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NAB - Australia’s Dairy sector faces a number of cross currents

  • By: "Prime" Ag News
  • Jan 20, 2020

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By Phin Ziebell - NAB Agribusiness Economist

Dairy dynamics: prices, drought and costs impacting dairy landscape.

  • Australia’s dairy sector faces a number of cross currents. Farmgate prices are very strong by historic standards, with Saputo and Fonterra having both stepped-up to $6.95/kg –a level not seen since the heady days of 2013-14. There are, however, four key differences between now and 2013-14 that make for a very different experience for Australia’s dairy farmers.
  • Firstly, input costs are much higher than in previous times. NAB’s feedgrain price index for the season to date is around 23% higher than the 2013-14 average and temporary water in the Lower Goulburn over 5 times higher. These higher input costs reflect (and are worsened by), the second key difference –generally poorer seasonal conditions. 2019 was Australia’s hottest and driest year on record, and while some dairy regions, such as western Victoria and parts of Tasmania, escaped the worst, others like northern Victoria, southern NSW and subtropical areas suffered heavily.
  • Thirdly, global prices are well below their 2013-14 peak, but this has been offset by a lower Australian dollar. The AUD averaged 91c in 2013-14 but only 68.5c so far this season. Our USD denominated dairy price outlook is essentially neutral and NAB’s house view is that the AUD will only appreciate very modestly, reaching 75c by mid-2022. This should keep AUD dairy export prices elevated, although clearly a global demand or FX shock would upset this.
  • Lastly, suppliers are scrambling to offer premiums to maintain milk flow, which has been severely constrained by drought and high input costs. Thus far, high farmgate prices have failed to arrest the fall in Australian dairy production, which is now the lowest since the mid-1990s. In this environment, increased import competition is a serious risk.

For further details, please see the In focus: Dairy – January 2020

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