dairy situation and outlook june 2016

8/16/2019 Dairy Situation and Outlook June 2016

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Dairy Situationand OutlookJune 2016


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Disclaimer

Published by Dairy Australia Limited.

Whilst all reasonable efforts have been taken to ensure the accuracy of Dairy Situation

and Outlook, June 2016, use of the information contained herein is at one’s own risk. To the fullest extent permitted by Australian law, Dairy Australia disclaims all liability for

any losses, costs, damages and the like sustained or incurred as a result of the use of

or reliance upon the information contained herein, including, without limitation, liability

stemming from reliance upon any part which may contain inadvertent errors, whether

typographical or otherwise, or omissions of any kind.

© Dairy Australia Limited 2016. All rights reserved.

ISSN 1839-0781


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ContentsDairy Situation and Outlook – June 2016

Six key drivers of theAustralian Dairy Industry 2

Executive summary 3

National Dairy Farmer Survey (NDFS) 2016 5

National results at a glanceas at February/ March 2016 5

Export region weighted cost

and income indices 8

Inputs 9

Weather 10

Water 10

Fertiliser 10

Cows 11

Grain 11

Hay 12

Grain and hay prices 13

The Australian market 14 Australian market 14

Infant formula 15

Impacts of $1.00 per litresupermarket milk – Five years on 16

Economic settings 17

Global economy and exchange rates 18

Global supply and demand overview 19

Global demand 20

Overview 20

Greater China 20

Japan 20

Southeast Asia 20

Mexico 21

Middle East 21

Russia 21

Iran 21

Dairy affordability 22

Dairy substitutes 23

Global supply 24Overview 24

European Union 25

United States 25

New Zealand 25

Australia 25

Latin America 26

Australian milk production forecast 26

Corporate sector update 27

Policy updates 28

Food Standards Australia New ZealandInfant Formula Review 28

‘Effects test’ for Section 46 of theCompetition and Consumer Act 28

Regional NDFS results at a glance 29


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2

Six key drivers of the Australian Dairy Industry

Inputs

Exchange rates

Global economy

Global demand

Global supply

Australian market

The season continues to be unusually hot and dry,increasing costs for hay, grain and temporary irrigationwater. However, a weakening El Niño, and depressedfertiliser prices offer some potential respite.

Supermarket sales for Australian dairy productsshowed volume growth for all categories, exceptyoghurt and dairy snacks. Growth in value waslimited to dairy spreads, driven by increaseddemand for butter over blended spreads.Other categories were largely stable.

Global demand growth has been patchy, withgrowth in China and southeast Asia, and a slightdecrease in exports to Japan and the Middle East.However, apart from China, low pri ces mean totalexport values are well down.

The USD looks likely to appreciate over the next twelvemonths against major exporter currencies. Accordingly,following an appreciation in the December quarter, the AUD looks likely to depreciate over the course of 2016,which should improve export competitiveness.

With strong growth in Europe and New Zealandmilk production proving resilient in the face of lowfarmgate prices, the global supply of dairy productsremains more than sufficient to meet currentmarket requirements.

According to the IMF, a continued slowdown inemerging markets driven by lower commodity pricesand increased macroeconomic volatility will be onlypartly offset by growth in mature economies. The netresult is a lower forecast for overall global growth.

Situation:

Outlook:

Situation:

Outlook:

Situation:

Outlook:

Situation:

Outlook:

Situation:

Outlook:

Situation:

Outlook:

Positive Neutral Negative


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Dairy Situation and Outlook | June 2016 3

Executive summary

An already challenging season became

signicantly more dicult during April

and May, as late-season farmgate price

cuts were announced for most farmers

in the southern, export-focused regions.

The impact of these developments

continues to unfold, and the process

of revising budgets and strategies

to accommodate sharply lower late-

season incomes has begun. Next

season’s options will be reassessed in

earnest once 2016/17 opening prices

are announced. Although it remains

too early to quantify the impact of the

recent milk price cuts, it is clear that

farmer condence will be signicantly

impacted; with ow on eects for on-

farm investment and likely future growth.

Amidst an outlook suggesting tighter

(in many cases negative) margins, next

season’s milk production will depend

heavily on seasonal conditions. As

always, regional variation is expected,

but a national volume total below that of

2015/16 is considered highly likely.

Australian farmers have been hit bythe impacts of a deep and persistenttrough in international dairy markets.

The same market trough has failed tosignificantly dent milk supply in mostof the world’s major dairy exporters.Europe and the US continue to powerahead in year-on-year terms, andfavourable weather in New Zealand hasled to a much smaller decline than manyhad expected – even after a secondseason of bruising margins. Attractiveinternational commodity prices and slowtrade last year have supported dairydemand in most importing regions overthe past twelve months, with overall

tonnages up nearly 6%. However,supply continues to outpace demand,and inventories in many parts of theworld (most conspicuously Europe) arebuilding. These stocks will likely slowany emerging price recovery.

Despite an absence of the breakneckdemand growth of recent years,China has been responsible for a largeproportion of the observed demandgrowth in the twelve months to February2016. Total global exports to Greater

China (China, Hong Kong and Macau)for this period are up 16% in volumeterms, though WMP volumes are stilldown. Although total volume and value

are up, depressed commodity pricesand strong competition (particularlyfrom Europe) continue to constrain

unit returns. Exports to Southeast Asian countries have continued togrow (up 4%), with strong expansion inmilk powder categories, while exportvolumes to the Middle East andJapan have eased (down 8% and1% respectively).

A relatively stable domestic market isstill buffering the Australian industry inthe face of international headwinds.Despite some slowing, overall trendsfor supermarket sales of major dairy

categories remain relatively unchangedfrom February’s Situation and Outlook report. Dairy spreads continue togrow strongly (up 5%), while cheesevolumes increased by 1.7% for thetwelve months to March 2016. Ongoinggrowth in block and ingredient cheesesegments offset falls in sliced andsmooth cream cheeses, with specialty/ entertaining and deli cheeses alsoperforming well (up 17% and 4.3%respectively). The value of cheese salesgrew by 1.8% in year-on-year terms,

with strong growth in the value of deliand specialty cheese sales helpingoffset price falls in the unit cost of blockand ingredient cheese categories.

Fresh milk volumes and values aresteady, while those for yoghurt anddairy snacks have eased. Infant formula

continues to sell strongly, with growthof over 30% in sales through thesupermarket channel, though the splitbetween Australian consumption andgrey market exports is much less clear.

On-farm, the 2015/16 season hasbeen characterised by challengingseasonal conditions in many regions.Rainfall across the country has beenvariable but generally below average,and while April was forecast to providea much needed autumn break, totals

received for the month were lower thanpredicted. Constrained pasture growthhas coincided with a tight market forhay, while lower international grainprices have taken some time to flowthrough to the Australian market. Forirrigators, low allocations and highdemand have driven temporary waterprices to post-drought highs. Fertiliserremains a bright spot, and a morefavourable rainfall outlook suggestsfarmers may be better placed totake advantage of an ongoing global

oversupply to grow more feed on-farm,where cash flow permits.


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4

Confidence amongst farmers asmeasured by the National Dairy FarmerSurvey (NDFS), fell significantly from

2015 to 2016. The annual survey,conducted in February and March,showed a decline in the proportionof farmers feeling positive about thefuture of the industry from 74% to 67%. This was concentrated in Victoria andsouthern NSW (and particularly theMurray Dairy region), with farmers inother regions feeling similar or greaterlevels of confidence this year. Morerecently, late season cuts to farmgateprices have caused a significant declinein sentiment across most regions, which

is currently being quantified throughfollow up research.

A global market turnaround remainssome way off, though the Australianmarket remains stable and some relief

from elevated input costs is likely if theforecast favourable rainfall patternseventuate. Profitability and sentiment insouthern, export focused regions havebeen hit particularly hard by recent cutsto farmgate prices, and the forecastfavourable rainfall in 2016/17 will proveinvaluable in supporting both, should iteventuate. There is little doubt however,that managing short term pressures toachieve longer term business plans willprove a greater challenge than usual i nthe months ahead.

Managing short term

pressures to achieve

longer term business

plans will prove a

greater challenge

than usual in the

months ahead.


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National results at a glance as at February/March 2016 The NDFS was conducted duringFebruary and March 2016 amongst1,000 dairy farmers nationally. At the

time of the survey, 67% of respondentsfelt positive about the future of thedairy industry and this represented asignificant drop in sentiment from 2015survey results where 74% were positive. The decline has been largely driven bysubstantial declines across Victoria butmost noticeably in the Murray Dairyregion where positive sentiment fellsignificantly from 81% to 62% in twelvemonths. Farmgate prices and access toirrigation water were of greater concernin this region than in the recent past.

In the past month, announcements ofreductions in farmgate milk prices havehad further impact on farmer sentimentwith early indications from a subsequentsurvey showing at least a 20% drop inconfidence since March.

