35 Nicholls Tues 1600 1730 PETER COLLINS
Today I'll be presenting ABARE's outlook for dairy. I think it is fair to say that this year has been
a challenging one for the Australian dairy industry, with a fall in demand and falling prices. That
said, the outlook has improved and is looking more positive for next year.
World dairy prices and the Australian farmgate milk price is forecast to increase. And Australian
milk production and exports are also expected to rise. Also think it is fair to say that growing
demand in Asia, which was spoken about in sessions earlier today-- Mark Bennett will also be
talking about that-- that this demand, and the influences behind that demand, are already
influencing the prospects of the Australian dairy industry, and will for some time to come.
There will be times when you get deviations from these underlying trends. And some of these
deviations will be to our advantage. But other years, those deviations will be to our disadvantage,
as has occurred this year.
Another bright spot for Australian dairy in the longer term is the recently signed trade
agreements with the Republic of Korea, Japan, and China. I'll have a little bit more to say about
these later. But first I would like to take a look at the financial performance of Australian dairy
farms. And this will draw on the preliminary results of the most recent ABARE's dairy farm
survey.
After rising last year, average farm cash income for dairy farms is forecast to fall to $97,000 per
farm this year-- around 14% below the 10-year average to 2013-2014. Last year, the increase in
farm cash incomes was largely due to rising prices for milk. There was also an increase in
spending on fodder because of the dry conditions, but this was not enough to outweigh the
influence on incomes or the rising prices.
This year, farm incomes are expected to fall because of falling farmgate price in most regions.
There's also been higher expenditure on feed grains. However, the effect of the falling prices on
farm incomes is expected to be mitigated by higher production in most states, particularly in
Tasmania.
Farm incomes are forecast to be lower in all states except Queensland and Western Australia.
But it is expected that there will be regional variations because of regional variations in the price
force and the production increases. One thing to note is that the increase in production has been
behind the increase in expenditure on feed grains, so the increased production has come at a cost.
I've already mentioned how the average farmgate price of milk has fallen this year. Next year,
the price is forecast to rise by 6%, which is expected to result from high world prices for dairy
products and an assumed depreciation of the Australian dollar. Over the medium term, we think
the price will increase moderately in real terms for a couple of years before easing in the latter
part of the outlook period, as will dairy prices begin to fall.
Nevertheless, milk prices are still expected to average about 4% higher over the outlook period
than over the previous decade. Over the next five years, Australian milk production is projected
to grow steadily to around 10 billion litres at the end of the outlook period.
Without question, the driver of the projected increases in milk production is increases in the
average milk yield per cow. There has been a long-term trend of rising yield per cow, albeit with
some short-term variations from this trend. This has resulted from increased use of feed grains
and forage crops, improved genetics and technology, and better pasture management.
We are expecting these influences to continue over the outlook period and drive the projected
increase in average milk yield per cow. Changes in cow numbers are expected to have minimal
influence on the predicted increase in milk production over this period. Measured by value,
around 45% of milk production Australia is exported in the form of dairy products. Given the
importance of exports to the Australian dairy industry, we'll now take a look at the export
outlook.
With the higher production and growing world demand, the volume of Australian dairy exports
is projected to increase over the outlook period for all the major product groups. The value of
dairy exports is forecast to rise by 8% next year because of the high export volumes, higher
world prices, and an assumed depreciation of the Australian dollar.
Over the next two years, the value of exports is projected to increase at a more modest rate
before falling slightly in real terms over the last two years of the outlook period, when world
prices are expected to fall modestly. With such a high export orientation, what is happening on
world markets is very important to the Australian dairy industry.
I've already mentioned how we think growing world demand will contribute to higher Australian
exports. I would just like to explore this demand growth in a little more detail and its
implications for world prices. Next year, we expect to see a moderate recovery in demand from
China and the Russian Federation, and continuing demand growth in Southeast Asia, the Middle
East, and North Africa.
This growth is forecast to lift world prices of dairy products over the next couple of years. At the
same time, higher production in the major exporting countries in the world will limit the extent
of these forecast increases. Over the medium term, we're expecting demand to continue growing
in Asia, the Middle East, and North Africa.
In these regions, rising incomes, higher populations, and consumption of more western-style
foods are all expected to contribute to the higher demand. Additionally, there is expected to be a
limited capacity for production increases in these regions over this period, which is expected to
increase the import demand.
While demand is projected to grow, we think world production will grow faster, and prices are
expected to fall modestly in real terms over the last couple of years of the outlook period. This
will see prices at the end of the outlook period fall below the five-year average 2013-2014 but
remain above the five-year average to 2006-2007.
On the supply side, stocks can have a significant influence on world supplies and prices. This
was demonstrated this year in China. Using [INAUDIBLE] as an example, stocks in China had
built up over the previous couple of years. The end result was a drop off in Chinese import
demand, which, as I have just mentioned, was a significant factor in the fall in world prices this
year.
Stocks held in the EU and the United States can also significantly influence world dairy supply
and prices. With the drop-off in import demand in China, and the ban by the Russian Federation
on dairy imports from key exporting nations, stocks of butter, skim milk powder and cheese all
rose last year. The skim milk powder, to the highest level since 2010, and for cheese, to above
what had been a fairly stable level over the previous five years. But butter and skim milk powder
stocks have remained well below the levels they were in 2009, when world prices fell sharply.
World milk production has been increasing over the last few years in the main dairy exporting
countries. Next year, production is forecast to increase again in these countries, largely as a result
of low feed grain prices and higher milk yields. Milk yields and production are projected to
continue rising over the medium term.
A contributing factor to the projected increases in production in the EU is the forthcoming
removal of the milk production quota. After it ends next month, it expect that milk yields and
production will increase in regions where more efficient producers might grow the use of new
technology and advances in genetics. Additionally, with the removal of the quota, the dairy herd
in Europe is forecast to expand, although we expect the expansion will be constrained by falling
prices in the latter part of the outlook period.
In New Zealand, the conversion of beef and sheep farms to dairy enterprises in the South Island
is expected to slow and reduce the rate of production growth in New Zealand from what it has
been over the previous five years.
Before closing, I would like to say something about the recently signed trade agreements with
the Republic of Korea, China, and Japan. I've left this 'til now because these agreements will
have their most significant effect on Australian dairy beyond the present outlook period.
With the agreement with Korea, there will be an elimination of tariffs on cheese over 11 to 18
years. With the agreement with China, there will be a removal of tariffs on a range of dairy
products over a period of between 4 and 11 years. And with the agreement with Japan, the
volume of unprocessed cheese able to be imported duty free will increase to 20,000 tonnes over
19 years, and the volume of selected other cheeses that will be able to be imported at preferential
tariff rates will be increased over 10 years.
These recently signed agreements will be important because they apply to regions that have been
important destinations for our dairy products for some time. And these regions are occupying an
increasingly important place in our dairy export trade. Asia's export share of our dairy exports
grew from around about half to almost 2/3 over the last decade.
As well as Asia taking a greater share of our dairy exports, the research about demand from these
regions over the longer term suggests that the opportunity exists for the Australian dairy industry
to take advantage of this demand growth, and to grow the size of our export pie.
In summary, after a challenging year this year, the outlook for dairy has improved. World prices
and Australian farmgate milk prices are expected to increase over the next couple of years.
Australian milk production and exports of dairy products are projected to rise, and growing
demand in Asia and the recently signed trade agreements offer opportunities for the Australian
dairy industry over the longer term. Thank you very much.