After the usual lull in trading activity over Christmas, dairy market participants are again taking stock of the supply and demand dynamic to try and get a read on the prospects for 2018.
From an Australian perspective, it’s a mixed bag.
Australia’s milk production is up nearly 3 per cent for the first half of the 2017–18 season, reflecting a more favourable spring than 2016 in most regions, and incrementally higher milk prices.
As envisaged in Dairy Australia’s October Situation and Outlook report, this production growth is driven by southern, export-focused regions.
Domestic-focused regions have seen profitability and (in some areas) seasonal challenges weigh on output.
Given the weak 2016 comparables and continuing challenges on-farm, it’s likely that year-on-year growth rates will moderate during the second half of the season, with Dairy Australia’s full season forecast remaining for growth in the range of 2 to 3 per cent.
Amongst the key global dairy exporters, milk production has shown diverging trends. In Europe, milk volumes have surged.
Growth in European milk production has been one of the key drivers in the deterioration of market sentiment since the northern hemisphere autumn.
Year-on-year growth for the latest reported month (November) is at 6 per cent, with the year-to-date total closing in on 2 per cent for 2017, and likely to add another 1 per cent (of 150 billion litres) in 2018.
In a positive sign, the size of the region’s dairy herd has begun to fall, and combined with the decision to move straight to a tender-basis for government intervention buying, this should herald an eventual moderation in the current growth spurt.
US milk production continues to grow, up 1 per cent in December, ending 2017 with an increase of 1.4 per cent for the year (for a total of nearly 98 billion litres). The rate of growth peaked at 2.1 per cent in August and has since slowed relatively consistently.
After wet and cold conditions muted the recovery from last year’s slow spring, extremely dry conditions have further hit New Zealand’s milk production through the summer months.
December 2017 milk intakes were around 2.5 per cent lower than the same month in 2016, representing a change from the trend which had seen year on year growth peak at just over 4 per cent in November.
Rain in January may help arrest the decline, however there will be further impacts as a result of lower feed surpluses in spring reducing the volume stored as silage or hay.
Key global markets have helped absorb some of the increases in milk production, with China and Japan seeing double digit annual percentage increases.
Wholemilk powder and infant formula demand have grown strongly in China, whilst increased exports of whey powder, cream and SMP have also been noted. Industry commentary points to lower domestic production in China and the continued cost competitiveness of imported product, particularly from Australia and New Zealand. Imports of liquid milk from major exporters have fallen considerably over the same period, easing 12 per cent from 620 000 tonnes to around 546 000 tonnes, with much of this decrease appearing to have come from the European Union, and Germany in particular.
In the case of Japan, the largest single increase occurred in lactose, with SMP and cheese also seeing significant increases. Dairy trade volumes to Southeast Asia have remained largely flat, as have those to Mexico.
Despite continued uncertainty over the future of NAFTA, US exports continue to make up over 80 per cent of Mexico’s dairy imports. The EU and New Zealand are competing for second place in market share, with exports from both up significantly over the last five years.
Dairy trade with the Middle East and North Africa (MENA) region from the major exporters remains depressed, with particularly large falls in butter and WMP purchases likely reflecting the impact of significantly higher dairy fat values in especially price sensitive markets.
Back home, the Australian domestic market remains largely stable, with volume growth continuing in most major dairy categories. Sales value growth remains robust, with the exception of cheese where retail prices remain under pressure.
With a slower season than expected in New Zealand, reasonable import demand and northern hemisphere producers finally getting the market message, 2018 might be a better year for Australian dairy farmers than earlier feared.
However, the growth trajectory of northern hemisphere suppliers is likely to include their spring peak, which means a large amount of milk has yet to find a home, and caution remains advisable.
• John Droppert is Senior Industry Analyst with Dairy Australia