The 2022-23 season is opening with large numbers on both sides of the ledger.
As discussed in Dairy Australia’s May Situation and Outlook report, early announcements of opening milk prices have set new records, while fertiliser, fuel and grain prices have soared amid the reality of a war in Europe, renewed geopolitical tensions and ongoing disruptions associated with COVID-19.
After successive seasons of recovering profitability, these sudden and substantial pressures on margins — and the degree to which the milk price will help offset their impact — is a key question as farmers and processors try to plan ahead in a volatile market.
The 2022 National Dairy Farmer Survey has reported that farmer confidence is high, however, this and profitable margins are not translating to milk supply growth.
Australia looks set to conclude the 2021-22 season with a national milk pool of around 3.5 per cent below the 2020-21 total, at just under 8.57 billion litres.
Competition for land, high beef prices and ongoing risk aversion are all contributing factors to constrained milk supply.
The most pervasive and commonly cited one, however, is the shortage of labour, which continues to not only hold back potential expansion plans, but drive industry exits or reductions in herd size.
Fatigued farmers are taking advantage of good margins to reduce workload or realise the rapid gains in asset values, having reduced debt.
As such, ongoing growth constraints and heightened margin risk are expected to offset strong milk prices and favourable seasonal conditions. This is expected to result in a comparatively flat milk pool for the upcoming season, totalling 8.55 billion litres.
Australia’s major dairy export competitors are also contending with slow, or more often negative, growth in milk production.
New Zealand’s 2021-22 season-to-date milk intakes are four per cent down to March in year-on-year terms, having tracked below the prior year’s levels all season, particularly over summer. Analysts at NZX expect a full-season drop closer to five per cent by the end of May.
In the Northern Hemisphere, European Union data to February suggests a recovery from negative territory to parity with the same month in 2021, while the United Kingdom just broke even in March.
Nonetheless, more recent indications suggest milk volumes in the major dairy regions of north-west Europe remain suppressed, with rising costs being one of the headwinds deterring expansion.
Additionally, milk production in the United States is tracking one per cent down for the calendar year to date, though the US Department of Agriculture is forecasting a modest recovery through the second half of the year.
In the broader market, many countries — including Australia — have seen the COVID-19 pandemic management move from an emergency response to ongoing sustainment.
Nonetheless, the impacts of COVID-19 — and now of the war in Europe — continue to reverberate around the global economy, fuelling inflation and disruption.
Dairy demand has so far remained resilient, albeit tempered by price sensitivity in markets where affordability is a constraint and peaking product inventories.
China is a market under close watch, as government efforts to limit the spread of COVID-19 intensify. Severe disruptions are expected to continue, not only related to shipping and logistics, but dairy consumption too. Early indications suggest the consumption of fresh dairy products has already tumbled, driving more local milk into powder dryers.
Back home, cafe and restaurant spending has continued to boom, with the three months to February topping not only the same period in 2021, but also pre-pandemic levels.
This is a significant shift from the past two years, where strength in the takeaway food and quick service restaurant sector has driven foodservice sales.
With consumers out and about again, fewer meals are being cooked at home and the volume of dairy products sold through supermarkets has continued to ease across most key dairy categories.
Nevertheless, retail food expenditure remains strong, a sure sign that inflation has arrived.
The 2022-23 season will be marked by rising numbers throughout the supply chain — from production costs to farm gate prices, from commodity values to food expenditure.
This theme is likely to be tempered by an absence of growth in milk production.
However, robust balance sheets after several profitable years might just mean that the volatility accompanying such giddy numbers is something the Australian dairy industry is well-placed to tackle.