domestic milk pool by raising opening milk prices,” the report said.

“Closing price estimates and revisions to opening prices suggest there may be multiple step ups during the season.”

It is also tipping higher-than-average international prices into the spring.

“This is driven by demand from Asia, particularly for milk powder,” the report said.

“The desire to hold a slightly higher level of inventory due to the threat of further COVID-19 disruptions could hold prices in the middle of the forecast range for the remainder of 2021.”

The report said Australian milk production was forecast to increase 1-2pc in 2021/22, building on production growth of about 1pc in 2020/21

The bank’s Tasmania regional manager agribusiness Dean Lalor said milk supply growth would be led by Tasmania and Victoria.

“Supply growth will be assisted by strong milk prices, favourable levels of feed and cheaper input costs for water and grain,” he said.

“However, early winter rainfall in parts of Victoria which caused flooding will present ongoing challenges for some farmers.

“In global markets, strengthening demand for finished dairy products, particularly from Asia, is expected to underpin historically high prices.”

The report said increasing milk supply in Australia would provide a higher exportable surplus, which was likely to lead to growth in export value of 5-8pc for 2021/22.

Demand for milk powder is expected to remain above year-on-year levels for July to December.

This is driven primarily by underlying demand from China but also interest from other countries.

However, the bulk of China’s purchasing in 2020 occurred between January and May, suggesting there is a low likelihood of exceeding the monthly highs set earlier this year as supply of finished product traditionally dips over winter.

Milk supply is anticipated to increase by 1-2pc in New Zealand and the US driven by favourable seasonal conditions and expanding herds.

In contrast, parts of Europe are likely to record a decline in milk production due to drier than usual conditions.

Agriculture thriving

The report said Australian agriculture had thrived under much calmer conditions in the first half of 2021 compared to the unexpected disruptions that characterised 2020.

Favourable seasonal conditions continued into the first half of 2021 in most regions and are forecast to continue in the coming months.

Signs of recovery from the impacts of COVID-19 in Australia and key export markets would help strengthen demand for commodities such as wool, dairy, red meat and horticulture.

The bank’s chief operating officer Will Rayner said even when taking these factors into account, there was cause for optimism on the outlook for Australian commodities.

“Although South Australia and western Victoria experienced a dry start to 2021, the probability of a wet winter is looking positive for the production of most commodities and will assist continuing efforts to rebuild livestock numbers,” he said.

“Market sentiment has improved on early signs of recovery from the impacts of COVID-19 as outbreaks in key export markets slowly come under control and vaccine distribution rolls out.

“Economies globally will continue to emerge from lockdowns of varying degrees and consumer confidence should rebound, strengthening demand for wool and dairy – commodities that experienced a decline in 2020.

“Demand is also strengthening for the horticulture and red meat sectors and we are anticipating Australia will produce a winter crop 13 per cent above average, with generally optimistic forecasts for rainfall.”

Shares of Saputo Inc. SAP, -0.63% dropped 2.76% to C$33.15 Monday, in what proved to be an all-around negative trading session for the Canadian market.

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