5 December 2006
Despite the difficulties posed by the current drought, a recently released report by Rabobank, the world's leading food and agribusiness bank, predicts a solid future for the Australian dairy industry.
Following a sustained run of declining prices through 2005/06, Report author and Rabobank senior dairy analyst, Tim Hunt says he still expects pricing to remain firm in coming years.
The recently released report cites strong growth in global demand for dairy as one of the key price drivers going forward.
"The global economy may no longer be travelling at the heady pace enjoyed through 2004, but growth remains above its long term average and is expected to remain so in the next few years."
"Global demand is forecast to rise by just under 3% per annum over the medium term - an acceleration on that seen in recent years. Developing economies are expected to be the central driver of that growth, accounting for an astonishing 80% of projected demand growth," Mr Hunt says.
Rising consumption in these markets is expected to be underpinned by the combination of economic growth, population growth, westernisation, urbanisation and heavy government and corporate promotion, according to the report.
The reduction of the price of some traded products over the last 18 months has also improved their competiveness against local supply in these developing markets, rebooting import demand in several key markets.
"The reduction in butter fat prices, in particular, has also improved its competitiveness in ingredient uses - particularly given the more recent spike in vegetable oil costs on the back of a global shortage of soy - helping to unlock demand growth," Mr Hunt says.
While the majority of growth in the global dairy market will be met by local supply in coming years, some important markets will continue to rely on imported product - including the Middle East, South East Asia, Japan and Korea.
However, traditional exporters - the EU, Australia and New Zealand - are likely to be able to contribute only limited additional volumes of product to the global market in coming years.
"In fact, the slow decline of EU surpluses as recent reforms continue to bite are likely to generate replacement opportunities for competing exporters that are as great as the import potential of any market," Mr Hunt says.
And while countries like the Ukraine, Brazil and Argentina are home to rapidly growing dairy sectors, their combined exports remain 30% shy of Australia's own export volumes (in 2005/06) the report says. Moreover, several impediments to growth may mean it takes many years for these countries, as a group, to rival existing exporters, according to Mr Hunt.
But as recent years have shown, high global commodity prices are in themselves not sufficient to generate regrowth in the Australian dairy industry.
Despite high farmgate prices and improving profitability for most Australian dairy farmers, 2005/06 saw national milk production fall for the third time in four years, down 0.5% for the year. The current drought will set the industry back even further, according to Mr Hunt.
"There's a while to run yet, but national production could come in 8-10% down on previous year levels in 2006/07," Mr Hunt says.
The drought will have impacts beyond the current season with the need to rebuild herds, finances and confidence seriously limiting growth prospects in the next few years.
But given a return to more normal seasonal conditions, in the medium term, the report predicts milk production will eventually return to growth in Australia.
"Feed prices will come down, land prices may experience a period of slower growth - improving the operating returns to dairying - and irrigation water availability should eventually improve. Investments in labour-saving technology and water use efficiency are also improving the industry's ability to deal with the high costs of these inputs," Mr Hunt says.
Australia may no longer be the lowest cost producer of milk in the world, but according to the report it remains far more competitive than the USA or EU, and the global market will need its surplus production for the foreseeable future, Mr Hunt says.
"This should ensure attractive pricing will remain in place for some time yet - bringing the prospect of solid returns for more efficient dairy farmers beyond the current drought."
For processors, Mr Hunt says the reduction in milk supply in the short term will exacerbate the situation of excess capacity and strong competition for milk. It will also force exporters to tighten their focus on high value markets given the inevitable product volumes, according to the report.
"Looking further ahead, companies will benefit from the expected development of stronger supply base and the prospect of an eventual return to production growth that will enable them to participate in attractive opportunities at home and abroad."
Rabobank Australia is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 100 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank has a AAA credit rating and, in recent years, has twice been awarded the title of the world's safest bank by Global Finance magazine. Rabobank operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1500 offices and branches. Rabobank Australia is one of Australia's leading rural lenders and a significant provider of business and corporate banking and financial services to the Australian food and agribusiness sector. The bank has 46 branches throughout Australia.
Contact
For further information please contact Denise Shaw, Public Relations Manager (Tel: +61 2 8233 8744) or email on sydney.mediarelations@rabobank.com.