View archived dairy industry profiles at the Industry Profile Archive

Key points

• The Dairy Industry Profile provides an overview of Victoria’s dairy industry
• The dairy industry is Victoria’s largest rural industry, with a gross value of raw milk production of around $2.52 billion in 2011-12. The industry is mature, well resourced, well organised and internationally competitive.
• In 2011-12, Victorian milk production increased to 6.21 billion litres (66 per cent of Australia’s total milk production) from 5.91 billion litres in 2010-11. This was the second consecutive increase in annual milk production which is currently at its highest level in 5 years.
• Victoria supplies around 86 per cent of Australia’s dairy product exports worth around $1.93 billion in 2011-12. As a result, returns to farmers are strongly connected to world dairy product prices and exchange rates.  Early milk production figures for northern Victoria suggest milk production could increase in 2011-12 for the first time in five years.
• In northern Victoria, favourable seasonal conditions and 100 per cent irrigation allocations saw 2011-12 milk production increase by an unprecedented 15.5 per cent.
• The high Australian dollar and recent decreases in international dairy product prices continue to present challenges to the ongoing stability of farm gate milk prices.
• Conditions for the Victorian dairy industry have been favourable in 2011-12 with good irrigation water allocations, improved on-farm pasture/feed production, relatively low grain and hay prices and a stronger milk price. However, southern milk production regions faced slower starts to the season following heavy rainfall and flooding in early 2011.
• The high Australian dollar and recent decreases in international dairy product prices continue to present challenges to the ongoing stability of farm gate milk prices.

Location of Victoria’s dairy farms

Victoria’s dairy farms are predominantly located in the North, South-West and Gippsland regions (Figure 1). The Northern region is dominated by irrigated farms, while the South-West and Gippsland are mainly dry land farms. The Macalister Irrigation District is the major irrigated dairy region in Gippsland.

Figure 1: Victoria’s raw milk production regions¹

Structure of Victoria’s dairy industry

There are around 4,240 licensed dairy farms in Victoria – spread relatively evenly between the three production regions²In 2010-11 the Victorian dairy herd totalled around 1 million head.

Farm numbers have declined over time as the dairy industry has consolidated and exploited improved economies of scale. Average dairy herd sizes more than doubled between 1980 and 2007, while farm numbers more than halved.

Dairy producers in Victoria can sell to either liquid milk or manufactured dairy product processors. Dairy product manufacturers utilise around 92 per cent of Victorian raw milk production. Manufacturing plants are generally located near or in production regions, while liquid milk processing plants are usually located near major population centres. There are more than 20 major milk processing plants in Victoria. Murray-Goulburn Cooperative, Fonterra and National Foods are the three largest processors.

Victoria's raw milk production

Victoria’s raw milk production peaked in 2001-02 at 7.4 billion litres – more than double the 3 billion litres produced in 1980-81. Yield per cow increased from 3,012 litres in 1979-1980 to 5,824 litres in 2010-11²

Between 2001-02 and 2009-10, drought conditions and shortages in water allocations were the primary drivers of a 1.6 billion litre fall in raw milk production (Figure 2).

Due to its reliance on irrigation water, the North experienced a decline of 1.3 billion litres, while the dairy industries in Gippsland and the South-West regions experienced less severe production declines because of lower reliance on irrigation and less exposure to drought conditions.

In 2011-12, Victorian milk production increased to 6.21 billion litres (66 per cent of Australia’s total milk production) from 5.91 billion litres in 2010-11. This is the second consecutive increase in annual milk production which is now at its highest level in 5 years³.

Figure 2: Victorian Raw Milk Production

Domestic and export demand for Victorian dairy products

In the last two years, around 45 per cent of Australia’s total milk production has been used to manufacture dairy products for export. Australian dairy exports account for 8 per cent of world dairy trade and are worth around $2.24 billion. The other large suppliers to the world market are New Zealand (35 per cent), the European Union (34 per cent) and the United States of America (11 per cent)².

Victoria’s dairy product exports in 2011-12 were worth $1.93 billion. Victoria supplies around 86 per cent of national dairy exports.

In 2011-12, the main markets for Victorian dairy products, by value, were Japan (22 per cent), Singapore (10 per cent), Indonesia (7 per cent), and China (7 per cent). Greater China (which includes mainland China, Hong Kong and Macau) is the fastest growing export market for Australian dairy products⁴.