This response is predictable consideringhistorical data which shows thestrong correlation between price andsentiment. This is discussed further inthe following key themes.

Theme 1: A close relationshipexists between farmgate prices andfarmer confidence in the future of

the industry.

The NDFS has been conducted since2004 with the purpose of gaugingfarmer sentiment about the industry,ascertaining production, herd andinvestment intentions and understandingchallenges being faced.

Over the time of the survey, the nationaltrend in farmer sentiment showed aclose relationship with farmgate prices.Statistical analysis suggests that pricesaccount for more than 80% of the

variability in farmer confidence aboutthe future of the dairy industry. Climateor seasonal conditions and input coststended to be the next most dominantdrivers of sentiment but show a muchlower correlation than price.

Trend data (Figure 1) also showsfarmgate pricing is considered aconsistent and ongoing challenge fordairy farmers. Over the past 12 years,price has always been seen to be amajor challenge when considering

the future of the industry, even in timeswhen prices are at comparativelyhigh levels.

(2015: 74%)

Increased

production

in 2015/16

Increased

herd size in

2015/16

Anticipatedprofit in

2015/1664%

42% 33%

49%

Intended

to invest in

the next

12 months

67%

Farmerspositive about

industry future

National Dairy Farmer Survey (NDFS) 2016


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6

Year

C o n fi d e n c e ( p e r c e n t )

M i l k p r i c e ( $ / k g m i l k s o l i d s )

$0.00

$2.00

$4.00

$6.00

$8.00

0%

20%

40%

60%

80%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Positive Milk price

Data from the latest survey, however,suggests farmers are used to dealingwith seasonal challenges and variabilityin market conditions. The majority(60%) report that they were prepared tomake on-farm changes to deal with thechallenges they face. These changeswere primarily related to purchasing and

conserving feed, making adjustments toherd size and closer monitoring of coststo cope with current conditions.

Theme 2: Profitability predictions aremore pessimistic in 2016.

At the time of the 2015 NDFS, 79% offarmers predicted an operating profitfor the 2014/15 financial year end. Thisoptimism was realised with 80% offarmers nationally reporting profit forthis period. This was widespreadacross all regions.

However, even prior to the recent priceannouncements, profitability predictionsfor the 2015/16 financial year droppedsignificantly. Survey data showsapproximately two thirds of farmers(64%) were expecting to make anoperating profit but 56% were expectinglower profit levels when compared tothe past five years. Victorian farmersin the Murray Dairy (58%) and WestVic(52%) regions as well as those inDairyTas (60%) were most pessimistic in

terms of 2015/16 profit expectations. Incontrast, the profitability outlook for theyear ahead was notably more optimisticin the domestic market focused regionsof Western Dairy (90%), Dairy NSW(88%) and Subtropical Dairy (80%).

Interestingly, profitability for the current

season was less of a predictor of farmerconfidence about the industry than profitexpectations for the year ahead. Therewas also variability across the regionsin terms of confidence and profitability.Figure 2 shows farmer sentimentcompared to profitability expectationsby dairying region.

The impact of lower profit expectationsfor 2015/16 does appear to betranslating into a decline in theproportion of farmers planning on-farminvestments in the next twelve months.In the year ahead, 49% of farmerssaid they intended to make capitalinvestments compared to 59% in theprior twelve month period. Investmentintentions have declined significantly inthe Murray Dairy and WestVic regionswhere impacts of price combined withdifficult seasonal conditions are morepronounced. Recent cuts to farmgateprices will likely reduce investment plansfurther in the months ahead.

Region

P e r c e n t 7

9 %

7 8 %

8 2 %

7 6 %

7 3 %

8 0 %

8 3 %

9 3 %

5 8 %

5 2 % 6

5 %

8 8 %

8 0 %

6 4 %

9 0 %

6 0 %

0%

20%

40%

60%

80%

100%

Murray

Dairy

WestVic

Dairy

Gipps

Dairy

Dairy

NSW

Subtropical

Dairy

Dairy

SA

Western

Dairy

Dairy

Tas

% made profit 2014-15 % will make 2015-16 % positive NDFS 2016

Figure 1 National sentiment vs price trend

Figure 2 Sentiment vs profitability expectations

Source: National Dairy Farmer Survey 2004−2016, Australian Dairy Industry In Focus

Note: the 2012/13 season was an exceptional year in terms of farmer sentiment. The lowest levels of confidence

were reported since tracking commenced as a result of falling farmgate prices (affected by a strong Australian dollar),

cash flow challenges, higher debt loadings, high input costs and variability in seasonal conditions with floods and

drought being experienced. If we exclude the 2013 survey results, the correlation increases to over 90%.

Source: National Dairy Farmer Survey


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Theme 3: Since 2014, annual surveyresults consistently show a quarterof the industry being in an expansionphase and close to 40% being‘stable and happy’ with theircurrent enterprise.

Despite variability in sentiment, trend

data shows some consistency in theproportion of farmers being in anexpansion phase or ‘stable and happy’with the state of their dairy enterprise.For the past three years, just under twothirds of respondents report being ineither of these phases (Figure 3).

Typically farms with herd sizes inexcess of 300 cows are more likely tobe expanding. In 2016, there are morefarmers in an expansion phase in thesouthern dairying regions of WestVic,

GippsDairy, DairySA and DairyTas thanthere were in the prior year but there arealso more expanding in the SubtropicalDairy region.

The reported confidence in enterprisephase translated into optimistic outlooksin terms of production. Looking ahead

three years, 66% of farmers expected tobe achieving greater production levelsin 2018/19 compared to levels reachedin 2015/16. Higher levels of productionwere anticipated across farms of all herdsizes (although more likely amongstfarms with herds in excess of 300 cows)and the production outlook was positivefor most dairying regions. SubtropicalDairy and Western Dairy were the leastoptimistic regions with 50% and 43%expecting higher production in2018/19 respectively.

The National Dairy Farmer

survey was conducted in

February and March 2016

amongst 1,000 dairy farmers

across eight dairying regions.

Respondents are recruited

randomly and are interviewed

by telephone. Results presented

are based on survey data which

is weighted to represent the structure of the Australian

dairy industry.

23%

41%

21%

8%

25%

39%

26%

9%

26%

38%

25%

11%

Expanding Steady and happy Steady unable

to grow

Winding down

2014 2015 2016

0%

10%

20%

30%

40%

50%

P e r c e n t

Figure 3 Enterprise phase trend 2014−2016

Source: National Dairy Farmer Survey 2014−2016


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8

Export region weighted cost and income indices

Cost index Income index

40

60

80

100

120

140

160

O c t 1 2

J a n 1 3

A p r 1 3

J u l 1 3

O c t 1 3

J a n 1 4

A p r 1 4

J u l 1 4

O c t 1 4

J a n 1 5

A p r 1 5

J u l 1 5

O c t 1 5

J a n 1 6

A p r 1 6

J u l 1 6

O c t 1 6

I n d e x

v a l u e

Month

Source: Dairy Industry Farm Monitor Project, Dairy Australia analysis

Figure 4 Export region weighted cost and income indices The weighted cost and incomeindices consider the near-termoutlook and highlight the net

impact of market changes.

The latest update suggests:

› Overall, margins have beensignificantly tighter through 2015/16;squeezed by both higher costs andlower income.

› Furthermore, income for many farmerswill fall below the previously assumedbase case of a farmgate price aroundthe 2015/16 opening level for the finalmonths of the season.

› Although some easing of costs duringthe 2016/17 season is likely, a weakmilk price outlook suggests thatmargin pressure will intensify – at leastthrough the first half of the year.

› An earlier than expected commodityprice recovery may provide relief in thesecond half of the season, but eitherway, cash flow challenges throughspring will present a significant hurdlefor many farms.


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Inputs

Northern Victoria

217 $/ML

+107% LY

+144% 5Y

1,867,522 ML

+12% LY

+20% 5Y

Murray Irrigation System

221 $/ML

+103% LY

+135% 5Y

106,766 ML

− 36% LY

− 42% 5Y

Price and volume of water traded are average

last 12 months to April 2016, and compare to

year earlier (LY) and last 5 years (5Y).

Source: Victorian Water Register,

Murray Irrigation Ltd

Cull cows

410 c/kg

+22% LY

+37% 5Y

93,026 head

+37% LY

+38% 5Y

Dairy cattle exports

68,026 head

− 29% LY

− 7% 5Y

Price is March 2016 average, compared to

year earlier (LY) and 5-year (5Y) averages.

Number of head is last 12 months (cull cows

to March, dairy cattle exports to February 2016) compared to year earlier (LY) and

5-year (5Y) averages.

Source: NLRS, ABS

Fertiliser Water and weather Cows

Urea (granular Middle East)

226 US$/t

−11% LY

− 32% 5Y

DAP (US Gulf)

351 US$/t

−19% LY

−20% 5Y

MOP (granular Vancouver)

277 US$/t

−9% LY

−21% 5Y

Price is March 2016 average, compared

to the 2015 March average (LY) and

5-year (5Y) March average.

