Australia-Dairy farmers crisis gets no signs of improvement.

AUSTRALIA-DAIRY CRISIS FUTURE LOOKS BLEAK.In Australia, the gap between export-exposed southern farmgate milk prices, and those paid in domestic market-focussed northern regions, will expand significantly over the remainder of the 2008-09 season, Dairy Australia says.

In fresh milk regions, contracted prices for 2008-09 are up 10pc as processors seek to shore up regional supplies.

Domestic market exposure and current contract obligations would imply that these prices will hold for the current season, according to Dairy Australia’s latest Situation and Outlook report released this week.

These domestic milk contract prices, however, could come under pressure when these contracts are renewed.

In contrast, the report confirms the extent to which the 60pc of Australian dairy farmers relying on export dairy product prices have been shaken by the global financial downturn - mostly southern dairy farmers, especially those in Victoria.

The rapid downturn in exports to the international dairy market has mirrored falls of those in many commodities, as the global economy slides rapidly into recession, the report says.

The outlook over the next 12 months will continue to remain uncertain. It says conflicting signals are still coming in from overseas markets.

And there’s still a lot of potential volatility in the market outlook, as the global downturn unfolds.

Slowing economic expansion in China, a key market underpinning growing consumer demand for dairy products, has further added to the uncertainty.

But it’s not all bad news for Australian farmers, Dairy Australia’s manager of strategy, Joanne Bills says.

Easing input prices, for instance, should cushion some of the blow.

Lower grain and fuel prices, also the result of the global economic downturn, for instance, should start flowing through to farmers over the coming months.

While these lower input prices will help protect margins, managing cashflows in the face of significant milk price cuts will be a challenge for dairy farmers for most of 2009.

Dairy Australia says the sudden deterioration in the world economy has already prompted almost unprecedented ’step downs’ in Austrlaian farmgate milk prices.

The average 12pc reduction in this year’s opening prices - an estimated 27pc fall from last year’s record full year return - is the first since 1973.

The move, affecting around 60pc of Australian farmers, followed similar announcements in New Zealand.

Struggling global financial markets and restricted access to trade finance have constrained trade, and prompted an increase in supplier inventories as cautious buyers meet only their immediate needs.

At this stage, the impact on final consumer demand in key export markets remains unclear, Dairy Australia says.

Short term delivery prices for WMP sold on the global DairyTrade platform, for instance, increased 1.3pc in January, and Japan SMP import tenders indicate that some buyers are becoming short of product, and that the rate of price decline may be slowing.

The EU’s reinstatement of export subsidies, however, is seen as a major blow to the international price outlook, the report says.

Perhaps more significantly, it marks a deviation on the EU’s path to policy reform.

The EU move could also open the door for similar action from the US, where government stockpiling has already begun as prices fall to support levels.

So the build-up in dairy product inventories and worsening economic conditions are expected to continue to weigh on the market for at least 12 months.

Lower dairy commodity prices then may encourage buyers back into the market, and gradually reduce global inventories.