THE WORLD dairy market is still hot. Xcheque dairy industry analysts Dr Jon Hauser and Neil Lane said dairy’s continued bullish run was being reflected in Australian processors’ opening prices for 2008-09.
Dairy commodity inventories around the world remained at historically low levels and demand was still strong – particularly in Asia and the Middle East, they said.
The one word of caution from the analysts was that the market had definitely peaked, and production from the dairy “power houses” – the European Union and United States – was increasing to meet this demand.
The US dairy industry is on target to produce 4-5 billion litres more in 2008 than it did in 2006 which has already had a significant impact on skim milk powder (SMP) prices and is also affecting cheese and butter prices.
“Aside from the fall in SMP price, we have an unusual situation at the moment where the US market for dairy commodities is trading at a 10-25 per cent discount to European and Oceanic prices,” Dr Hauser said.
“It appears that the maintenance of traditional trading relationships and concerns over the security of supply are holding prices up.
“This is likely to continue until there are clear signs of a lift in production from Oceania and the EU and there is more supply competition in the market.”
Dr Hauser said the current uncertainty was good news for the 2008-09 milk price.
He said Xcheque’s forecast models were showing pricing for the major dairy processors in the range of $5.80-$6.40 a kilogram milksolids (MS) (43-47 cents/litre for 4.1pc butterfat and 3.2pc protein) for the whole year.
“The low end will be a consequence of a decline in commodity prices to the current level in the US, and the high end will be achieved if current commodity prices hold,” Dr Hauser said.
Forecasts aside, the 2007-08 season had a little way to run. Industry leader Murray Goulburn will not announce its final price and dividend until late July and there remains significant speculation on where it will close.
Dr Hauser is still sticking to Xcheque’s early season forecast.
“We have been forecasting a price in excess of $6.80/kgMS (50 cents/litre) since August last year and see no reason why this won’t be achieved in direct price or a combination of milk price and dividends,” he said.
“At least one export processor has already passed this figure with a sixth step up for the season.”
The export-driven milk price rise has led to intense farmgate competition in this current year, and domestic processors, in particular, have struggled to keep up. A consequence of this has been strong opening prices and some significant variations in contracts and milk pricing systems.
“It’s hard to remember a time when we’ve seen so much change in milk pricing schedules from one season to the next,” Mr Lane said.
“We are also seeing a wide range of opening prices ($5.40-$6.60/kgMS or 40-49 cents/litre).”
The higher price is from a processor who supplies domestic retail processors.
Mr Lane said the competition for flat supply curves was particularly fierce – an area targeted by domestic processors.
The export processors were not taking this lying down and were responding with increased off-peak incentives.
Mr Lane said another factor in the increase was the “grey” market where individual contracts were being negotiated with the published price and a one-year term as the starting point.
“We are also seeing initiatives such as new supplier incentives, upfront payments, and access to zero or low interest loans.
“In this environment, it is more difficult than usual (but not impossible) to compare various milk factory payments.
“We would also caution farmers that the more important factor to watch is the history of each processor’s final price and not the opening price.”
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