Peter Collins, ABARES: Prospects for dairy
PETER COLLINS: Thank you very much, Lee. Good afternoon, ladies and gentlemen. As Lee has just said, the last couple of years have been especially challenging for the dairy industry, and the last 12 months have been specially so. We've had falling world prices, and we've had falling farm-gate price in Australia. And we've had falling farm cash incomes. As Lee mentioned, over the recent months, there has been a bit of a turnaround in world prices, and despite the hiccup last night, there does appear to have been a turnaround in those markets.
As a result of the turnaround and changes in marketing, we are forecasting brighter prospects for Australian dairy going forward, and I would just like to start with our view on what might happen with world prices. We're forecasting our world dairy prices will rise over the first part of the outlook period. In this first coming year, that's going to be largely because of slowing production in some key exporter regions.
In the European Union, the commission there is paying producers to cut back on production. In another major producer, New Zealand, in their largest-producing region, this years they've had some very wet weather in their largest-producing area, and that's disrupted the supply chain and disrupted production.
In Australia, too, we're forecasting that production this year will be down, but I have a little bit more to say to that in a moment. As well as a slowdown in world milk production, we think that demand is recovering and continuing to grow. And we believe that that will grow over the reminder of the outlook period.
On the supply side, as prices start to rise in the first part the projection period, we think that getting into the [INAUDIBLE], you'll see a supply response from producers in the major exporting regions. And this increased production will see downwards pressure put on world dairy prices in the latter part of the outlook period.
One other thing about this series tonight is that the series for skim milk powder, which is one of our major dairy exports-- its price fall was bigger than any other of the major product groups, and its recovery we expect to be a bit softer. And the main reason for that is over recent times, there's been a sharp buildup of stocks of skim milk powder in the European Union.
I now just want to move on to discuss some of the demand-side factors at play here. As we all know, China import demand fell dramatically in 2015. This was after a buildup of stocks of dairy products in that country in the few years before that.
There was a sharp drop in those stocks in 2016, and import demand started to recover. As well as the sharp fall in these stocks, there's also been a recovery in import demand and consumer demand in China for dairy products after it got a little bit soft in the lead-up to 2015.
In China as well, we believe that the domestic industry will be constrained in its ability to respond to the growing demand there. The industry there has been going through a period of restructure and its dairy herds is now smaller than it was.
Over the medium-term, we expect the Chinese dairy market to get bigger. With rising incomes and a higher proportion of dairy foods in their diets, we expect this to drive growing Chinese demand for dairy products going forward. As well, Chinese consumers are quite concerned about food safety in relation to dairy products, and in this regard, they have a very regard for imported products.
Another big driver of world dairy prices over recent years has been the Russian import demand in the Russian Federation. Import demand there fell sharply in 2015, partly because the economies slide considerably, but also because the Russian government imposed a ban on the importation of dairy products from some of the major production regions in the world.
We've seen a very modest recovery in that demand in 2016. And at the end of this year, when the ban is scheduled to be lifted, we would expect that recovery to keep going, but still only be modest, and that's mainly because the economy there is still not travelling as well as it might, and therefore, we wouldn't expect to see a really significant increase in the growth and import demand there.
In Australia, the farm-gate price for milk we are forecasting to rise this year, but it's just going to be a modest price rise in the first year. That's probably because, as I've said before, the skim milk powder, which is a large exporter of ours-- the price rise for that is a little bit softer than some of the other dairy products.
But as we get further into the outlook period and the skim milk powder and also the cheese price starts to rise a little bit, we'll see the export returns for Australian products start to improve, and we should see a more significant farm-gate milk price next year. In line with world prices, we would expect to see the Australian farm-gate milk price rise over the remainder of the first part of the outlook period, and then come off a little bit in real terms as we get towards the end of the outlook period.
With production, we're forecasting that milk production in Australia will fall sharply this year. Producers have been adjusting to the falling prices over recent times, and have been culling cows. Not only have dairy producers faced falling milk prices, but the price for beef has been quite strong over recent times, and so dairy producers have had a double incentive to cull cows. And it's not just been old or less productive cows that have been culled, it has been other cows, as well.
This has meant that the opening cow number at the beginning of this year was quite a bit lower than it was at the start of the previous year. As well, in some of our key producing regions in Victoria, there's been some quite cold weather, and this has adversely affected the average milk yield in those regions.
But with the prices forecasted to rise, we would expect that producer would start to increase the size of their dairy herds, and that production will rise over the outlook period, the remainder of the outlook period. As well, there's been an ongoing trend in Australia for the average milk per cow to increase. And we would expect that to continue over the remainder of the outlook period.
You can see here the impact that falling production and falling prices has had on average farm cash incomes of dairy farms in Australia. This year, we're projecting that the average farm cash income on dairy farms is going to fall for the third successive year.
Two years ago, this cash income was at its highest level ever in real terms. So with the recent drops, this year, it is projected to be just a little bit below the long-term trend growth path. Over the last 20 years, that trend growth path has exhibited an average annual rate of growth in real terms of 1.4.%.
The other thing to note about this series is how volatile it's become, and that volatility has made it difficult for producers to manage their cash flows-- much more difficult than in the past. But that said, there are financial instruments available now designed to help producers manage these cash flow variations.
The Australian dairy industry is a very export-orientated industry, and you can see here the influence that world markets have on the Australian dairy export performance. The value of our exports this year is forecasted to rise despite production forecasted to fall. And the main reason for this is that we've seen a sharp increase in some higher-valued dairy exports like milk formula.
As we get a little bit more into the outlook period, we expect to see the volumes of some other dairy exports start to grow, and with the rising world prices, for these factors together to push the value of dairy exports up in the first part of the outlook period. But then as world prices start to fall in real terms, we'd expect to see those values come off at the end of the outlook period.
In conclusion, it has been a challenging period for the Australian dairy industry. We believe that there's brighter prospects ahead. World dairy prices, we think, have turned the corner, and we're forecasting them to rise in real terms over the next couple of years. We think that the Australian farm-gate milk price will also rise over the next couple of years.
Australian milk production is forecasted to fall this year, but for the remainder of the outlook period, it's forecasted to rise. And then over the first part of the outlook period, we think that the value of Australian dairy exports is expected to rise. That concludes my presentation. Thank you very much.