Source: Bloomberg


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10

Weather

For the first half of 2016 Australia’sclimate has been characterised by aweakening El Niño weather systemand warmer than average sea surfacetemperatures in the Indian Ocean. These events are associated with

warmer temperatures and lower rainfallin Australia. As such, it comes as nosurprise that since the start of the yearmost regions have faced very warmweather. February 2016 was Australia’sninth warmest February recorded,and in March, both the overall andmean minimum temperatures werethe warmest for March on record. Aprilwas also unseasonably warm and dry. The outlook towards the end of Junesuggests warmer than average weathernation wide, except in parts of the

southern interior and Western Australia.Rainfall across the country has beenvariable but generally below average.While southwest Western Australia,much of South Australia and partsof Queensland have tended towardsabove average levels, New South Walesrecorded its driest February since 1978.Rainfall has also been scarce in areasof south-eastern Australia, especially Tasmania and Eastern Victoria, andacross northern Australia. While April

was forecast to provide a much neededautumn break, rainfall for the monthwas lower than predicted. In regardsto drought, areas of severe deficiencyremain in western and central Victoria,inland Queensland, central NSW andin parts of western and south-eastern

Tasmania. Areas that previously hadserious deficiencies in pastoral districtsof South Australia have contracted.

Fortunately, the outlook for Australia’sweather for the remainder of the yearseems favourable. The SouthernOscillation Index (SOI) is showing clear

signs that El Niño is deteriorating andthat the following weather pattern will beeither neutral or a La Niña system.La Niña is usually associated withabove-average winter−spring rainfallover northern, central and eastern Australia. Furthermore, persistentwarmth in the Indian Ocean shouldprovide extra moisture for rain systemsas they cross Australia.

Water

The average price for temporary waterremains dramatically elevated with theaverage price in the Murray IrrigationSystem reaching $221/ML for thelast twelve months to April 2016 and$217/ML in Northern Victoria. The keydrivers of higher water prices includeCommonwealth buy-backs over thepast few years for the environment,and the recent low inflows for bothwater systems.

Demand has dropped off in the MurrayIrrigation System and is down 36% on

last year’s average. Conversely, theamount of water trading in Northern Victoria has increased by 12% toover 1.8 million megalitres. Thismay be attributable to orchardistsamongst Lower Murray Water divertersexpanding plantings in recent years

and increased production levels in thedairy industry.

General Security water share allocationsin the NSW Murray system were at 23%as of April 2016. In the absence of asignificant flow event in the Darling Riverduring the wet season, the outlook for

water levels in the near future is lessfavourable. Whilst the situation has beenless severe for the Victorian Murraysystems, most High Reliability WaterShare allocations in the region are yetto reach 100%. Given the likelihood ofneutral conditions or a La Niña eventduring the second half of the year, theoutlook for the remainder of the yearmay contain additional upside,relative to 2015.

Fertiliser

International benchmark prices for urea,MOP and DAP all remain lower than lastyear and have been in decline for thefirst few months of 2016. This trend islikely to continue in the second half ofthe year with an ongoing global supplyglut putting downward pressure on themarket. Adding to this is stagnant globaldemand for fertilisers. The InternationalFertiliser Industry Association forecaststhat demand will retreat by around 0.1%by the end of the 2015/16 financialyear, predominantly as a result of lowcrop prices.

The global MOP market has beenparticularly soft and set to decreasefurther with India announcing areduction on the subsidy allocationfor potash. On the other hand, the EU

International

benchmark prices for

urea, MOP and DAP all

remain lower than last

year and have been in

decline for the first fewmonths of 2016.


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is planning to lift restrictions on sugarproduction and exports in the nextfew years. If this goes ahead it couldaffect global demand as sugar beetcrops have exceptionally high potashrequirements. As Australia is a netimporter of fertiliser, local prices areset on an import parity basis, so they

should follow global price movements.

Cows

Cull cow sales for 2015/16 have beensignificantly elevated compared to lastyear and five year averages, up by 37%and 38% respectively. With relativelycheap replacement stock and continuedmargin pressures driving high salesnumbers, much of this increase canbe attributed to the high price that cullcows have been fetching. The average

March price in 2016 was up 22%compared to March last year.

One of the main factors boosting thelocal cull cow market is unseasonablystrong demand for importedmanufacturing beef in the United States.Following several years of decreasedUS production, Australia exported arecord amount of manufacturing beefto the US in 2014/15 and the amountfor the current financial year is alsoforecast to be well above average. Theoutlook for 2016/17 is less favourable,as a projected reduction in Australianbeef supplies due to herd rebuilding isexpected to limit export growth.

It is a different story for live dairycattle however, as exports for the l asttwelve months to February 2016 have

decreased 29% compared to theprevious period. This is largely a resultof reduced demand from China, wheredomestic milk price has been relativelysoft for the last few years. Chinaaccounts for over 80% of Australia’s livedairy cattle exports, with the remaindermainly exported to Malaysia, Indonesia,

Pakistan and Vietnam.

Grain

Following several seasons of strongproduction, global grains stocks havebeen sitting at record highs for thelast few years. Much of this can beattributed to major players China andthe EU, for whom 2015/16 will markthe fourth consecutive year of bothincreased production and stocks. As expected, this has pushed global

wheat prices lower, as reflected bya world wheat indicator price that isforecast to be the lowest in 10 years. The global market has been subjectto further softening as low crude oilprices continue to pressure biofuelusage, which accounts for a significantproportion of demand for cornand oilseeds.

On the other hand, well below-averagewheat crops in India may push pricesupwards, as it is predicted that theusual net exporting country may needto import more than 2.75M tonnes ofwheat. There are also concerns thata colder than average winter forecastfor much of the northern hemispherecould impact productivity of crops in theregion, which would also put upward

pressure on prices. Overall however,the market is forecast to stay soft forthe 2016/17 with no end to the recordglobal stocks in sight and a decline inconsumption of wheat for livestock feed.

In Australia, domestic grain pricesare still at a premium, which is a result

of 2014/15 prices tracking consistentlyabove five-year averages. In sayingthis, the local market is currentlyfollowing the global trend and in nearlyall growing regions wheat is at a lowerprice compared to the previous year.Downward pressure on prices is likelycoming from high levels of wheat andbarley production, with ABARES quotingtotal wheat production for 2015/16 up5% compared to the previous season,at 24.2 million tonnes, and barley up 4%to 8.5 million tonnes.

While Australian grain should becompetitive on the global marketgiven the weak AUD, the export pacehas been slow in recent months and Australian exports of coarse grains areforecast to fall in 2016/17 compared toprior years. This having an especiallylarge impact on barley trade due tolow demand from China and Saudi Arabia, two of Australia’s largest exportdestinations. While China took around59% of Australian barley exports in2014/15, in late 2015, the ChineseGovernment implemented importrestrictions on feed grain, which isexpected to lower imports. Conversely, Australian canola exports are forecastto rise by around 8% in 2016/17reflecting higher expected production.

Dry weather in parts of

Victoria and Tasmania

has maintained

pressure on fodder

stocks, especially in the

main dairying regions.

Overall, however, the

market is forecast to

stay soft for the 2016/17

with no end to record

global stocks in sight.


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12

The 'Grain and Hay Report'provides a comprehensiveoverview of the market andindicative pricing by dairyingregion, and is publishedmost weeks.

The Production Inputs Monitorprovides statistics andcommentary for grain, hay,fertiliser, weather, water andcull cows on a monthly basis.

This is attributable to steady importdemand from the European Union andlower canola production from Ukraine, Australia’s main competitor in theEU market.

Hay

Two key factors continue to exert thelargest influence over the fodder market:stocks on hand and the autumn break. As of mid May, fodder stocks are low inmany regions and the break arrived laterthan expected for much of the country.Notable exceptions are the north coastof NSW and the Bega region where astrong season has led to good stocksof homegrown fodder, and areas insouthern WA that experienced anearly autumn break.

Outside these regions stocks of fodder

have tended to be low and levels ofdemand mixed. Typically, with thecurrent seasonal conditions and fodder

stocks on hand, higher levels of demandand potentially further price increaseswould be expected. Conversely, thereis some resistance to current pri cesfrom buyers. This has resulted in buyingpatterns which have been describedas 'hand to mouth' and in relativelysteady hay prices. That said, there is

also a general consensus that fodderprices will not fall in most regionsthrough winter.

Regionally, dry weather in parts of Victoria and Tasmania has maintainedpressure on fodder stocks, especiallyin the main dairying regions. This isresulting in buyers having to look furtherafield to source fodder, and transportis increasingly contributing to foddercosts. Tasmania also faced distortionof the market due to reports of inflated

prices for small batches of fodderbeing purchased by hobby farmers.In addition, there are reports of the

domestic market being tight for hay inWestern Australia. This is unexpectedconsidering the strong 2015 cerealhay harvest.

