Agribusiness banking specialist Rabobank has predicted the storm clouds hanging over the global dairy market were expected to clear, later this year.
Rabobank’s senior dairy analyst Michael Harvey said the battle between the two global dairy giants, Canada’s Saputo and New Zealand’s Fonterra, loomed large on the horizon.
“At the frontline of this battle are the two large international companies butting heads, as Saputo looks to win back milk supply and Fonterra maps out capacity expansions,” Mr Harvey said.
In a report, ‘Australian Dairy – Let the big milk battle begin’, Mr Harvey said Saputo’s purchase of MG, pending approval by the Foreign Investment Review Board (FIRB), was set to fundamentally transform the ownership of the milk supply chain.
MG told shareholders at its recent extraordinary general meeting, it estimated it had lost more than 1.6 billion litres of milk, or 45 per cent of its milk intake, since April 2016.
“And then you have a number of dairy companies that have already taken up the lost milk from Murray Goulburn (MG) and they will be determined to retain their recently-acquired milk suppliers,” Mr Harvey said.
At the EGM, MG announced a step-up of 40 cents per kilogram milk solids (kg/MS) and additional retention payment, bringing its weighted average price to $6 kg/MS.
Fonterra has announced a forecast closing range for 2017-18 of $5.62 to $5.70 kg/MS.
Mr Harvey said smaller, and newer dairy players, were set to continue actively recruiting milk to secure their share of the pool, meaning competitive pressures for milk supply were likely to intensify.
The prospects for a gradual tightening in global dairy markets were also bright.
Greater competition for milk was likely to bring higher value-add payments.
Rabobank was forecasting an annual average farm gate range across southern Australia of $5.40 kg/MS to $5.90 kg/MS.
It also forecast domestic milk production would increase by 2.7pc in 2018/19 to deliver an additional 170 million litres of milk.
Mr Harvey said, over the next two years, Australia’s dairy processing capacity was likely to increase further, with an estimated 900 million litres of capacity to be built.
In light of increased processing capacity, Australia’s dairy sector needed to ensure sustained milk supply growth continued.