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 a recently-released industry report.
The report, Oceania Dairy – Let’s Debt Serious by agribusiness banking specialist Rabobank says the 2016/17 season will be financially challenging, with milk prices for many export-orientated producers likely to remain below breakeven.
However, much of the industry will be in a position to source working capital and manage the cycle, it says, with Australian farmers having learnt from previous cycles the importance of generating cash buffers and appropriate gearing levels to help manage volatility.
“Over recent years, many dairy producers have taken the opportunity of improved farm profitability to pay down debt rather than expand their business,” says report co-author Rabobank senior dairy analyst Michael Harvey, “and this focus on manageable debt levels has proved paramount to maintaining farm resilience in an ever-increasingly volatile climate.”
With equity likely to be eroded during this downturn as farmers access working capital to manage the challenging conditions, Mr Harvey says, producers will need to use the next upward price cycle to strengthen their business structures.
“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 says.
Mr Harvey says the adoption of a flexible production system is also a good long-term strategy for farm resilience.
“The rules of engagement have changed for Australian dairy and it is no longer enough to be a low-cost, pasture-based milk producer,” he says.
“Instead, there needs to be appropriate flexibility in the production system so costs can be scaled back when times get tough.”
Australia can run, but not hide, from the global commodity market
The Rabobank report says global market dynamics have finally caught up with Australia, despite dairy processors continuing to invest in value-add strategies.
“Value-add may well be the sweet spot for the Australian dairy sector,” Mr Harvey says, “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 says with the 2016/17 season set to remain extremely challenging for dairy, there will be a significant focus on cost control.
“The retrospective timing of the 2015/16 milk price cut –10 months into the season – didn’t give dairy farmers the opportunity to pull any levers to reduce costs,” he says.
“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.”
Mr Harvey says while there is not much upside for prices in the 2016/17 season, Rabobank’s just-released Dairy Quarterly forecasts 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,” he says. “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.”
Australia heads into storm clouds in better shape than in the past
The Rabobank report says while medium-term confidence will be shaken by the late-season price reductions, Australian dairy farmers have headed “into these storm clouds in better shape” than in past downturns.
“While it hasn’t been all smooth sailing, over recent years southern region farmers in Australia have enjoyed periods of improved farm profitability with relatively good seasonal conditions, affordable feed and water and favourable farmgate milk pricing,” Mr Harvey says.
He says this period has seen many farmers reduce debt levels and invest in productivity initiatives, also aided by historically low interest rates.
“Our analysis shows that average Victorian farm debt levels (in terms of debt per kilogram of milk solids) are now 20 per cent below the historic highs of 2008/09,” he says.
Most major farm working expenses are at historically low levels, Mr Harvey says, with grain and global fertiliser prices around decade-lows. Though while lower currencies are also helping to ease pricing pressure on imported inputs, the cost of production will rise again in the long term.
“Producers must prepare for continued price volatility of both inputs and outputs,” he says, “and businesses that have the structures in place to scale back costs when times get tough will be best placed.
“But perhaps even more important than that will be a prudent focus on debt levels – and repaying debt when times are good – as this will help generate cash buffers and appropriate gearing levels to draw on during downturns.”