Table 2: Victorian exports of dairy products 2011-12⁴

	Value ($AU million)
Butters, fats and oils	180
Cheese and whey products	699
Milk and cream	940
Milk extracts	48
Yoghurt and Fermented drinks	0.8

Prices

Farm gate milk prices for liquid milk are usually higher than manufacturing prices, as farmers are required, under contract, to supply on a continuous basis across the year.³

However, the liquid milk market consumes only 8 per cent of Victorian production, so the majority of farmers supply to the export reliant manufacturing sector. As such, farm gate prices in Victoria are strongly influenced by world dairy product prices and exchange rates. Historically, farm gate prices have followed world prices with only a small lag.

Farm gate milk prices have remained fairly strong since 2010-11 on the back of growing international demand for dairy products. Following on from 2010-11, a year that saw the second highest milk price on record, the milk price opened strongly in 2011/12, with price setter Murray Goulburn offering $4.90 per kilogram of milk solids and other companies quickly following suit. Despite the strong Australian dollar, milk price step-ups, including several late in the season helped push the average closing milk price to $5.52 per kilogram of milk solids.

International dairy product prices have remained relatively strong over 2010-11 and 2011-12 with the Oceania skim milk powder price averaging over $US3000 a tonne since September 2010 (Figure 4). Although the average Oceania skim milk powder price declined around mid-year, the price had recovered to US$3,325 per tonne in September 2012. The strength of the Australian dollar continues to be a challenge for Victorian dairy producers and processors.

Australia’s southern export region farmers are facing a 8-10 per cent price drop. As at February 2013, Dairy Australia forecasts suggest that the southern farm gate prices are expected to range around $4.90 - $5.10 per kgMS or 36-38c/L.

Figure 3: Victorian farm gate milk prices

Figure 4: Skim Milk Powder Oceania Indicative Export Price⁵

Employment in Victoria’s dairy farms

In 2011, around 10,629 people were employed in dairy production and around 9,297 were employed in the dairy processing sector⁶.

Fam financial performance

As reported in the DPI’s 2011-12 Dairy Farm Monitor⁷, profitability across all three regions were varied as a result of the diverse seasonal conditions.

In the North, above average rainfall (approximately 128 per cent of the long term average) and 100 per cent high reliability water allocations saw what can best be described as a traditional season for the first time in a decade. This helped farmers reduce their costs of production by 10 per cent, more than enough to offset the 1 per cent drop in milk price. This result saw farms in the North improve their average whole farm earnings before interest and tax from $202,806 in 2010/11 to $232,119 in 2011/12. Subsequently, return on assets rose from 7 per cent in 2010/11 to 7.6 per cent in 2011/12 and all farms in the sample reporting a positive EBIT for the second consecutive year.

In the South West, milk prices fell by 1 per cent (closing at 5.56/kg MS). The dry spell caused costs to rise by 12 per cent as farmers spent more on purchased feed and labour. Fodder reserves were depleted by almost $52,000 leaving many farms with very little or no hay or silage by the end of the financial year. These conditions saw return on assets for farms in the South West fall from 5.5 per cent in 2010/11 to 3.3 per cent in 2011/12.

Gippsland farmers experienced the largest drop in milk price, falling from $5.59/kg MS in 2010/11 to $5.37/kg MS in 2011/12; a 4 per cent drop. Variable costs were largely unchanged from last year while overhead costs rose by almost 9 per cent mainly due to increased imputed labour costs. This caused the average return on assets for Gippsland farms to fall from 6.1 per cent in 2010/11 to 4.4 per cent in 2011/12.

Further detail is provided at Table 3: Farm performance – 2011-12 & Table 4: Purchased feed costs.