On the other end of the scale,coastal regions in NSW and SouthernQueensland continue to experience

good conditions for pasture production. This has resulted in a low demandfor purchased fodder due to goodavailability of paddock feed andhomegrown fodder. While the size ofon-farm hay and silage production isdifficult to estimate there is generalagreement that demand for purchasedfodder into these regions is likely tobe well down on average. There alsoappears to be good volumes of hayavailable in central NSW and SA,However much of the available fodder

in NSW is weather damaged and firesearlier in the year in South Australia maylead to shortages in the coming months.


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14

Australian market

The trends for supermarket sales ofmajor dairy categories remain relativelyunchanged from the February Situation and Outlook report. Dairy spreadscontinue to grow strongly, milk andcheese sales growth remains flat, whilstsales volumes and values for yoghurtand dairy snacks declined.

Total milk sales volumes remainedsteady, increasing by 0.4% over thetwelve months to March, with growth

in fresh milk sales accounting forthe increase. Sales volumes forUHT product fell 0.1% (to a totalof approximately 190 million litres),although category value declineddisproportionately by 2.9%, as theaverage price of UHT fell by 2.7% to

approximately $1.31/litre. Volumesof flavoured UHT milk continue to fall(-11.7%), while sales of ‘white’ (non-

flavoured) milk rose 0.4% to183 million litres. Growth in salesof fresh milk overtook that of UHT,increasing 0.5% in volume terms (to1,139 million litres), with value declining-0.1% as the price per litre declinedby -0.8%, to an average of $1.54. Incontrast to UHT product, sales of freshflavoured milk continue to grow (+4.9%),while fresh white milk sales volumesremained flat at 1,025 million litres.

The consumer transition toward full

cream options in both fresh milk andUHT categories has continued. Salesvolumes of full cream fresh white milkhave increased 5.1%, and modifiedmilk decreased 8.8%, while salesof full cream and modified UHT milkrose 9.8% and fell 3.6%, respectively.Hence, full cream fresh white milk nowrepresents 49.9% of total white milksales (by volume), compared to 47.7%a year earlier. Full cream UHT white milknow represents 7.7% of total white milksales, compared to 7.1% a year earlier.

Consumer preferences also seem tobe evolving with regards to non-dairymilk alternatives. Overall sales volumeshave continued to increase, growingby 3.3% over the last twelve months toMarch 2016, and increasing non-dairyproducts’ overall share of milk sold by0.2%. However, within non-dairy ‘milks’there has been a marked transition

away from bulk-commodity based milkssuch as soy, rice, oats, which fell by7.2%, 10% and 19.5% respectively,

towards nut-derived alternatives suchas coconut, almond and macadamiamilks, which grew in volume terms by174, 22.2 and 93%. Total value grewmore rapidly, by 4.6%, as the averageprice for non-dairy milk increased by1.3% to $2.58 per litre, reflecting theincrease in sales of higher-priced nut-based alternatives.

Branded milk continues to cede marketshare to supermarkets’ own housebrands in the fresh white milk category.

Market share of company branded milkhas fallen by 0.3% to 36.3% of all whitefresh milk sales, and total sales volumesfalling 4% in the l ast twelve months to372 million litres. The average price perlitre of branded milk fell by 1% to $1.92,while the price of private label milkremained steady at $1.01. This trendalso carried over into the UHT whitemilk category, as sales of branded whiteUHT milk fell by 0.2%, while private labelsales grew 1.4%. The average per litreprice for branded and private label white

UHT milk was $1.38 and $0.96.Dairy spreads (butter and blends) grew4.2% in volume and 5% in value in thetwelve months to March 2016. Buttersales increased 6.4% by volume,although a 0.1% fall in average price($8.38 per kilo) caused total sales valueto increase by less than this, at 5.4%.Sales of butter blends grew 1.6% by

The Australian market

Milk Cheese Dairyspreads

Yoghurtsand snacks

Volume (m. litres) Volume (kt) Volume (kt) Volume (kt)

1,329 138.6 46.5 204.4

Year-on-year growth Year-on-year growth Year-on-year growth Year-on-year growth

+0.4% +1.7% +4.6% – 2.8%

Retail value ($ m) Retail value ($ m) Retail value ($ m) Retail value ($ m)

2,043 2,118 421 1,424.6

Year-on-year growth Year-on-year growth Year-on-year growth Year-on-year growth

– 0.5% +1.8% +5.0% – 0.7%

Source: IRI

Note: Available data is taken from differing periods; milk and dairy spreads figures from MAT 06/03/2016;

cheese, yoghurt and dairy snacks from MAT 03/01/2016.

Figure 5 Supermarket sales


17/40


volume, and 4.4% in total value, asthe average price increased by 0.5%to $9.83/kg. Butter increased its total

share of dairy spreads sales by 0.3%to 53.6% at the expense of blendedspreads. This continues a markedchange in consumer preferencestowards higher fat levels, as perceptionsregarding the healthiness of dairy andthe risks of fat content have altered. At the same time, sales of unsaltedhave outpaced those of salted butter,sales increasing by 9.8% and 6.7%respectively over the same twelvemonth period.

Cheese sales volumes increased by1.7% for the twelve months to March2016, with sales totalling 138.6 millionkilos. Ongoing growth in block andingredient cheese segments (up 2.8%,1.7%) offset falls in sliced and smoothcream cheeses (down 1.5% and 4.7%),with specialty/entertaining and delicheeses also performing well, growingby 17% and 4.3% respectively. Thevalue of cheese sales grew by 1.8% inyear-on-year terms, with strong growthin the value of deli and specialty cheese

sales. These helped to offset price fallsin the unit cost of block and ingredientcheese categories (down 0.8% and2.8%), the largest two categories ofcheese, as more heavily discountedbulk 1−1.5 kg pack sizes gained marketshare at the expense of smaller higher-margin 200−300 gram packs.

Yoghurt and dairy snack sales continuedto decline, falling 2.8% over the twelvemonths to January 2016. Overall dairy

yoghurt is down 2% year-on-year,however ongoing shifts in consumerpreferences driven by health concernsmean that this growth is distributedunevenly; sweetened yoghurt hascontinued a steady decline, falling by9%. This was partially offset by stronggrowth in natural and unsweetenedvarieties. Sweetened yoghurt has lostmarket share to traditional yoghurt, withthe percentage shares of total snacksand yoghurt sales falling by 1.9% andrising by 3.9% respectively, to 28.3%

and 39.5%. Consumer surveys suggestthat perceptions regarding the healthimpacts of sugar are evolving, whilstat the same time consumers arere-evaluating the risks posed bytraditional dairy fats, leading to achange from products advertised as‘lite’ or reduced fat, which may haveadded sugar.

Total sales value for the yoghurtcategory decreased by 0.1%, as strongper-unit price increases (6.9%) partially

offset a fall in total volume. As withvolume, within the yoghurt category thekey difference is between traditional asopposed to sweetened yoghurt, withthe per-unit price of the two categoriesincreasing by 22.4% and decreasingby 7.6% respectively, with total salesvalues changing by +10% and -10.2%respectively.

Infant formula

Infant formula continues to make headlines in themedia, with ongoing reports of shortages, and aseries of large partnerships and investments inthe sector. Sales through supermarket channelsincreased in volume by 37.1% and 45.3% in value,as the product range diversified to include morehigh-value specialty ranges such as organic andlactose-free varieties. Parallel exports to Asianmarkets may account for part of this growth,as there is no evidence to suggest significantdemographic or consumer preference changesover this period.

With an eye to foreign export markets, BegaCheese, Fonterra Australia and Murray Goulburnhave all announced partnerships with establishednutritional companies to develop their infantformula businesses. Fonterra have purchased astrategic stake in Chinese i nfant formula companyBeingmate, whilst Murray Goulburn has committed$260− 300 million for a new infant formula plant inKoroit, with a capacity of 45,000 tonnes a year.

Source: IRI

Note: Data for the period MAT 03/01/2016.

Infant

formula

Volume (kt)

16

Year-on-year growth

+37.1%

Retail value ($ m)

396

Year-on-year growth

+45.3%


18/40

16

Impacts of $1.00 per litre supermarket milk

Five years on

On 26 January 2011 Colessupermarkets announced that i t wasmaking significant and permanent

reductions to the retail price of i ts mainprivate label lines of drinking milk.Other major supermarket competitorsresponded by making similar pricecuts, although the majority indicatedthey believed the margins associatedwith the new price structure to beunsustainable.

Not only did the retailers drop the priceof their private label full cream milksto $1.00 per litre for 2-litre and 3-litrepack sizes, but they also ‘li ne-priced’

their modified white milks – reduced fatand no fat /skim milks – to the samelevel. Analysis at the time concludedthat the overall retail value of drinkingmilk sales would decline substantially.

