All eyes on 1 June contracts
There is constant discussion in the dairy industry about the upcoming yearly frenzy for milk which officially starts on 1 June. Some contracts have already been presented including 3-year contracts in Victoria at around 90c/L.
It is unclear what will happen to prices from 1 July 2023. On the one hand, retailers are trying to contain price increases given the 30-year high inflation rates. In addition, world dairy prices are not as favourable as they were last year.
On the other hand, milk production in Australia fell by 300ML in 2021/22. Production has already fallen by around 300ML at the halfway point of 2022/23 so is on track to fall by 600ML for the year. Australian production will likely fall to under 8BL which is a far cry from the almost 12BL peak. The days of Australia being a large dairy exporter are well and truly behind us and we are now a net importer of dairy products.
So, what does all this mean for prices in July 2023? There are 2 options. The first is that prices only increase marginally from the 2022/23 prices. If this occurs, production throughout Australia will plummet and most likely a further 1BL of milk will disappear. Dairy farmers throughout Australia will not continue to produce milk for love and need reasonable profits to justify continuing. Can you blame them when there are many other options for their land that require much less work, risk, inputs and labour? No, you can’t.
The other option is we see substantial increases in prices to justify farmers continuing and for some expanding. Given a 15c/L price increase across Australia last year has still led to a 600ML loss, it is clear that a further increase in line with last year is required to stem the tide of milk loss.
But is plummeting milk production really a bad thing for the industry? Can’t processors remove their low valued lines and make the same money as they did previously? Well, that’s all great, but what happens if they weren’t making much money last year? And how do processors fulfill contracts where these low valued products are required if they don’t make them anymore? And if these low valued lines are removed, how many factories across Australia are shut down, how much do processors write down the value of their business and how many people are unemployed?
June will be a fork in the road time for the Australian dairy industry.
Eric Danzi, Co-CEO eastAUSmilk