Situation and Outlook: Key Highlights

John Droppert, Industry Insights and Analysis Manager, Dairy Australia

When speaking about the dairy industry in 2020, two very different stories are likely to be told. One tells the tale of consistently improving conditions at the farmgate in most regions as the season progresses. Favourable weather, easing input costs and competition for milk have further boosted confidence, and generated a positive flow-on impact on milk production. The other speaks about the ongoing pandemic and the market challenges it creates by depressing global economic growth and disrupting dairy demand. 

Beyond the farm gate, most countries are now in a recession. Due to the strategies implemented to stop the spread of COVID-19, consumption (especially through channels such as foodservice), has been significantly affected. Whilst dairy commodity prices have proven resilient so far, global demand has been uneven. In China, demand has remained stronger than many initially predicted, supported by an increased prioritisation of food security. Not all countries have been able to financially support such measures, and weaker demand for dairy has been observed in price-sensitive countries in southeast Asia and other emerging markets. Rising unemployment rates are also likely to subdue demand in some regions where dairy is priced at a premium relative to incomes.

Dairy demand within Australia has also been affected. With more people staying home than ever before, demand for dairy products used in cooking (and baking) has grown. This includes sales of butter, as well as retail sales of everyday style cheese and plain Greek yoghurt. Before the pandemic, premium dairy products like flavoured yoghurt or speciality cheese usually sold in individual pack sizes to be consumed on-the-go and were a major growth driver for the industry. Now, consumers seem to be increasingly focusing on buying dairy products in value packs to be consumed at home.

At the same time as consumer demand is under pressure in some markets, northern hemisphere supply growth has picked up as incentives to curb milk production were phased out over winter. Milk supply in the US has particularly exceeded expectations, and a mild winter in New Zealand has boosted pasture growth early in their season. This global milk production growth is likely to weigh on the market balance unless resurgent demand can soak up the additional milk.

The looming market imbalance remains a risk, particularly in light of the slow economic recovery ahead, even under a favourable COVID-19 scenario. Given already-announced 2019/20 minimum milk prices, the shift in market fundamentals is not expected to undermine farmer returns in the current season. It may, however, cap further upside potential, especially following the recent strength in the Australian dollar. Nonetheless, with better weather and easing input costs, this year still offers the strong chance of a much-needed breather.