Volume Four 2009 Regional Economic Report
Dairy and beef
Dairy: prices rebound Dairy prices rebound What a difference three months can make! International dairy prices have surged higher on an strongly ... improving outlook for world economic growth, a winding back of intervention and an outlook of tightening supply. Our sub-Index of global dairy prices is up 16% in the three months to October (or up 31% in US dollar terms).
As noted by Fonterra, restocking of supply chains on positive signals and expectations of demand recovery, together with further contraction in main supply regions of the world is creating a situation where availability of fresh production seems insufficient for current demand levels. At the Fonterra auction in early November the average milk powder price was US$3,437/t. Average prices have surged 88% in four months and the longer dated contract is 10% higher than the near spot contract, indicating an expected further tightening of supply.
Whereas earlier in the year there was a build-up of intervention stocks in the EU and the US, releases of government stocks have begun and to date have not been disruptive to the market. Moreover, the EU announced reductions of export refund levels.
... as demand firms and Tightening milk supply has contributed to the sharp improvement in prices. US milk supply tightens. production in the September quarter dropped below year ago levels and the USDA forecast a 0.9% fall in US milk supply in 2010 aided by the herd retirement program, following an anticipated 0.6% contraction in 2009. In New Zealand, the predicted upcoming El Niño points to downside risk from potential drought conditions in the eastern areas.
Australian producers will be squeezed this year, but prospects are far better for the 2010/11 Australian production year. The farm gate milk price for 2009/10 is forecast to be 33¢/l, down 22% on last year declines as farm gate price and a third lower than two years ago. The start of the new season has not been good, with drops. milk production for the three months to August down 2% on a year. Indeed, domestic milk production is forecast to decline by 2% this year, reflecting relatively low prices, limited irrigation allocations in the Murray-Darling Basin area, seasonal conditions and the cost of supplementary feeds. This production environment points to constrained exports.
Beef: higher AUD a headwind Global beef demand International developments present both opportunities and challenges for the beef market. A improves ... plus is the upswing in general global demand. However, the surge in the Australian currency against the US dollar will reinforce competitive pressures for Australian exports to key markets.
Australian beef exports performed well in 2008/09, a time of switching flows and mixed demand – as we emphasised in our last report. Volumes actually increased, rising by 4%, despite the generally weak world economy. The rise in exports was boosted by an 18% jump in sales to the US, as consumers switched away from restaurant meals to groceries and fast food.
... but greater competition Perhaps a little counter intuitively, exports are expected to soften a little in 2009/10. and higher AUD will crimp Increased competition and a sharply higher Aussie dollar are a challenging combination. Australian exports. ABARE’s forecast is for a 3% fall in total volumes. Sales to the US and Japan, which will account for almost 70% of total exports, are expected to be little changed. However, Korean demand for Australian beef is weakening, with a further decline of 7% forecast. That follows a 23% drop in 2008/09, at a time of economic slowdown and increased consumer acceptance of US beef following the relaxation of import restrictions in mid-2008. Korean imports of US boneless beef displaced more than half of Australia’s market share. Increased competition will also be evident in the Japanese market, with Japanese imports of US beef in 2008/09 still less than a quarter of what they were in 2002/03.
Saleyard prices moderate Domestically, an anticipated rise in the slaughter rate will be a key driver of conditions in as slaughter rates rise. 2009/10. With the likelihood of below average rainfall in south eastern Australia, ABARE is forecasting a 2% increase in total cattle slaughter to 8.8 million head. That more than reverses a 1% decline in 2008/09. By implication, saleyard prices are expected to moderate, with ABARE forecasting a fall of 3% in 2009/10 to 285¢/kg (dressed weight). The appreciation of the Australian dollar is also placing downward pressure on prices by crimping export demand for Australian beef. Indeed, a step-down in prices is already evident, with saleyard prices in September down 3% on last financial year.
16 Regional Economic Report Volume Four 2009
Dairy and beef
Chart 1. Chart 2.
Global dairy prices: snap back Global powdered skim milk prices
US$/t US$/t USD/t USD/t 6500 6500 6000 6000 Sources: USDA-FAS, Westpac Economics 5500 5500 skim milk powder butter 5000 5000 Oceania 4500 cheese whole milk powder 4500 4000 4000 Western Europe 3500 3500 3000 3000 2500 2500
1500 1500 2000 2000
Sources: ABARE, USDA, Westpac Economics 500 500 1000 1000 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09
Chart 3. Chart 4.
Dairy prices rebound Beef export prices index *
1997/98 = 100 1997/98 = 100 index 200 index 200 Sources: USDA-FAS, Westpac Economics 250 250 AUD index USD index 160 160 dairy index USD (lhs) 200 200 dairy index AUD (rhs) 120 120
150 150 80 80
100 100 40 40
* average Sources: MLA, Westpac Economics 50 50 0 0 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08
Chart 5. Chart 6.
Beef prices Cattle slaughterings lift
index, AUD AUD¢/kg AUDkg '000 225 4.5 4.5 750 Sources: Bloomberg, MLA, Factset, Westpac Economics number of beef slaughters (rhs) 200 4.0 4.0 eastern young cattle indicator (lhs) 700 175 3.5 3.5
150 3.0 3.0 650
125 2.5 2.5 600 100 Export prices * 2.0 2.0 Eastern Young Cattle Indicator (rhs) 550 75 1.5 1.5 Sources: ABS, Bloomberg, Westpac Economics * average 50 1.0 1.0 500 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts. 17