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• 1999 June

1999 June

Australia's Dairy Industry - The Big Picture

It is surprising for many of us when we discover the relative size of Australia's Dairy Industry compared to the rest of the world.
The Australian Dairy Corporation produces an annual compendium, which has some interesting reading.

World Dairy Cow Numbers (1997)

 India - 		34,000,000
 Brazil - 		23,600,000
 European Union - 	21,700,000
 Russia - 		14,600,000
 USA - 			9,300,000
 New Zealand - 		3,200,000
 Australia - 		2,000,000


World Milk Production

 European Union - 	24%
 USA - 			15%
 Russia - 		7%
 India - 		7%
 South America - 	5%
 New Zealand - 		2%
 Australia - 		2%

These figures suggest we are an insignificant part of the world dairy Industry. However, if we consider our contribution to the world dairy export trade, the picture is very different. World trade represents 8% of the total world production.

Exporters Share of Market Trade

 European Community -	38%
 New Zealand - 		31%
 Australia - 		12%
 USA - 			5%

Although Australia and New Zealand produce only 4% of the world's milk, we are predominantly exporters of our products which combined represents 43% of the world trade in dairy commodities. Our exposure to this market has major repercussions on our farm gate price.
A few examples of the farm gate price of milk are as follows:

 Country - 	cents per litre
 Australia - 		28
 Canada - 		55
 European Union - 	44
 Japan - 		96
 New Zealand -		26
 Poland - 		24
 Switzerland -		75
 USA -			40

This picture shows that we are currently near the lowest farm gate price in the world. It could be argued that to survive at this level we have adopted some very efficient and effective farm management practices. Our cows feed on a predominantly pasture diet in a relatively extensive system with no shedding.
This is certainly the case in Victoria where farm gate price is well below 28 cents per litre and closer to 24 cents per litre.

Victoria has 8,000 of the 13,000 dairy farms in Australia. There are 1.2 million dairy cows producing 62% of Australia's milk, Western Victoria produces 30% of Victoria's milk. Half of Australia's milk production is exported in manufactured form, most of this coming from Victoria and Tasmania.

These exports are purchased as follows: 

Asia			52%

Japan			17% 		

Middle East		7% 

Given that the increase in milk production in Australia is far outweighing any increase in domestic consumption, our farm gate price in Victoria will be increasingly exposed to the value of the World Export Market Price of Milk Powders, Cheese and Butter and the value of the Australian Dollar.

The world price is determined by supply and demand. Recent downturns in Asia have reduced demand from that region which is one of our major importers. Probably the most significant impact however, on the world price is the supply from the European Union and the USA. Both these giants in world production are capable of dropping the price through the sale of subsidised product in the world market. These effects may be farmore reaching than any impact that deregulation of the Australian Dairy Industry will have on farm gate prices in Victoria.

 

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The Financial Implications of the Downturn

The below average seasonal conditions of the last three years and the drop in farm gate prices have reduced the profitability of dairy farming.  This impact has lead to depressed cow prices and an absence of property buyers for dairy farms.  This lack of demand will in time have a downward influence on land values.

These price falls will reduce the capital value of farms and so return on revalued capital will increase.  This will only apply to farmers who purchased land or cows at these prices or who entered farming many years ago at lower prices.  For farms with significant debt, this is not the case.  They will need to utilise much of this profit to meet loan and lease commitments.

In the past two years, few farms in the district have shown a return better than 10% on capital especially once depreciation and operator allowance have been considered.  Although some farmers may have produced surplus cash especially where they have high equity, many will find it difficult to put aside funds for further development and upgrading of facilities.

The farms that survive in the future will have maintained their farm development and will be very efficiently managed.  They will be the farms with modern dairies, upgraded pastures and good soil fertility.  Their herds will be young with reasonable calving patterns and low cell counts.  These farms will already be well on the way to this position.  Farms that have not had capital upgrade and are operating on a minimal input system may well be providing an adequate income for the owners at present.

Given the likely outlook for milk prices, these farms will be less likely to remain viable in the long term, especially if there is any debt associated with them.  This type of farm has been a significant part of the Australian Dairy Industry for decades.  Many will survive, however, downturns such as this one will see more of these farms disappear.

Is there room for trimming areas of expenditure without affecting production?


Capital Expenditure:
    Farmers with a serious cash flow crisis will need to review their capital expenditure
    budgets for this year.  There are very few capital items which have an immediate  
    impact on the amount of milk in the vat.  It is amazing how well dairy farmers can
    improvise when times are tough.<BR>

Labour:
    On large farms, labour input can be reduced by endeavouring to maintain a simple
    farming system.  Every farm has inefficiencies in their work practice, some being
    extreme whilst others have little fat to trim.  In the next ten years these farms will
    become even more efficient.  Today's benchmark figure of one person per 200 cows
    will most likely be surpassed.

The Herd:
    Cow losses can be a major area of wastage on some farms.  Enough well grown
    heifers entering the herd each year, a substantial milk quality program and excellent
    feed management will reduce animal health losses and improve efficiency of feed
    conversion to milk.

Pastures:
    Although the cost of keeping pastures growing is a significant part of a dairy farm
    budget, it is important not to ignore the importance of this area in tough times.  The
    ability to produce pastures and convert them to milk is the key generator of profit on
    Victorian dairy farms.  Pasture renovation, maintenance fertiliser applications, efficient
    use of nitrogen, summer and winter crops as well as efficient grazing management are
    the keys to profits.  Most purchased feeds cost over $150 per tonne on a dry matter
    basis.  Pastures and crops can be grown on the farm for well below this figure.  The
    variable cost of pastures which includes fertiliser, renovation costs, weed and pest
    controls and upkeep of water, tracks and fencing is between $30 and $100 per tonne. 
    The ability to grow and utilise this feed source depends on stocking rate, seasonal
    conditions and pasture management skills.  To calculate the overhead cost of pastures,
    the value of land itself could be assessed at the current interest rate of 7.5%.  At
    $2,000 per acre of unimproved grazing land this equates to an overhead cost of $400
    per hectare.  Contrasting pasture utilisation rates of 4 tonnes versus 8 tonnes per
    hectare gives an overhead cost of pastures varying between $100 and $50 per
    tonne.

The more profitable farms will keep pasture utilisation high so that cost of feed per tonne of pasture grown will be low.

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Teat Disinfection and Water Quality

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