Total Australian milk production for February was up 2.4 per cent, putting the 2017–2018 season 3.4 per cent ahead on a year-to-date basis.
The growth continues to come from the southern, export oriented regions of South Australia, Victoria and Tasmania, whilst drinking milk states such as NSW and Western Australia are flat.
Queensland is down significantly on a year-to-date basis (-6.0 per cent).
Within the southern regions, Western Victoria had shown the weakest growth, down 3.2 per cent for February and just 0.2 per cent ahead on a year-to-date basis.
Whilst it is still too early to assess the effects of the devastating March bush fires across Western Victoria, the loss of property and stock, as well as disruption caused, will significantly affect March production.
Despite natural disasters, growth in milk production volumes is broadly in line with Dairy Australia’s forecasts, putting Australia on track for total production of around 9.1 to 9.2 billion litres.
However, whilst a modest recovery on 2016–2017 production (9.015b litres), this still represents a significant decline on 2015–2016 volumes (9.681b litres).
Compounded by manufacturers’ investments in capacity across southern Australia and global commodity price fluctuations, these lower volumes have forced many processors to make significant changes in milk utilisation to optimise returns.
Australian manufacturers have been changing their product mix away from butter/SMP manufacturing streams in favour of cheese and WMP, due to the better total returns offered by these streams.
Total returns from SMP/butter stream have fallen further in the last few months, with Dairy Australia’s Spot Price Report showing a decline in butter prices from around US$6100 at the beginning of 2017–2018 to around US$5400 now.
Australian SMP production to January has fallen 23 per cent year-to-date, to 130 000 tonnes.
Over the same period Australian WMP production has increased 34 per cent to almost 55 000 tonnes, while production of cheddar, cream and mozzarella cheese varieties are up by 8 per cent, 6 per cent and 5 per cent respectively.
Lower Australian butter production also goes some way to explaining increased Australian imports of butter.
So far Australia has manufactured around 39 000 tonnes of butter (-16 per cent), and imported around 16 000 tonnes (+8 per cent), while exports of butter stand at just 5500 tonnes.
It should be noted that this decline in butter production followed a 15 per cent fall over the same period to January last year.
In the face of strong ongoing consumer demand for butter, and season-on-season declines in butter production, it seems likely that the trend of growing Australian butter imports will continue into the 2018–2019 season.
Heading into the 2018–2019 season, there is concern about the amount of milk coming out of Europe.
Although severe storms and blizzards appear to have reportedly affected March production, January EU Milk collections are estimated to be up +3 per cent-4 per cent year-to-date (using an Australian season for ease of comparison) as the northern hemisphere heads into its spring flush.
Most of this extra production will have to be exported beyond Europe’s customary markets.
Middle Eastern demand remains subdued and Russia is still closed, forcing the EU to expand its presence in East and Southeast Asia, traditionally Australia’s main markets.
As in Australia, European processors have reportedly been favouring WMP and cheese to SMP/butter production, meaning Australia is likely to see more competition in our major export markets for cheese, which is the single biggest use of Australian milk.
EU milk production generally peaks in May, meaning the effect of increased EU milk production will likely make itself felt early in the 2018–2019 season.
The global supply outlook might suggest processors lead with a more conservative opening price, leaving room for potential step-ups.
However, faced with a changed industry landscape and the need to secure (or more ambitiously, grow) supply, processors will have to position themselves competitively.
How these new industry dynamics will play out, and whether they can offset weaker international prices at the farmgate, remain to be seen.
• Laurie Walker is an industry analyst with Dairy Australia.