Table 3: Farm performance

	Victoria			Northern			South-West			Gippsland
	09-10	10-11	11-12	09-10	10-11	11-12	09-10	10-11	11-12	09-10	10-11	11-12
Average milk sold (kg/ms/cow)	496	493	508	515	495	516	503	491	507	472	494	501
Average herd size	307	305	328	282	261	304	366	369	387	268	285	291
Gross farm income ($/kg ms)	5.17	6.5	5.97	5.19	6.7	6.06	5.23	6.3	5.97	5.1	6.34	5.89
Variable costs ($/kg ms)	2.58	2.7	2.78	3.09	3.2	2.95	2.37	2.5	2.79	2.3	2.52	2.59
Overhead Costs ($/kg ms)	1.89	2	2.06	1.83	2.1	1.75	1.92	2.1	2.4	1.9	1.86	2.01
Return on assests % (exc.cap app.)	2.2	6.2	5	0.8	7	7.6	3	5.5	3.3	2.6	6.1	4.4
Return of equity % (inc. cap app.)	1.1	9.3	3.1	-3.9	12	6.9	4.2	5.7	-1	2.4	10	3.5
Average equity	64	68	65	58	66	62	66	65	61	68	74	72

Table 4: Purchased feed costs

	Victoria			Northern			South-West			Gippsland
	09-10	10-11	11-12	09-10	10-11	11-12	09-10	10-11	11-12	09-10	10-11	11-12
% of feed consumed purchased	34	35	43	49	42	47	29	33	45	27	31	38
Average price ($/tonne)	245	264	275	214	237	234	262	268	293	256	286	297
Average % of costs	28.5	48	48.5	34.6	51	53.2	26.7	46	46	25	47.2	46.4

Variable costs

Feed costs accounted for around 84 per cent of all the costs directly associated with production (e.g. animal health, agistment and pasture costs), although slightly lower in Gippsland.

In the North, good seasonal conditions and water allocations in 2011/12 meant farmers focused on pasture management and conserving quality fodder rather than producing large quantities. This was reflected in $93/ha increase in irrigation costs and a $65/ha decline in hay and silage making. Bought in feed also increased this year by $147/ha and $131/ha for fodder and grain purchases respectively. See the graph of water allocations in the Goulburn system.

Figure 5: Water allocations – Goulburn system⁸

 

In the South West, the average variable costs increased from $1,482/ha in 2010/11 to $1,694/ha in 2011/12 due to across the board rises in herd, shed and feed costs per hectare. Feed costs were again the major variable cost in the South West with the hot dry summer increasing feed costs 14 per cent on last year and accounting for 46 per cent of total costs of production in 2011/12. This cost also does not include the $109/ha feed inventory loss incurred through the depletion of fodder reserves.

In Gippsland, the average variable costs increased from $1,710/ha in 2010/11 to $1,820/ha in 2011/12. Feed costs were higher this year due to increases in grain and concentrates ($50/ha), fodder purchases ($42/ha) and fertiliser ($23/ha). However hay and silage making decreased by $41/ha.

 

Outlook

Due to increasing difficult seasonal conditions up until February 2013, Dairy Australia has lowered its milk production forecast for the 2012/13 season to 9.5 billion litres, up just 0.2 per cent on last season.

The United States is experiencing its worst drought in half a century which has placed enormous pressure on global grain prices. For Australian farmers, with more feeding options than many US farmers, the short term pain of higher grain prices will ultimately be offset by a recovery in the farm gate price as dairy commodity markets adjust to slowing supply growth. Farmers with a greater ability to utilise pasture, or contracted grain at lower prices will be able to minimise cost increases. Suppliers to export-focused processors are likely to see the earliest income benefits.

Global dairy exports to China are expected to continue growing. Chinese demand for imported dairy ingredients and finished goods will continue due to lack of confidence in the quality of local dairy products.

 

Notes:

¹Australian Bureau of Statistics (ABS). Based on 2006 Mesh Block Boundaries. Number of dairy cattle sourced from the 2006 Agricultural Census. Land use based on actual activity reported in the 2006 Agricultural Census.
² Dairy Australia, Australian Dairy Industry in Focus, 2011.
³ Dairy Australia, Industry Statistics, Victoria Milk Production 2011-12 by Region.
⁴ Department of Primary Industries Victoria, Victorian Food and Fibre Export Performance, 2011-12 Financial Year.
⁵ Australia and New Zealand supply 45 per cent of world dairy exports.
⁶ ABS Census Data, 2006.
⁷The Department of Primary Industries' Dairy Industry Farm Monitor Project. The Project analyses the performance of 71 farms across Victoria's three production regions. Note: ms=milk solids.
⁸ Goulburn - Murray Water.