Total drinking milk consumption growthaveraged 1.7% pa over the ten yearsto 2010, and it was assumed that therewould be no extra growth overall inmilk sales volumes, reflecting limitedprice elasticity of milk consumption.

In reality, volumes grew by 2.8% and3.3% over the first two years, slowingthereafter to the population growth

rate and slightly further over the l asttwo years.

A 10% shift from route trade tosupermarket sales channel was alsoassumed. By the end of 2015 however,the loss in share of the Route and Foodservice channel totalled 1.4%over the last five years.

The 4.7% increase in market share forsupermarket private label milk overthe last five years is substantially l essthan the assumed 10% shift from

processor-branded to supermarketprivate label product. Average brandedmilk prices are now 3% (6 c/L) higherthan five years ago (a 10% fall hadbeen assumed).

The net result in value terms is shownin the tables opposite. The datasuggests that over the five years to theend of 2015, the total milk market hasincreased by an estimated $325 millionin retail value to nearly $4.6 billion.

Milk sales − Australia

Estimated retail sales value − $ million

Year Total market Supermarkets Route and F/S *

2010 $4,260 $1,940 $2,320

2011 $4,280 $1,920 $2,360

2012 $4,434 $1,996 $2,437

2013 $4,541 $2,027 $2,513

2014 $4,540 $2,054 $2,486

2015 $4,584 $2,046 $2,538

Actual change in retail sales value − $ million Year Total market Supermarkets Route and F/S *

2010

2011 $21 –$20 $40

2012 $153 $76 $77

2013 $107 $31 $76

2014 –$1 $26 –$27

2015 $44 –$7 $52

5-year

impact

+ $325 + $107 + $218

Route and Food service * − assumes route price is equal to the branded supermarket price


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Economic settings

The Westpac−Melbourne InstituteConsumer Sentiment Index fell by 4%in April to 95.1 from 99.1 in March,and down from 101.3 at the timeof the last Situation and Outlook inFebruary, indicating that pessimists

outnumber optimists amongstconsumers. Confidence is now belowthe level it was twelve months ago.Concerns about household financesled many respondents to indicate debtrepayment as a priority, with perceptionsof households’ financial positionscompared to twelve months priordeteriorating in consecutive months,by 8.2% and 3.8% in March and Aprilrespectively. This suggests a subduedoutlook for households’ spending in thenear future.

Respondents’ outlook for the nexttwelve months also deteriorated by5.5%, with households less confidentabout economic growth. Unease aboutmarket volatility and negative mediacoverage of the property market andhousehold debt levels appear to beweighing on consumer sentiment. The April result is the second consecutivedecline in confidence, and the concern isthat ongoing pessimism will be reflectedin a reduced desire for expenditure ondiscretionary items such as eating out,or more 'indulgent' food items.

Consistent with subdued consumersentiment, Dairy Australia’s FoodService Index shows slowing growthin the food services sector. The indexreflects year-on-year growth in turnoverof the Food Service channel, whichaggregates hospitality turnover from

takeaway food, cafes, restaurants andcatering services. The Index showsthat overall growth in food servicespending has slowed markedly overthe last six months, and noticeably inthe takeaway food segment. Whilstsupermarket sales have fallen, theyhave fallen less in proportion to other

sectors and have maintained a higherrate of growth, suggesting consumersmay be economising by preparing andconsuming food at home.

Inflation has slowed in Australia, withheadline inflation captured by the ‘allgroups’ CPI falling 0.2% in the Marchquarter, compared to a 0.4% increasein the previous December quarter.Over the twelve months to the Marchquarter 2016 inflation rose 1.3%, downfrom the twelve month total to the

December quarter of 1.7%. Automotivefuel (-10.0%), fruit (-11.1%) andinternational travel and accommodationrepresented the largest category pricefalls, while pharmaceutical products(+4.8%), secondary education (+4.6%)and medical and hospital servicesrepresented the largest increases.

Within the 'all groups' CPI, food fell by0.2% from December quarter 2015,but was unchanged over the pasttwelve months from March quarter2015. Within the food component ofthe consumer basket of goods, thedairy category CPI fell 0.2%. Milk rose0.1%, cheese fell 2.0%, and ice creamand other dairy products rose by 0.9%. The fall in inflation was unexpected bythe market, and prompted a relaxationin monetary policy. In turn, this has hadimplications for Australian exchangerates, causing a depreciation in the AUD.

12 months 6 months

Takeaway

food

Cafes and

restaurants

SupermarketsFood Service

2.9% 3.1% 2.8%3.1%

2.2%1.9%

2.4%2.7%

Figure 7 DA Food Service Index (YoY Turnover Growth to February 2016)

Source: Dairy Australia, ABS

104

102

100

98

96

94

92

96.2

Jul 2015 Apr 2015 Apr 2016Oct 2015 Jan 2016

102.4

95.3 95.1

92.3

99.5

93.9

97.8

101.7

100.8

97.3

101.3

99.1

Month/Year

I n d e x

v a l u e

Figure 6 Australian consumer confidence

Source: www.tradingeconomics.com, Westpac Banking Corporation, Melbourne Institute


20/40

18

The latest update to the WorldEconomic Outlook (WEO) from theInternational Monetary Fund (IMF)

(April), projects global economic growthat 3.2% in 2016, a slight downwardrevision of its original 3.4% forecast inJanuary. This revised forecast reflectsongoing macroeconomic developmentssuch as a continued slow-downin Chinese growth, weakness incommodity prices, and declining capitaland investment flows into developingand emerging markets (whichaccounted for the majority of globalgrowth in 2015).

Subdued commodity prices, particularlyfor oil, have had a severe negativeincome effect, and led to a depressedoutlook and reduced confidence

for many major exporters. Thishas prompted significant currencydepreciations, reduced trading activity,

and reduced consumption. At the sametime, many emerging and developingcountries face pressure to reduce fiscaloutlays that could stimulate or stabiliseaggregate demand, and have haddifficulty in accessing external financinggiven increased financial volatility. Facedwith deteriorating macroeconomiccircumstances, many lower-incomecountries have seen capital outflowsand a decline in i nternationalinvestment, which has weighed downthe global economy.

Currencies of major dairy commodityexporters have remained fairly weak,improving their cost-competitiveness.

The Australian dollar averaged0.77 AUD/USD during the Marchquarter of 2016 up from 0.73 in the

December quarter 2015. Expectationsof monetary tightening by the USFederal Reserve and rate cuts bythe Reserve Bank of Australia haveled exporters to anticipate a lowerexchange rate going forward, with themedian consensus forecast fluctuatingaround the 0.72−0.73 AUD/USD markover the year to first quarter 2017.Forecasts for major dairy exportersNew Zealand and the European Unionalso anticipate that both the NZD andEuro will depreciate further against the

USD over the course of 2016, beforestabilising in the first quarter of 2017.

Global economy and exchange rates


21/40


22/40

20

Greater China

Exports to Greater China (PRC, Macauand Hong Kong) grew by 16% involume terms over the twelve monthsto February 2016. Demand for milkpowder is mixed, with WMP down15% year on year to 430,000 tonnes,whilst imports of SMP have increasedby 7.5% to 248,000 tonnes. Sales ofbutter increased by 43% to over 73,000tonnes, whilst liquid milk imports rose53% (over 581,000 tonnes). Australianexport volumes grew by 21%, while thevalue of Australian exports increased by29% year-on-year, with strong growth inhigh value categories such as liquid milkand infant formula.

Higher production costs forChinese dairy farmers, combinedwith low international prices for dairycommodities have constrained localproduction growth and led to a recoveryin demand for dairy imports. WithinChina, the government has encouragedcontinued improvements in the nationalherd genetics through the import of livedairy cows (of which Australia is thelargest supplier) and genetic material.

Policies are also in place to promoteconsolidation and growth inlarger-scale farms.

Japan

Global dairy exports to Japan fell by 1%in volume during the twelve months toFebruary 2016. SMP (-20%) and Milk

(-16%) saw the most significant volumefalls. Overall cheese volumes saw nogrowth in the twelve months to February

2016 and total value declined by 18%,however Australia’s cheese exportsgrew by 17% in volume and 12% invalue to $431 million. The total USDvalue of global exports to Japan fell21% over the twelve month period,however the value of Australia’s shareincreased by 4% over the same period.

Falls in global prices combined with astrong appreciation of the Yen has seenthe affordability of dairy imports improvesignificantly for Japanese consumersover the last twelve months.

Southeast Asia

Overall growth in the Southeast Asianregion slowed, with volumes increasingby 4% year-on-year, whilst the USDvalue fell 24%. Import volumes to Vietnam, Thailand and Indonesia grewby 14%, 8% and 4% respectively, whilstMalaysia, the Philippines and Singaporeposted slight declines.

SMP export volumes to the region

grew by 10% to 666,000 tonnes,driven mostly by strong growth from Vietnam (+34%). Volumes of butter andcheese both increased (7% and 4%,respectively), whilst total WMP volumesfell by 3%. The value of dairy exports tothe region fell across all major categories,and overall USD value for the twelvemonths to February declined by 24%.

