Australian dairying set for dramatic recovery

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Life is looking up for dairy farmers across the Tasman, but Australian exports are not expected to threaten New Zealand's share of world dairy markets for several years.

Industry body Dairy Australia said operating conditions had improved "dramatically" after last year's near-crisis, due to improved milk payouts, lower grain prices, autumn rain and increased water allocation in northern Victoria.

But national milk production was expected to fall again this year because of reduced herd sizes and farmer debt.

General manager of trade and strategy Chris Phillips said national production was expected to grow only 1-2 per cent "for the next few years".

In contrast, New Zealand dairy exports are forecast by the Agriculture Ministry to surge 58 per cent in the next four years to earn NZ$15.6 billion in 2014.

Like New Zealand, Australia accounts for about 2 per cent of world milk production, but ranks fourth in terms of world dairy trade with a 9 per cent share, behind New Zealand which is second with 21 per cent. Australia exports 45 per cent of its milk, New Zealand around 95 per cent.

New Zealand dairy giant Fonterra, Australia's second-biggest milk processor by volume, is offering suppliers a milk price 30 per cent higher than this time last season, at A$4.83 (NZ$6.02) a kilogram of milk solids. Fonterra Australia managing director of ingredients Bruce Donnison said supply to the firm was up 1 per cent on this time last year.

Dairy Australia said milk production had fallen from 11 billion litres at its peak nine years ago, to nine billion litres in the 2009-10 season just ended. The national herd had shrunk from two million cows to 1.6 million in that time.

Despite the 2009-10 end-of-season recovery, national production was expected to fall to 8.95 billion litres this season.

Sustained drought, water shortages in northern Victoria and a slump in world dairy-market prices, which led to a big fall in milk payouts in 2009, had "battered" farmer confidence and increased debt levels in the sector, Mr Phillips said.

"Improved world market conditions will encourage farmers in the southern, export, regions to increase production, but it will come off [the back of] limited herd numbers and higher debt levels.

"Until farmers see the return to better and improved international market prices is sustained, they are not going to rush back into expanding their herds."

A recent survey showed average farm debt had risen 20 per cent compared to two years ago.

The biggest milk processor, with 33 per cent of the country's milk, is Murray Goulburn, with Fonterra and National Foods, following its acquisition of the Dairy Farmers company, processing about 20 per cent and vying for No2 position.

- © Fairfax NZ News