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Australian dairy can ‘ride out storm’

Despite global prices of milk tumbling, Australian dairy producers can work it, says recent industry report.

Australiai is “well prepared” with sufficient equity levels, putting dairy producers in good stead to weather the current storm, according to agribusiness banking specialist Rabobank.

For the 2016/2017 season, the industry is forecast to face financial challenges, with milk prices for many export-orientated producers likely to remain below breakeven. However, much of the industry will be in a position to source working capital and manage the cycle, says Rabobank.

Australian farmers, the report says, have learnt from previous cycles the importance of generating cash buffers and appropriate gearing levels to help manage volatility.

“Over recent years, many dairy producers have taken the opportunity of improved farm profitability to pay down debt rather than expand their business and this focus on manageable debt levels has proved paramount to maintaining farm resilience in an ever-increasingly volatile climate,” says report co-author and senior dairy analyst Michael Harvey.

With equity likely to be eroded during this downturn as farmers access working capital to manage the challenging conditions, Harvey says, producers will need to use the next upward price cycle to strengthen their business structures.

“This may see farmers adopt a business strategy focused around reducing debt and rebuilding equity, rather than chasing the profit margin in the upswing,” he says.

Harvey says the adoption of a flexible production system is also a good long-term strategy for farm resilience.

“The rules of engagement have changed for Australian dairy and it is no longer enough to be a low-cost, pasture-based milk producer,” he says.

“Instead, there needs to be appropriate flexibility in the production system so costs can be scaled back when times get tough.”

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