T o t a l i m p o r t s ( ’ 0 0 0 t o n n e s )

Africa Japan Russia Mexico

Market

South East

Asia

Middle

East

Greater

China

0

500

1000

1500

2000

2500

2012 2013 2014 2015 2016

Source: Dairy Australia, GTIS

Figure 8 Exports to key demand markets (twelve months to February)

Global demand

Overview

Globally the volume of dairy productstraded grew by 5.8% over the pasttwelve months, with a recovery indemand from Greater China accountingfor much of this growth. Overall volumesto Southeast Asian countries continuedto grow, with strong growth in milkpowder categories, while exportsvolumes to the Middle East and Japan

have eased slightly. The value of globalexports fell by 9%, with falls across allmajor markets.

Demand from Russia, previously theworld’s second l argest single countrydairy market, has collapsed followingthe embargo on western exporters.Mexico has since assumed this title,with strong growth in (mainly US)import volumes.


23/40


Relative market shares by region haveremained more-or-less constant, withNew Zealand remaining the largest

single exporter accounting for 30% ofvolume, and Australia maintaining amarket share of around 11% inthe region.

Mexico

Mexico saw strong growth in overallvolumes of dairy imports up by12% on last year, led by increasesin SMP (+33%), butter (+29%) andcheese (+13%). The overall value ofMexican imports declined however,falling by 10%. The US maintained itsmarket share of 79% of total productpurchased. New Zealand increased itsshare to 9.5% of product, and the EUshare remained steady at 7%. Majorproduct shifts were in butter oil, cheeseand SMP. Butter oil rose 72% (to 39,000tonnes), while SMP grew by 32% toalmost 295,000 tonnes, and cheeseincreased by 9% to approximately114,000 tonnes.

Middle East

Export volumes to the Middle Easteased slightly, down 1% on the sametime last year, with falls in demand forSMP (-9.8%), butter (-4.5%) and cheese(-2.7%) to 174,000 tonnes, 137,000and 325,000 tonnes respectively. Thiswas only partially offset by increasesin condensed milk (+8.6%), WMP

(3.0%) and infant formula (+13.5%) to156,000, 332,000 and 102,000 tonnesrespectively.

Following the removal of productionquotas and substantial productionincreases, export volumes from theEU have increased by 17% over thelast twelve months, increasing marketshare to almost 38%. This has come atthe expense of other major exporters,displacing imported product from North America (-40%) and New Zealand(-5.7%). Australia’s dairy export volumesto the region fell by 21%, and weredown 33% in value terms over the sameperiod. Australia’s market share declinedslightly over the same period, to 2.6% ofproduct sold.

Russia

Embargoes remain in place on dairyimports from United States, EuropeanUnion, Australia, Canada and Norway– although exceptions have periodicallybeen made.

The ban on key suppliers saw Russiandairy imports fall precipitously, from629,000 tonnes in 2014 to 118,000tonnes in 2016. Russia has turnedto smaller dairy producers such as Argentina, China and Switzerland forsupplies, while the combined EU stillaccounts for the majority of Russia’simports. In spite of depressed globalprices for dairy commodities, marked

Iran

The successful conclusion ofnegotiations and the lifting ofnuclear-related sanctions on Iranhas been greeted as a welcomepiece of news by major dairyexporters. Iran is a large, middleincome country, with population

of approximately 80 million.Importantly, it has a well-establishedtradition of dairy, which comprisesabout 40% of average Iranians’daily protein intake. Cheese,yoghurt and sour milk productsare all popular traditional productsamongst consumers. With theopening up of the Iranian market,and expectations that the economywill grow strongly with the removalof sanctions, hopes are high thatIran will mature into a large,

high-value market for dairy exports.Until relatively recently, Iran was asizeable dairy importer, particularlyof butter and SMP, and there issome existing foreign presence.

Perhaps the most significant is NewZealand, which has had an averagemarket share of around 55% overthe last 15 years by volume, 90% ofwhich was exports of butter.

However, optimism must betempered with a realistic appraisal

about the challenges of doingbusiness with Iran. These includeremaining US financial sanctions(making banks wary about thecountry), a still-fickle regulatoryand tax environment for foreigncompanies, and restrictive tradepolicy. Oil revenues, which compriseapproximately 80% of Iran’s exportrevenue, are also depressed dueto low global prices, meaningaffordability may be an issue formany of Iran’s consumers.

Iran presents a potentially excitingopportunity for dairy exporters; butit remains unclear whether, and justhow quickly this market can deliveron the high hopes of some.

depreciation of the Rouble has meantthat dairy imports are less affordablefor Russian consumers, with declines

in import volumes even from countriesunaffected by sanctions.


24/40

22

Dairy affordability

Dairy Australia’s affordability indexcontinued to fall from its reported level inthe February Situation and Outlook , withthe SMP price index easing a further5.1% to 83.1 from 87.6. This marks afall in value of 8% on its value of 89.9

in June last year, and is the lowestthe USD benchmark has been sinceFebruary 2009. However, subduedcommodity prices have been partiallyoffset by a general appreciation of theUSD against most major currenciesover the past twelve months fromJune 2015, which has served tomake imports denominated in USDmore expensive.

Consequently, improvements in theaffordability of dairy over the past twelvemonths for major importers have been

less than SMP prices would suggest,with individual country affordabilityindices down by just 2% on averagefrom the same time last year, andsome importers such as Mexico and

Malaysia seeing affordability worsenslightly. Nevertheless, affordability is stillsignificantly better than the three-yearaffordability index averages forall importers.

A standout case is Japan, where strongappreciation of the Yen against the USD

since November 2015 (by approximately35%) has reduced the cost of dairyimports by 16% since June last year,making them the most affordable theyhave been since late 2009.

Despite recent speculation that Russiamay relax its embargo on dairy importsfrom a number of major producers, asignificant re-emergence of Russianimport demand for dairy remainsunlikely. Prior to sanctions, Russiawas the second largest single countryimport market for dairy; however the

subsequent significant depreciationof the Rouble has meant that dairyimport affordability has deteriorated.Russian buying would thus likely remainsubdued, even in the absence oftrade restrictions.

More expensive

Less expensive

Month

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

F e b 0 5

J u l 0 5

D e c 0 5

M a y 0 6

O c t 0 6

M a r 0 7

A u g 0 7

J a n 0 8

J u n 0 8

N o v 0 8

A p r 0 9

S e p 0 9

F e b 1 0

J u l 1 0

D e c 1 0

M a y 1 1

O c t 1 1

M a r 1 2

A u g 1 2

J a n 1 3

J u n 1 3

N o v 1 3

A p r 1 4

S e p 1 4

F e b 1 5

J u l 1 5

D e c 1 5

China Indonesia Japan Russia SMP Benchmark

I n d e x v a l u e

Source: Dairy Australia, Bloomberg

Figure 9 Dairy affordability

Since June 2015

Improvement

in affordability

in Japan due

to strong

appreciationof the Yen

16%


25/40


B u t t e r p r e m i u m (

$ / k g

f a t )

M i l k p r o t e i n p r e m i u m (

$ / k g

p r o t e i n )

Protein Fat (RHS)

1.00

2.00

3.00

4.00

5.00

6.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Month

J a n 0 7

J u l 0 7

J a n 0 8

J u l 0 8

J a n 0 9

J u l 0 9

J a n 1 0

J u l 1 0

J a n 1 1

J u l 1 1

J a n 1 2

J u l 1 2

J a n 1 3

J u l 1 3

J a n 1 4

J u l 1 4

J a n 1 5

J u l 1 5

J a n 1 6

0.00 0.00

Source: Dairy Australia, Oil World

Figure 10 Dairy price premium vs palm/soy substitutesDairy substitutes

Premiums for dairy fats and proteinshave continued to weaken since the lastSituation and Outlook report in February,falling a further 7.5% to $3.13/kg forbutterfat and down by 5.3% to $4.46/kgfor dairy proteins, relative to palm oil and

soy meal substitutes. This representsa marked deterioration for proteinpremiums, which are 32.7% below thelevel of the same time twelve monthsago. Butterfat premiums are down by21.5% on the same time last year,and 7.3% lower than the twelvemonth average.

This reflects supply side fundamentalsand ongoing weakness in globaldemand for dairy products. Fat andprotein substitutes such as palm oiland soybean meal can be blended

into processed food to reduce cost,

with demand from manufacturerschanging with relative prices of dairyand dairy substitutes. Consecutiverecord soybean crops in 2014, 2015and projected increases again in2016 for South America and USA,on the back of large existing stockssuggest a looming oversupply. This has

exerted strong downward pressure onsoymeal markets, and with SMP spotprices approaching a floor, may seeprice differences widen as soymealprices continue to fall. Whilst dairy fatpremiums are also down, drier El Niñoconditions in Malaysia and Indonesiahave reduced kernel yields for palm oilcrops, leading palm oil prices to risein February. Adverse weather eventsmay yet lead to further downward croprevisions, with the higher palmoil substitute prices narrowing the

dairy premium.

