ON-FARM

Southern Australian dairy in the midst of a supply chain revolution

Unprecedented change to the way milk is procured, priced and processed

Kristy Moroney
Southern Australian dairy in the midst of a supply chain revolution

The Australian dairy supply chain – the great reset, identifies three key events responsible for driving change across the dairy sector; a 20-year low in national milk production; internal challenges facing Australia’s largest dairy cooperative and the reset in farmgate milk prices to better align with global markets. 

Report author and Rabobank senior dairy analyst Michael Harvey said so many changes in such a short time frame are unprecedented.

“Australia’s dairy supply chain will emerge from all of this looking vastly different and almost unrecognisable,” Mr Harvey said.

“While this sector transformation is leading to short-term uncertainty and potential business disruption for dairy farmers it will present opportunities for some dairy farm businesses – particularly around choice to supply new markets and more commercially attractive supply contracts,” he said.

“However farmers need to thoroughly assess these opportunities, and associated risks, before taking action.” 

The report says the fall in milk production, along with the anticipated slow rebuild, is set to see competition for milk amongst processors remain fierce – changing the way milk is procured in Australia’s southern dairy region. 

“While milk supply is down across all dairy regions and is at its lowest level in two decades, northern Victoria has experienced the most significant drop, accounting for 50 per cent of this decline,” Mr Harvey said. 

Rabobank is forecasting a small bounce in Australian milk supply in the 2017/18 season around 2.5% in the medium-term with milk supply is expected to grow by a modest 1.8% per annum. 

The Rabobank dairy specialist said Australia’s largest processor, Murray Goulburn, has faced the most significant contraction in milk supply, challenging the role of the cooperative as the lead for price discovery and benchmarking in southern Australia. 

“While Murray Goulburn is on a journey to turnaround its business, and a successful turnaround could see the return of ‘cooperative principles’ as the benchmark for setting milk prices – the reality is that this is years away and a new method of price discovery will need to emerge,” Harvey said.

“This is an issue for the entire dairy industry because if Murray Goulburn isn’t setting the price, then who is?” 

The report said there are lingering risks for all Australian dairy processors, as the sector emerges from the challenging market conditions in 2014 to 2016, which saw reduced earnings exacerbated by a period of aggressive milk-pricing strategies. 

“As market conditions have started to improve in recent months, there has been acceleration in processing investments, with at least 700 million litres of new primary processing capacity coming online across southern Australia this season,” Harvey said. 

“Much of this investment has been concentrated on increasing production capacity for export-orientated cheese production to tap into market opportunities – particularly in Asia with growing demand in both the retail and foodservice channels.” 

A growing series of reports, each focused on a key discussion point for the farming sector, brought to you by the Kondinin team.

A growing series of reports, each focused on a key discussion point for the farming sector, brought to you by the Kondinin team.

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