Despite a milk glut, dairy farmers are not leaving the industry as expected

Dairy Farmer Ben Govett at Melbourne rally for fairer milk prices. Darrian Traynor/Getty Images

Australia’s dairy farmers are holding on despite a global milk glut cutting prices.

Analysis by Rural Bank, owned by Bendigo and Adelaide Bank, shows fewer dairy farmers, facing a sharp fall in income, are getting out of the industry than expected.

The big milk processors, such as Fonterra, the world’s biggest dairy exporter, and Murray Goulburn, the largest processor of milk in Australia, have been cutting farm gate prices for milk.

The industry is suffering from a global glut of dairy products caused by weaker demand and overproduction. Slower economic growth in China, a major export market for milk producers, has slowed demand.

The ratings agency Moody’s has warned that the decline is credit negative to banks because a lower payout reduces the income of farmers and threatens the asset quality of banks exposed to the dairy sector, especially in New Zealand.

However, the Rural Bank’s latest dairy industry update report says prices are crawling higher.

And Australia is producing less milk because of a cut to the dairy herd size which started the 2017 financial year 10.3% lower than the previous 12 months.

“Our regular contact with customers confirms that, in the main, they are taking a long term view and adopting prudent practices,” says Andrew Smith, general manager agribusiness for Rural Bank and Rural Finance.

“While some are making changes to their operations or downsizing, the small number of producers planning to exit the industry appears to be in line with the long term trend.

“When you factor in the historical resilience of dairy farmers to manage volatility in commodity prices, this supports an encouraging outlook for the sector.”

Skim milk powder prices have increased 14.1% since June and exports to key Asian markets are showing gradual signs of recovery.

The value of dairy exports to China has grown 53% for the June quarter compared to the same three months in 2015.

In May this year, 4.5% of Rural Bank dairy farmers were planning to get out. Now the rate is back to the average 2% turnover.

Rural Bank CEO Alexandra Gartmann says the perception of the downturn was worse than the reality.

“I do think with the fiction and the rumour, the more people talk about the potential negative impacts on the industry, the more it snowballs,” she told ABC radio.

“We get this group think effect and so we starting to think we will lose more farmers, the younger farmers, the more innovative farmers because we start to think they can do something else.”

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