Premiums for dairy

fats and proteins have

continued to weaken

since the last Situation

and Outlook report inFebruary, relative to

palm oil and soy meal

substitutes.


26/40

24

Global supply

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

0 . 0

%

0 . 5

%

1 . 0

%

1 . 5

%

2 . 0

%

2 . 5

%

3 . 0

%

3 . 5

%

4 . 0

%

4 . 5

%

F o r e c a s t g r o w t h ( 2 0 1 6 )

Actual growth (2015)

NZ

EU-28US

Aust

Figure 11 Actual and forecast milk production growth – four largest exporters

Note: Size of bubble represents share of global dairy exports.

Data covers production seasons for Aust and NZ, calendar years for US and EU.

Figure 12 Farmgate price movements – four largest exporters

Change in indicative farmgate price NZ EU-28 US Australia

Compared to last report (Feb 2016) –6% 0% 0% –4%

Compared to prior year (Jun 2015) –26% 3% –7% –8%

Overview

A better than expected summer has supported milk production in New Zealand, whiledifficult conditions have slowed intakes in Australia. The European Union continues to

produce significant growth, while US farmers have seen margins cushioned by cheapfeed grain prices.

Figure 13 Market trends – four largest exporters

North Africa

Middle East

Greater China

Southeast Asia

Japan

Mexico

European UnionSignificant market shifts

AustraliaSignificant market shifts

New ZealandSignificant market shifts

United StatesSignificant market shifts

59%

27%

17%

12%

0% 0%

12%

7%

0%

-5%

0%

21%

9%

5%

-21%

0%

-14%

-15%

-41%

6%

Source: GTIS, Dairy Australia


27/40


European Union

European milk production finishedcalendar 2015 up 5% compared to

2014, reflecting an extra 3.2 billion litresof production across the 28 memberstates. Favourable weather conditionsand low grain prices have augmentedthe boost to milk production followingremoval of quotas in 2015, whilst theclosure of the Russian market and aweak Euro have amplified the Europeanpresence on international markets.

January 2016 data shows a further 5%growth for the month, and while somemember states are beginning to see

production slow, there have been somelarge increases reported for Februaryas well. In leap-year-adjusted terms,the Netherlands (Europe’s third largestproducer) saw an 18% increase in milkdeliveries, whilst Ireland’s output grew amassive 32%. France and the UK haveseen production begin to track belowcomparable 2015 levels since Februaryand March respectively, but in general,the current surge is expected to lastthrough the northern hemisphere spring.

The European Commission hasresponded to pressure from the farmsector by announcing a packageof additional support measures,including a doubling of the ceiling forintervention purchases of SMP andbutter. Having filled the existing limit of109,000 tonnes for SMP, the schemereverted to purchases via tender for a

short time until implementation of theadditional 109,000 tonnes. This hasnow occurred, supporting the €1,698/t

(US$1,900/t) floor. Growth in Europeanmilk production is expected to moderatefurther as the year progresses, with theEuropean Commission forecasting a fullyear total of 1.3% above 2015.

United States

Milk production growth in the UnitedStates has persisted despite thenational dairy herd tracking at similarlevels to the same time in 2015.Increases in per-cow milk productionhave been helped by persistently lowfeed prices, and local analysts predictfurther gains as higher quality feedbecomes available later in the year.

Although milk prices continue toease, concurrent falls in feed costshave kept average margins for milkproduction positive. February markedthe 28th consecutive month that theUSDA’s calculated margin remained in‘expansionary’ territory (measured interms of return over feed cost, relativeto a benchmark).

Despite growing production, the UShasn’t had the same impact on globalmarkets as Europe over the past year. A strong domestic market has absorbedthe extra milk produced, keeping overallUS export shipments in line with thesame time last year. The exception hasbeen nonfat dry milk (NDM), which has

seen strong volume growth, albeit ata lower total value due to aggressivepricing. More recently, manufacturers

have responded to falling NDM valuesby shifting production in favour of SMP,which is likely to herald a renewedfocus on markets in southeast Asia.Cheese production in the US is li kely toremain high, with milk output strongestin the cheese-focused Midwest states(such as Wisconsin). Cheese stocksare well above average, and it appearsthat demand may no longer bekeeping up. Butter production is alsosurging (+5.8%), due to high prices,and imports are also well up, while

demand (measured by commercialdisappearance) has eased – despitesome major food service establishmentsswitching from margarine to butter.

With the milking herd forecast to remainaround current levels (9.3 million head)in the near term, the USDA predicts milkproduction will increase 1.5% for the fullyear, to exceed 96 billi on litres.

New Zealand

A declining farmgate milk price outlook

has squeezed the margins of NewZealand’s dairy farmers for the secondconsecutive season. Fonterra’s currentfarmgate price forecast of NZ$3.90/kgMS (A$3.86/kg MS) is the l owest since2006/07. Combined with a forecastdividend of NZ$0.40 per share, its totalpayout for a fully shared-up farmer falls

in the NZ$4.00−$5.00/kg range mostkiwi processors are offering. Fonterrahas also announced special measures

including interest free loans and earlydividend payments to help farmers dealwith severe cash flow pressure.

Seasonal conditions have providedsome reprieve, with timely rainfall andwarm temperatures maintaining goodpasture cover in many regions – aidedby lower stocking rates on those farmsthat culled early and heavily. Lowerdemand and a shortage of storagefor supplementary feeds such as feedgrains, palm kernel and maize silage arecontributing to sharp price reductionsfor these products, benefiting thosefarmers who continue to use them.Extra pasture availability and cheaperfeed have moderated the impact oftight cash flow on milk volumes, withintakes down 2.1% for the New Zealand(June− May) 2015/16 season to March. The month of March itself saw only asmall decrease compared to March2015, and overall the season total isexpected to be around 3% lower than2014/15, at around 21 billion litres. Thisis somewhat less than the 5−10% fallsome commentators had predictedearlier in the season.

Australia

Australian milk production hascontinued to track below prior-yearlevels since early spring, with most


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regions experiencing difficult seasonalconditions in addition to challengingmargins. March data shows a 1.1%

drop over the season to date, withintakes for the month itself down 4.6%compared to the same time last year. Alate autumn break, persistently high feedcosts, and other issues such as pasturepests and herd health problems havealso contributed.

Tasmania saw milk production hit bya hot, dry season that has causedongoing tightness in feed supplies,despite good rainfall in February.Production rebounded in Marchhowever, up 4.1%. Many parts of Victoria have experienced similarlydry conditions, with water and fodderavailability and pricing amongst thekey issues facing farmers. Temporaryirrigation water prices reaching post-drought highs, impacting cash flow andmilk production in northern Victoria,whilst rainfall deficits have necessitatedadditional fodder purchases in thestate’s west and into South Australia.

Western Victoria has seen the mostdramatic year-on-year declines in milk

production (12.1% for March) for thestate over recent months, thoughGippsland is currently furthest (3%)below the prior season in year-to-date terms. Seasonal conditions inGippsland have been widely varied,with south Gippsland and parts of

West Gippsland severely impacted bydry conditions. Northern states havehad a better season, with coastal

parts of NSW enjoying good rainfall;Queensland has avoided both floodingand cyclones. Western Australia hascontinued to produce standout growthin milk volumes (up 6.9% for the seasonto March), despite several farms beingseverely impacted by fires i n January,and some processors reducing intakes.

Latin America

After a slow start to 2015, Argentineanmilk production finished the year up1.6% compared to 2014. Reports fromlocal contacts suggest the situationhas deteriorated in early 2016, withlow farmgate milk prices and pressureon feed costs squeezing margins. Inparticular, relaxation of export taxes anda depreciating currency have increasedcorn and soybeans prices, and debtburdens are reducing the ability ofmany farmers to absorb margin losses.Excessive rain in two major productionregions (Santa Fe and Córdoba) in Aprilhas compounded these issues, witha drop of as much as 15% forecast.Severe flooding is also likely to affectmilk production in Uruguay, which hadalready trended downwards in YOYterms since July 2015, and finishing theyear 2% below the 2014 total. Followingfurther deterioration, milk intakes were

down 11% for 2016 to February. TheUruguayan industry is also awaitingfull payment from Venezuela for dairy

product supplied under a July 2015 dealaimed at easing food shortages in thelatter country.

Australian milk production forecast

For the remainder of the currentseason, risks are weighted towardsthe lower end of the -1% to -2%range forecast in the FebruarySituation and Outlook report.While trends in northern statesand Western Australia are likely topersist to the end of the season,the outcome is far less predictablein southern regions. Following thematerial cuts to May and June milkprices for many farmers, there issignificant potential for a sharp dropin production, as farmers cull and/ordry off cows early in response.

