Dairy industry to ride out storm

Dardanup dairy farmer Philip Depaizzi is thinking laterally to make the most from his herd.

Dairy producers can look to a bright future beyond the global economic gloom, a new study has found. But they will have to brace for more volatile prices and higher input costs.

Rabobank said its study of the global dairy industry showed the "negative forces" of the economic crisis would weigh heavily on world dairy prices into next year.

High retail prices, slow income growth and substitution away from dairy ingredients in manufacturing were reducing demand, the study said. Production wind-downs in the US and the European Union were being offset by southern hemisphere producers.

"As a result, supply growth will struggle to slow quick enough to create any price tension in coming months, given weak demand conditions," Rabobank senior analyst Tim Hunt said.

While global demand was likely to stay weak for the first half of next year, Rabobank expected to see signs of a turnaround later in 2009.

This would come as the world economy and consumer demand recovered and supply weakened in response to lower prices.

Beyond that, Rabobank expected a return to strong global dairy consumption growth.This reflected positive trends in demand for produce caused by income growth and demographic and cultural changes.

With higher fertiliser, feed and fuel costs and constraints on supply from low-cost regions, "the world will need to pay higher milk prices to ensure supply growth is forthcoming," Mr Hunt said.

"That will push global commodity prices back into a higher trading range."

The industry should also expect more price volatility due to climate change, input costs and the rise of "less stable" suppliers such as China and Brazil.

These realities meant dairy farmers, processors and manufacturers must re-think their strategies.

"Those who adjust best will be well-placed to reap the benefits that market change will bring," Mr Hunt said.

Australian Dairy Farmers president, Allan Burgess, agreed with Rabobank and said adapting to volatility was a key challenge for the industry.

"The long-term strength of demand for protein is still there, but things will be far more volatile," he said.

"Traditionally, we've had one system of farming, but we'll have to be more adaptable to cope with climate change and economic volatility."

Dardanup farmer Philip Depaizzi said WA was developing several niche markets, which would provide protection from global commodity price fluctuations.

"I'm utilising the most out of my pasture, monitoring the soil to determine the correct fertilisers and then making sure the cows are managed well to consume appropriately, which will reduce my cost of production per unit of input," he said.

"Supply in WA remains tight as the dairy industry here was squeezed too hard for too long.

"With the recent increase in contract prices, the name of the game for dairy farmers seems to be to invest in new technology to drive productivity."

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