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DecisionNext Blog

The Dairy Drought ‘Down-Under’

Published by decisionnext September 26, 2019

Australia is in the midst of one of the most severe droughts on record. While droughts tend to occur every few years in Australia, the Bureau of Meteorology reports that the record high temperatures and rainfall deficiencies across the country have led to an almost unprecedented depletion of water.

This drought has been especially hard on New South Wales, Queensland, parts of the Murray-Darling Basin, Victoria, and other areas in south-eastern Australia. As a result of the lack of rainfall, these areas have had to raise prices on a host of goods and have started to see the decline of affected industries.

One of the many industries that are hit the hardest by this drought is dairy.

The dairy industry is a major player in the Australian economy. The Australian Department of Agriculture estimates that this industry accounts for over 7% of both the gross value of agricultural production and agricultural export income. However, unlike in previous years, this number is projected to significantly decrease due to the ongoing drought.

How this drought impacts dairy

Farmers and businesses within the dairy industry rely on water in order to care for their livestock and produce finished goods. In southeastern Australia and other areas with limited rainfall, the lack of water is detrimental to dairy farmers, who need roughly 1,000 litres of water to make one litre of milk. This severely limits the amount of milk and other dairy products that farmers are able to produce.

Growing demands for limited quantities of water boost the price to levels that can put a strain on dairy producers. As the price of feed and water increases, so does the cost of producing dairy products, leading the Department of Agriculture to lower forecasted milk production.

According to the Australian Bureau of Agricultural and Research Economics and Science (ABARES), this drought has already taken a major toll on dairy farmers. Roughly 75% of dairy farmers are expected to receive a lower income this year in comparison to last year due to the high cost of production with an average drop of $67,000. Similar drops have been seen with businesses and other dairy producers.

ABARES also notes that the volume of livestock products dropped by 2% in 2019, leading to decreases in milk and wool production. In order to make up for the loss of income related to this decrease in production, some Australian farmers have even had to sell off their livestock, influencing the availability of products like red meat.

To combat the rising costs of production that face dairy and livestock farmers, many supermarkets have had to raise the price of milk, meat, and soy-based products. This has impacted people who work in industries that rely on these products as well.

The inability to produce goods at an affordable rate and the loss of income has caused many dairy farmers to close up shop, and it has many businesses that produce dairy products worried about the future of this industry.

According to Fonterra Co-operative Group, a New Zealand based dairy giant that is responsible for over 30% of the world’s dairy exports, these farmers and businesses are right to worry.

Fonterra reportedly forecast a loss of more than a half-billion dollars for 2019, thanks largely in part to the drought in Australia and other areas. In order to prevent future losses, Fonterra is adjusting to what they consider the “new normal” for the Australian dairy industry: reduced milk production and an increase in competition.

Learning to navigate market conditions

Clearly, even "black swan" events like a once-in-a-century drought can have a significant impact on businesses across a variety of industries. From businesses that rely on irrigation to dairy farmers to supermarket chains, countless people are impacted by this drought.

Businesses that are affected by this drought, even those that are not directly within the dairy industry, need to follow Fonterra’s lead and learn to adapt when faced with unfavorable circumstances and navigate forecasted market conditions to remain profitable.

Here are a few ways through which dairy farmers can accomplish this:

Consider projected global commodities prices

Businesses that produce dairy products, or other relevant products like red meat and certain crops, need to understand that this drought is not going away anytime soon. This means that it is essential to stay abreast of changes within markets in order to find the expected global commodities prices on these products.

Due to increased competition, market simulation predicts Australian milk prices will fall each year at least until 2023. Businesses that do not factor in these falling prices will have trouble staying profitable and competitive in the coming years.

Businesses need to develop their pricing and marketing strategies around these prices to make sure that their business will be sustainable, and that they will remain profitable during this period of rainfall deficiency.

Use weather data and patterns

Another way for dairy farmers and dairy producers to stay in business during this drought is to keep track of weather data and patterns. Analyzing this information can help them stay ahead of production issues and know how to adjust their production techniques and strategies.

The Climate Council, which communicates climate change information to those living in Australia, is a resource that dairy enterprises can use to inform their business decisions. The Climate Council estimates that rainfall in Australia will decrease by an additional 15% by the year 2030, and that there is the potential for rainfall to decrease by 50% at the end of the century.

A report on Australian climate variability and change from the Bureau of Meteorology and The Commonwealth Scientific and Industrial Research Organisation also promotes the likelihood throughout this century for increased temperatures in Australia and a decrease in rainfall, two of the major contributors of this drought.

Rather than clinging to the hope that the drought will end soon and making choices to try to make ends meet for the moment, dairy producers can make more informed decisions that will help them remain sustainable over time.

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Businesses take risks everyday. What separates successful, well-run companies from the rest of their competitors is their ability to make accurate risk calculations - especially in tough market conditions related to external events, like the Australian drought.

 

Weather and trade are just two of the many variables included in market simulation to help dairy companies survive and navigate markets with agility for the long-term.