In southern regions, milk productionis expected to fall further in2016/17. The recent farmgateprice cuts have intensified marginpressure and dampened openingprice expectations; confidence

has suffered as a consequence,and on-farm investment is likelyto slow substantially. Northern Victoria is of particular concern,given the confluence of income(milk price) and cost (particularly

water) issues, together with alarge proportion of highly gearedbusinesses. For western Victoriaand Gippsland, a La Niña-drivenboost to rainfall could help reducethe effects of tighter margins. A recovery to modest growthin Tasmania is expected, whileWestern Australia’s rapid growth isforecast to moderate. The northernstates are likely to be mixed (witha small increase in NSW, andsmall decrease in Queensland),but growth is largely dependenton the timing of any adjustmentin farmgate prices to reflect lowersouthern values.

Dairy Australia’s 2015/16 seasonmilk production forecast remainsfor a total between 9.55 and9.65 billion litres; a contraction of

between 1 and 2% compared to2014/15. The initial forecast for2016/17 is for a further 1−2% fallin production, to between 9.45 and9.55 billion litres.


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The pace of new investmentannouncements slowed during atumultuous first half of the 2016

calendar year, though the corporatesector has been far from quiet.

Whilst its recent trading update andshock farmgate price reduction havecaptured headlines, Murray Goulburn(MG) has made a number of otherannouncements over the past fewmonths. Two of these were majoragreements with existing customers,concerning the $260−$300 millionin previously flagged investment innutritional powders capacity at MG’sKoroit site.

MG announced a ‘frameworkagreement to establish a strategicsupply alliance’ with global paediatricnutrition company Mead JohnsonNutritionals (MJN), and a supplyagreement with Kalbe Nutritionals,Indonesia’s leading nutritionals companyin March. The two agreementsallow MG to proceed with the Koroitinvestment, for which plans are currentlybeing refined. The most recent (March)guidance suggests two 45,000 tonne

per annum dryers are ultimatelyplanned, with the first slated to beoperational in early 2019.

Subsequently, in April, MG announcedan agreement to divest its 25% holdingin food testing business Dairy Technical

Services (DTS). DTS was formed in1954 as an independent analyticalservices provider, and is part-owned byFonterra and Warrnambool Cheese andButter, both of whom are also divestingtheir stakes. New Zealand state-ownedenterprise AsureQuality, itself a testingservice provider, owns a 25% share,and will buy out the three processors aspart of a consortium that also i ncludesthe Singapore arm of Belgian testingcompany Bureau Veritas. Full detailsof the sale value weren’t released, but

MG advised its share would generatea one-off profit of $18 million after tax,whilst Warrnambool Cheese and Butterbooked $8.4 million for its13.32% holding.

Burra Foods has also announcedsignificant changes recently, withChina-based Inner Mongolia FuyuanFarming Co Ltd (Fuyuan), taking amajority shareholding in the SouthGippsland processor, subject to ForeignInvestment Review Board (FIRB)approval. Fuyan’s biggest shareholderis Mengniu, one of China’s largest dairycompanies, and its interest in Burra istouted as offering ‘unparalleled access

to the world’s largest and fastestgrowing dairy market in addition toimproved access to capital that will

fund expansion projects.’Further development at the company’sKorumburra site has been flagged,aided by state government plans toimprove water supply to the town.Existing shareholders including BurraFoods’ founder, Grant Crothers andJapanese dairy distributor Itochu, willmaintain a combined 21% interest in thecompany with Mr Crothers remainingCEO. Both Burra Foods and Fuyuan willprovide directors for a new board onceFIRB approval is granted and the saleis completed.

Australian Consolidated Milk (ACM)has announced plans to expandproduction of organic liquid milk and isseeking new suppliers. ACM indicatedthat a significant premium would beoffered, and a willingness to cover thecosts of organic certification. In furtherdevelopments, Pactum Dairy Groupwhich is part-owned by ACM, hasannounced an agreement reached withInternational Dairy Products to supply

the Vietnamese company with UHT fromits plant in Shepparton.

Camperdown Dairy International hasalso concluded a supply arrangementwith a V ietnamese company, in this case

KLF Global, to export infant formula to Vietnam. Camperdown has developeda special line of formula branded GreenMeadow, with plans to export around500,000 tins a year.

In what it has branded a significant first,Fonterra Australia has launched thefirst available Extended Shelf Life milkproduct in Australia to use microfiltrationtechnology. The Anchor brand mil kmakes use of permeable membranesto reduce the levels of bacteria andmicro-organisms in the milk, whichdoes not otherwise affect taste. Thisallows for a shelf life of around 23days, without the need for higherheat treatment which may produce a‘cooked’ taste. While ESL microfilteredmilk has been available in Europe andthe US for some time, this marks thefirst time an Australian manufacturer hasadopted the technology. The milk will beprocessed at Fonterra’s Cobden plant.

Other local product launches includedthe Blackmores-branded infant formula

produced via a joint venture withBega Cheese, whilst MG’s DevondaleNatraStart infant formula was launchedin China.

Corporate sector update


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Food Standards Australia NewZealand Infant Formula Review

The regulation of infant formula

is currently under review by FoodStandards Australia New Zealand andis open for consultation. This standardaffects dairy derived infant formulaingredients. For example the use,development, marketing and trade ofboth dairy commodity and innovative,high value specialised dairy ingredients. The inputs to this consultation will alsobe used to help inform the assessmentprocess for the regulatory impact,including a cost benefit analysis ofproposed regulatory options for theinfant formula standard.

Authorities recognise, that thoughbreastfeeding is the recommended wayto feed a baby, a safe and nutritioussubstitute for breastmilk is neededfor babies that cannot be or are notbreast fed. For infants up to 6 monthsof age breast milk and or formula isgenerally the sole source of nutrition.Subsequently it is critical that standardsthat apply reflect the most currentevidence in terms of meeting infant

nutrition needs and deliveringhealth outcomes.

The purpose of the consultationproposal is to revise and clarify the

standard whilst considering thefollowing objectives:

› The health and safety of infantsis protected.

› There is consistency with advancesin scientific knowledge.

› Industry innovation and tradeis not hindered.

Dairy Australia is providing technicalguidance and coordinating thedairy industry submission with theview to guide the review towards astandard that is consistent with thefollowing principles: evidence-based,proportionate to risk, benefits can be

realised proportionate to cost, andsupports competition and trade –particularly with our major markets.

‘Effects test’ for Section 46 of theCompetition and Consumer Act

The Australian Government announcedin mid-May that it will introducelegislation later in the year to implementthe Harper Review’s recommendationto amend Section 46 of the Competition and Consumer Act – regarding the

misuse of market power provision. The new provision would be aimed atpreventing firms with substantial marketpower from engaging in conduct that

has the purpose, effect or likely effect ofsubstantially lessening competition.

Under the proposal, it would no longer

be necessary to prove a businesswith market power acted with the‘purpose’ of substantially lesseningcompetition − only that it engaged inbehaviour ‘likely to have the effect’ ofsubstantially lessening competition– thereby theoretically reducing theburden of proof to make it easier forsmall business to prove that a largecompetitor has misused itsmarket power.

There is a view among agricultural and

small business stakeholders that aneffects test will protect them againstmisuse of market power and anti-competitive behaviour – by addressing‘a longstanding weakness in the existingcompetition rules’ and will ensurethat there is a more transparent andcompetitive marketplace that treats allsupply chain participants fairly.

This change has been stronglyadvocated for by both Australian DairyFarmers (ADF) and the QueenslandDairyfarmers Organisation (QDO);arguing that it will strengthencompetition and give the ACCCstronger powers to pursue practicesthat undermine competition.

Policy updates

Under the ‘effects

test’, it would no

longer be necessary toprove a business with

market power acted

with the ‘purpose’ of

substantially lessening

competition.


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5 4 %

7 8 %

6 6 %

6 5 %

6 9 %

6 6 %

4 3 %

7 5 %

7 4 %

6 7 %

5 6 % 7

4 %

5 1 %

6 1 %

7 4 %

7 7 %

4

8 %

8 3 %

8 1 %

’07 ’08 ’09 ’10 ’11 ’12 ’13 ’14 ’15 ’16

Expansion

phase

Steady(where want

to be)

Steady(unable to

Expand)

Winding

down

phase

New farm/

taken over

from family

26%

38%

25%

11%

1%

26%32%

26%

14%

2%

Demand will continue (29%)

Improved farm gate

milk price/price OK (13%)

Greater export demand (11%)

Sentiment

Profitability and investment

Current herd size and production

Forecast herd size and production

Regional profile

Current sentiment

Challenges next 6 months

Anticipated change in herd size 2016 – 17 vs 2015 – 16

Herd size

Herd production

Sentiment trend (% positive)

Farm gate milk price

too low (22%)

Increasing cost of

production (16%)

Positive drivers Negative drivers

Very

positive

Fairly

positive

Neut

dairy situation and outlook june 2016

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