Page 23 - Food&Drink Business magazine October 2022

extreme heat in the US threatens crops, and EU spring crops also suffer from unfavourable weather. More disruption to Black Sea trade is still possible in the months ahead.
Downstream dairy companies are paying record levels for the key Cost of Goods Sold (COGS) raw milk. And cost headwinds are visible across many other aspects of the business.
Labour availability, high packaging costs, rising energy costs and distribution costs are crimping processing margins. Some relief has come from Covid-related costs which have begun to recede.
In response, dairy companies are pulling many levers across their businesses to protect margins, and pricing action is a key one.
FALLING LOCAL SUPPLY
For Australia, a real challenge is that local milk supply is still falling, which is generating supply chain issues. Despite
“ The shrinking milk pool has been dialling up the competition for milk supply amongst dairy companies while also ensuring the companies are focused on the right products and markets to maximise the value of milk solids.”
the cost headwinds, Australian dairy farmer margins remain healthy.
Record high milk pricing locked in for the 2022/23 season has been warmly received, but labour availability issues, competition for resources and unfavourable weather continue to crimp milk supply, with falls in production evident across the country.
Australian milk production fell 3.9 per cent in 2021/22 and has started the new season with a fall of more than eight per cent.
The footings are in place for a milk supply recovery in 2022/23. However, the recovery will be modest, with a slow herd rebuild being the major handbrake. There is good availability of irrigation
water, healthy soil moisture profiles and ample home- grown and supplementary feed. But Rabobank expects a modest recovery in the new season at best.
The shrinking milk pool has been dialling up the competition for milk supply amongst dairy companies while also ensuring the companies are focused on the right products and markets to maximise the value of milk solids.
Meanwhile, a weaker tone has set into the global market in Q3 2022, reflected in the broad- based softening across the Oceania dairy commodity complex. Spot Oceania prices have fallen by more than 20 per cent since the Q2 FY22 peak.
Rabobank is not ruling out
further downside in global dairy markets in the months ahead, especially those more dependent on Chinese demand.
When looking at the global market fundamentals, a potential collision is approaching, with Q4 year-on-year milk supply growth, softening Chinese import demand and broader demand rationing in developing countries weighing on price forecasts.
The Australian dairy sector continues to navigate these major global events. While it has not come without its challenges with pressure on the profit pool, the industry will be looking for some normalisation in the operating environment in themonthsahead. ✷
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