Following low dairy prices and milk production in recent years, dairy producers are expected to benefit from positive trading conditions in 2017-18. Domestic and global dairy prices are set to recover from large price declines in 2014-15 and 2015-16, which caused revenue declines for dairy cattle farmers. Dairy cattle herd numbers are also rising, causing milk supplies to increase, and the Australian dollar is depreciating, boosting the competitiveness of dairy exports.

Global dairy prices strongly influence local dairy producers. Around 40% of Australia’s milk production is exported, and global dairy prices strongly affect domestic prices. Global dairy prices have fluctuated significantly over the past five years, creating volatile conditions for Australian dairy farmers and processors. The Global Dairy Trade dairy price index reached 1,061 in February 2018, up from 656 in February 2016. This factor has caused farmgate milk prices to rise, benefiting dairy farmers, and cheese, butter and other dairy product manufacturers through higher prices.

Australian milk production is also recovering. National dairy herd numbers are expected to rise in 2017-18, following two years of declines. As milk is a vital ingredient for dairy products such as cheese and butter, lower milk production has negatively affected local dairy firms over recent years. The current upturn will allow dairy farmers and dairy product manufacturers to expand their production while benefiting from higher dairy prices.

The Australian dollar is set to depreciate in the current year, benefiting local dairy exporters. Approximately 50% of Australia’s total cheese production by volume is destined for export markets. However, cheese manufacturers only derive an estimated 30.3% of revenue from exports, as most exports are sold in bulk at discounted prices. In contrast, butter and dairy product manufacturers only receive an estimated 3.6% of revenue from exports, as these firms tend to have a stronger local focus. As a result, cheese manufacturers are expected to primarily benefit from the lower Australian dollar, as local products become more competitive in international markets.

Australian dairy farmers and processors are benefiting from higher dairy prices and milk volumes in the current year. Following several years of difficult trading conditions, revenue growth is set to be strong for several dairy-related industries. In particular, dairy exporters are expected to benefit from a combination of higher prices and volumes, and a lower Australian dollar. These positive conditions are projected to endure over the next few years, promising greener pastures for the Australian dairy sector.

Article sourced from Ibis World.