Industry Overview 

 

The Australian dairy industry is currently experiencing one of its toughest periods in the past 30 years. Farm incomes have fallen, farm numbers continue to fall, farm debt levels have increased and farmer morale in most key dairying regions is at its lowest ebb. As a result, spending on “non-essential” items has been put on hold by many farmers, working hard to rebuild their businesses and waiting for upward trends in world milk prices.

  

The main factors which have influenced the current situation include:    

·         Ongoing impact of one of the worst droughts experienced in Australia in the past 100 years, with dry conditions continuing in some key agricultural regions. Dairy farmers generally are in the first year of “recovery”, with some analysts predicting the second year is likely to be the most challenging.   

·         Higher input costs, particularly for supplementary feed, but also for other key expenditures such as fertiliser and fuel. Feed costs have started to return to more normal levels, but other costs remain high. 

·         Falling export milk prices, with the majority of Australian dairy farmers relying on export markets, and no forecast for a significant lift in world commodity prices in the immediate future. 

·         Cut price tendering by dairy companies for domestic market share, driving down the wholesale price benchmark. 

·         High Australian dollar for much of the past 12 - 18 months, against the US dollar. 

·         Water restrictions and ongoing uncertainty about future access to water for irrigation – vital to almost every Australian dairy farmer. One of the country’s most important dairying regions – northern Victoria and southern NSW – has been the hardest hit because of reliance on the Murray-Darling River Basin, which is facing severe environmental and political pressures. Current speculation is that water restrictions will again be applied this year unless significant rains fall over the next few weeks. 

·         An end to adjustment payments, provided to dairy farmers to help them cope with the impacts of total deregulation of the Australian dairy industry in 2000. 

   

Impact of the drought 

   

The drought had a devastating effect on many significant dairy regions in Australia, with the Australian Bureau of Agriculture and Resource Economics estimated that dairy farmers suffered an average lost of $76,600 last financial year. The drought resulted in:

·        Higher supplementary feed costs, as grain producing areas were also impacted by drought and demand increased dramatically. For eg, lucerne hay rose from $150 per tonne in January 2001 to a peak of almost $400 in July 2003. 

·        Falling incomes, with milk prices paid by most dairy companies remaining low and milk production dropping significantly through a combination of poor feed resources, additional heat stress and reduced herd sizes. 

·        Reduced herd sizes – reports vary, but in some districts it has been reported that farmers were forced to cull as much as 30% of their herds to survive. Most of these cows were sent to slaughter. 

·        Decrease in pasture/farm fertility – with pasture quality severely impacted by the drought, and added grazing pressures. Pasture is the major food source for most Australian milking herds. 

·        Increased farm debt or re-allocation of reserves set aside for capital investment (such as new dairies and milking equipment) as farmers coped with increasing input costs and falling incomes. 

·        Asset sales to provide extra cash flow. 

·        Increased stress on dairy farmers and their families. 

 

Access to water 

 

Access to water is one of the most contentious issues for any Australian farmer relying on irrigation. The issue is set to dominate farm politics, environmental and consumer debates for years to come as the world’s “driest” continent establishes policies for access to its most precious resource. While no dairying region is immune from this issue, the hardest hit region has also been Australia’s fastest growing dairying region in recent years – northern Victoria and southern NSW, along the banks of the River Murray.

 

Water authorities allocate amounts to farmers, based on access to flows through major river systems and the amount available in key storage dams. Flows are affected by increased removal of water upstream, diversion of water for environmental programs, and lower than average rainfalls for much of the past 10 years. Water allocations in some regions in 2003/04 remain as low as 57% of a farm’s traditional entitlement.

 

The Goulburn Valley in northern Victoria has had low allocations for the past seven years. Reserves remain low for most irrigation districts in northern Victoria. Permanent water trading is increasing – the amount of water traded in this region doubled in 2003-04, with prices increasing from $705 in 2001/02 to $1235 in 2003/04.

 

These issues may in the longer term force some relocation of dairy farms to areas where water is more readily available, or available at lower cost. There is already some evidence of farmers in the region diversifying into enterprises that do not rely as strongly on irrigation, including beef cattle production.

 

On a positive note, there are moves for governments and water authorities to invest in more efficient water delivery systems and improved delivery services for irrigators.

 

Finance and farm debt 

 

Debt levels in most dairy regions have increased, particularly short-term debt, although limited data is currently available. One finance company estimated that in northern Victoria, farmers experienced “cash losses” of $500 to $1000 per cow as a result of the drought, which could equate to as much as $180,000 in an average herd of 180 cows. There are indications in 2004 that farmers are focusing strongly on paying off this debt as quickly as possible, restricting cash flow for on-farm improvements. Some advisers predict that with reasonable milk prices, a reasonable proportion of farmers may be able to clear debt within one to two years.

 

Milk prices and profitability 

 

Milk prices in Australia are strongly influenced by world commodity prices, with the majority of Australian milk going towards products sold overseas. This is particularly true in Victoria, which accounts for more than 60% of Australia’s milk production. The domestic market is about four billion litres per year and static.

 

Unlike many other countries, since full deregulation in July 2000, there is no formal legislative control over the price processors pay farmers for milk. Farmgate prices can vary between manufacturers. Most milk prices are based on both the milkfat and solids non-fact content of fresh milk. Many farmers now receive a “blended” price, incorporating returns from both drinking and manufacturing milk. A range of incentive and penalty payment systems are also offered by various companies.

