A financially challenging season is expected, but farmers have the tools to manage.
Australian dairy producers entered the current global price downturn “well prepared” with sufficient equity levels, putting them in good stead to weather the current storm, according to an industry report released in July.
The report, Oceania Dairy — Let’s Debt Serious by agribusiness banking specialist Rabobank, said the 2016–17 season would be financially challenging, with milk prices for many export-orientated producers likely to remain below breakeven.
Despite this, the report said much of the industry would be in a position to source working capital and manage the cycle, thanks to Australian farmers learning from previous cycles the importance of generating cash buffers and appropriate gearing levels to help manage volatility.
Report co-author Rabobank senior dairy analyst Michael Harvey said in recent years many dairy producers had taken the opportunity of improved farm profitability to pay down debt, rather than expand their business.
With equity likely to be eroded during this downturn as farmers accessed working capital to manage the challenging conditions, producers would need to use the next upward price cycle to strengthen their business structures, Mr Harvey said.
“This may see farmers adopt a business strategy focused around reducing debt and rebuilding equity, rather than chasing the profit margin in the upswing,” he said.
The report said global market dynamics had finally caught up with Australia, despite dairy processors continuing to invest in value-adding strategies.
“Value-add may well be the sweet spot for the Australian dairy sector, though the reality is that not all milk can be moved into these channels and much of this higher-value output is still bound for global markets,” Mr Harvey said.
He said with the 2016–17 season to remain extremely challenging for dairy, there was set to be a significant focus on cost control.
“While this season will also be invariably difficult, producers are making on-farm adjustments to downgrade their feed requirements, cull less productive stock and defer their repairs and maintenance schedules.”
While there is not much upside for prices in the 2016–17 season, Rabobank’s Dairy Quarterly has forecast prices to rise modestly in the first half of 2017.
“We are finally starting to see the taps of global supply turn off, as farmers around the world adjust production in the face of continued lower prices,” Mr Harevy said.
“We all know that current low prices are not sustainable, and this supply response together with stable demand growth in the US and Europe is expected to see exportable surpluses dramatically reduce.”
The report said while medium-term confidence would be shaken by the late season price reductions, Australian dairy farmers have headed “into these storm clouds in better shape” than in past downturns.
Mr Harvey said during recent years southern region farmers in Australia had enjoyed periods of improved farm profitability, leading to reduced debt levels and investments in productivity initiatives, also aided by historically low interest rates.
He said while lower currencies were helping to ease pricing pressure on imported inputs, the cost of production would rise again in the long term.