Dairy Peter Colins
Good afternoon, ladies and gentleman. Today I'll be presenting ABARE's outlook for the dairy
industry. The main message I'll have in my presentation is that the outlook for dairy has
improved over the last 12 months and is now quite positive. Farm cash incomes are forecast to
rise this year. World dairy prices and the Australian farmgate milk prices are expected to remain
at favourable levels.
And Australian milk production and exports of Australian dairy products are expected to rise. I
think it's also fair to say that factors expected to influence to demand over the longer term that
were discussed by Karen Schneider, Jammie Pemm, and others in this morning's sessions are
already affecting the prospects for Australian dairy. I'll discuss the demand influences on world
markets later in my presentation, but first, I'd like to take a look at the financial performance of
Australian dairy farms this year.
Average farm cash income, after falling last year, is expected to rise this year to be 30% above
the 10-year average. Last year, farm incomes fell because of a large fall in prices, and there was
a significant increase in expenditure on fodder because of dry conditions. This year, the increase
in incomes is due largely to a significant increase in prices. Spending on fodder will again
increase this year because of dry conditions, but it will not outweigh the influence of the high
prices.
Farm incomes are forecast to be higher in all states, but there are significant regional variations.
Larger increases are expected in Victoria, South Australia, and Tasmania than in Queensland and
Western Australia. And when you look at New South Wales, dairy farms in the southern part of
the state are expected to perform better than those in the northern part of the state.
I have just mentioned the large price increase for milk at the farmgate this year. Another increase
is forecast for next year, but it is expected to be more modest. Over the medium term, the price
of milk is expected to fall modestly in real terms, in line with movements in world prices.
However, at the end of the outlook period, it is still expected to remain around 7% above the 10year average to 2012-13. Australian milk production is projected to grow over the outlook period
to around $10 billion litres.
The main driver of the forecast high milk production is expected higher milk yields. There has
been a long term trend, over a long period of time, where the average milk yields per cow have
been increasing. There have been some short-term variations from this trend growth, but the
trend is quite evident.
This can be put down to improved genetics and technology, better pasture management, an
increase of food use of forage crops and food grants. We're expecting these influences to
continue increasing average milk yield per cow over the outlook period. Increases in cow
numbers are expected to have a small influence on the projected increase in Australian milk
production. Cow numbers are forecast to increase slightly in the short term, in response to
favourable milk prices, but remain largely stable over the latter part of the outlook period.
With higher production and strong world demand, the volume of dairy exports are projected to
increase over the outlook period for all major dairy product groups. The value of dairy exports is
forecast to rise by 15% next year because of the high volumes, favourable world prices, and an
assumed lower dollar. Over the medium term, the increase in the value of exports is projected to
be more modest with export prices expected to fall slightly in real terms. Measured by value,
around 45% of our milk production is exported in the form of dairy products. With such a high
export orientation, world markets are important to the Australian dairy industry.
I've already mentioned have strong world demand is expected to contribute to higher Australian
exports. This demand is also forecast to drive increases in the world prices of dairy products this
year and next. However, higher production in major exporting countries is expected to limit the
extent of the forecast price increases. Over the medium term, we're expecting producers around
the world to respond to the favourable prices and continue to increase production. With
production increasing, prices are expected to fall modestly in real terms over the outlook period
but by the end of the period, remain quite a bit above the 10-year average to 2012-13.
Now we'll just take a look at some of the key drivers on the demand side. Over the outlook
period, strong demand is expected from emerging economies of Asia, the Middle East, and North
Africa. In these regions, rising incomes, higher populations, and more consumption of Westernstyle foods are all expected to contribute to the higher demand. Additionally, there is expected to
be a limited capacity for production to increase significantly in these regions, which is expected
to increase their demand for imports. Rising world imports of milk powders is a good example to
look at to see how this rising demand has been unfolding.
Before the global financial crisis, there was steadily rising imports in the ASEAN nations, China,
and the Middle East and North Africa. Immediately after the global financial crisis, there was a
drop in imports with a sudden drop in incomes, except for China. As world economies have
recovered from the global financial crisis, imports of these milk powders have again been
increasing steadily.
This pattern of world import demand for milk powders can be seen in Australia's exports for
dairy products. Asia has been an important destination for our dairy exports for a long period of
time, and its share grew from around about half to almost 2/3 over the last decade. At the same
time, the importance of the Middle East has grown significantly, driven by increased trade in
milk powders. Now we'll have a look at the supply side.
On the supply side, stocks can have a large influence on world supplies and prices, especially
stocks in the European Union and the United States. Dairy stocks in these two regions have
fallen steadily over the last five years, especially for skim milk powder, which are now at
negligible levels. With stocks at reduced levels, new production will be important in satisfying
demand, especially for skim milk powder.
Milk production has been increasing over the last few years in the main dairy-exporting
countries. Next year, production is expected to increase in these countries in response to
favourable milk prices and lower food grant prices and with the assistance of higher milk yields
per cow. With milk prices projected to remain favourable, milk production in these countries is
expected to continue rising over the medium term. An additional contributing factor to the
projected increases in milk production in the European Union is the expiry of the milk
production quota.
When it expires next year, milk production in the European Union is expected to migrate from
the less efficient producing countries to the more efficient countries and increase the average
milk yield per cow. Also in New Zealand, there has been large-scale conversions of beef
properties and sheep properties to dairy enterprises which going forward is going to increase the
production capacity of their dairy industry.
In summary, the outlook for dairy is a positive one. Farm cash incomes to the Australian dairy
farms is forecast to rise this year. World dairy prices and Australian farmgate milk prices are
expected to remain at favourable levels over the outlook period, and Australian milk production
and exports of dairy products are expected to rise. Thank you very much.