 

Typical farm gate prices have fallen from an Australian average of 47.2 cents per litre in 1999/2000 for drinking milk and 20.9 for manufacturing milk, before deregulation, to 27.1 cents in 2002/03. Last financial year the price paid ranged from 24.8 cents in Victoria to 34.8 cents in Queensland. One of Australia’s largest dairy manufacturers, National Foods, has recently written to its suppliers informing them of plans to reduce their opening milk prices further for the 2004/05 season, bringing strong condemnation from farm sector leaders.

 

Average cost of production varies from region to region, depending on farm systems and how long farmers have faced pressures to deregulate and become more efficient. In SA and Victoria, cost of production is among the lowest in the world, with farmers seeing little potential to reduce costs further. In WA, Queensland and NSW, farmers consider current prices borderline or below cost of production.

 

Key Statistics    

 

Farm numbers	99/2000	02/03	03/04
Australia	12,896	10,654
Victoria	7806	6801
NSW	1725	1290	1270
SA	667	516	466
Queensland	1545	1125
Tasmania	734	597	590
WA	411	325	290

*Farm numbers quoted for 2003/04 are until the end of February, and were only available from some states.

 

Cow numbers	99/2000	2000/01	02/03	03/04
Australia	2.17m	2.1m	2.09m	2.06m
Victoria	1.37m	1.377m	1.13m
SA	105,000	124,000	126,000
Queensland	195,000	186,000	182,000
NSW	289,000	268,000	265,000	*266,000
Tasmania	139,000	148,000	127,000	*124,000
WA	65,000	72,000	73,000	*72,000

*A rough estimate based on milk production figures.

It is interesting to note that in many states, cow numbers in the year or two after deregulation actually increased, while the number of farms declined, as farmers invested in expanded operations to counter the impact of falling prices. Herds numbers peaked in 2000/01 and early 2002.

 

Milk production (litres/cow)	2001/02	2002/03
Australia	5215	4800
Victoria	5391	4962
NSW	5030	4875
SA	5933	5800
Queensland	4067	3930
Tasmania	4646	4600
WA	5402	5350

 

Total milk production in Australia (ML)

2001/02	02/03	03/04
11,271	10,322	10,440

Milk production fell 8.4% from 2001/02 to 2002/03, which was the largest proportional fall since 1951/52. As at the end of January 2004, milk production is down 5.5%, and as much as 7% in Victoria.

 

Industry response and projections for recovery

Farm leaders and financial advisers estimate that it may take Australian dairy farmers four to seven years to recover from the combined effect of the drought and lower milk prices, as they work to rebuild herds and pastures, and recover debt. In the meantime, they are predicting that farm numbers will continue to fall, and that farm productivity is unlikely to improve significantly.

However, some commentators believe a significant number of farmers have already started to recover and may be able to clear short-term debt within 12 months. Another positive is that interest rates remain at historically low levels, and the Australian dollar is starting to drop and is expected to remain weaker over the course of the coming year, which should have a more positive effect on exports.

 

Australia’s exports have been growing at a rate of 10% per annum – with Australia and New Zealand doubling their market share in the 1990s – and now accounting for more than half the world dairy trade. Australia has 17% share of the international market even though it accounts for only 2% of the world’s milk production, contributing more than $3 billion a year to Australia’s gross value for agricultural production, and adding about $2.5 billion to the national income from export.

 

A key factor which will impact on this trend in the longer term is the speed of international trade reform. There is little likelihood of any growth in the domestic market. International spot prices for dairy commodities were expected to average higher in 2003/04. The positive influence of this on prices paid to Australian dairy farmers was likely to be eroded, with one major company already warning farmers of a reduction in opening prices for the 2004/05 season.

 

Meanwhile, government and dairy industry lobby organisations are under considerable pressure to help farmers improve farm profitability and survive in the short term. The national dairy marketing, research and development organisation (Dairy Australia) recently allocated reserves of some A$17 million to drive education and training programs which will aim to reduce on-farm production costs and improve viability.

 

Among the projects being supported by the organisation is Cow Time, which focuses on efficiencies that can be gained in the dairy. WestfaliaSurge is participating in this project.

 

While the number of farms continues to drop, it is expected remaining farmers will continue to build larger herds and boost milk production to remain viable. With labour costs and recruitment issues, farmers continue to look at investing in herd management and milking technology to drive this development.

 

Dairy Australia is currently undertaking a major survey of the national dairy industry to develop a more accurate picture of the industry, including current cow numbers, farm debt and intentions to remain and/or invest in the industry. The first results are expected to become available in July 2004.

 

Feed costs are dropping, with reasonable grain harvests in most major cropping regions in the 2003/04 season. Farmers are being encouraged to focus on pasture improvement to reduce reliance on feed purchased off farm and rebuild depleted supplies. Trends in water costs and availability remain uncertain in key irrigation areas for 2004/05.

 

Another factor which may impact on the national dairy herd, is the rapid expansion of the export market for dairy heifers, particularly to China. For example, an estimated 12% of replacement stock was exported from the northern Victorian region in 2002/03 – or about 19,000 heifers. As an indication of future trends, one deal with one company signed in April 2004, will see 3000 dairy heifers go to China in late 2004.

 

Information sources include:

Dairy Australia – Dairying in Focus 2003

State milk authorities

Presentations made to northern Victorian dairy farmers as part of Dairy Australia’s “Clearing the Fog” program.

Articles published in Australian Dairy Farmer, Dairy Foods Magazine

ABARE and Australian Dairy Farmers media releases