Required Report - public distribution

**Date:** 11/17/2006

**GAIN Report Number:** AS6072

AS6072

**Australia**

**Dairy and Products**

**Annual**

**2006**

**Approved by:**

![](media/image1.wmf)Kathleen Wainio, Agricultural Counselor

U.S. Embassy

**Prepared by:**

Mike Darby, Agricultural Specialist

**Report Highlights:**

Despite a positive outlook at the beginning of the 2006/07 forecast year
and a strong increase in first quarter production, the return of harsh
drought conditions has resulted in an across-the-board reduction in
dairy production and export forecasts. Poor pasture conditions combined
with a scarcity of other key inputs such as fodder and irrigation water
has precipitated an expected decline in fluid milk production together
with butter, cheese and milk powders.

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Canberra \[AS1\]

\[AS\]

Table of Contents

[**SECTION ONE: SITUATION AND OUTLOOK
3**](#section-one-situation-and-outlook)

[Summary 3](#summary-1)

[Weather conditions 3](#weather-conditions)

[Grain Production 3](#grain-production)

[Irrigation water outlook 4](#irrigation-water-outlook)

[Trade 4](#trade)

[SECTION TWO: STATISTICAL TABLES 5](#section-two-statistical-tables)

[SECTION THREE: NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING
10](#section-three-narrative-on-supply-and-demand-policy-marketing)

[Fluid Milk 10](#fluid-milk)

[Production 10](#production)

[Exports 10](#exports)

[Consumption 11](#consumption)

[Marketing 11](#marketing)

[Policy 11](#policy)

[Cheese 11](#cheese)

[Production 11](#production-1)

[Export 12](#export)

[Butter 12](#butter)

[Production 12](#production-2)

[Exports 12](#exports-1)

[Whole Milk Powder 13](#whole-milk-powder)

[Production 13](#production-3)

[Exports 13](#exports-2)

[Skim Milk Powder 13](#skim-milk-powder)

[Production 13](#production-4)

[Exports 13](#exports-3)

# SECTION ONE: SITUATION AND OUTLOOK

## Summary {#summary-1}

The outlook period for the Australian dairy industry can be described as
"difficult". Despite a positive outlook at the beginning of the 2006/07
forecast year and a strong increase in first quarter production, the
return of harsh drought conditions has resulted in an across-the-board
reduction in production and export forecasts. Poor pasture conditions
combined with a scarcity of other key inputs such as fodder and
irrigation water has precipitated an expected decline in fluid milk
production together with butter, cheese and milk powders. Furthermore,
other agricultural sectors such as rice and cotton, which produce
by-products for stockfeed, have also had production forecasts slashed
due to drought conditions.

## Weather conditions 

Nearly all agriculturally significant regions in southern Australia are
suffering drought conditions with rainfall deficiencies ranging from
"serious" to "lowest on record". Critical spring rains, which are
required to produce pasture-based fodder, finish winter cereal crops,
and provide soil moisture for planting summer crops, have not
eventuated. Furthermore, various parts of Australia have experienced
above average temperatures, which have dramatically shortened typically
more productive spring conditions.

The month of September, which is a critical month for Australian grain
production, experienced below average rainfall and above average
temperatures for South Australia, Victoria and New South Wales according
to the Australian Bureau of Meteorology. These conditions have followed
historically low rainfall periods beginning with the driest June on
record.

Post has assumed average weather conditions from December onward.
However, even if this occurs (and average rainfall is received), it is
unlikely to provide the relief necessary to achieve a return to normal
production conditions. The moisture deficit created by drought
conditions from June through to October will likely constrain
agricultural production over the next 12 months.

## Grain Production

Australian dairy production essentially remains a pasture-based system
with the overwhelming majority of dairy cattle having daily access to
pasture. However, supplementary feeding of grain is now widespread and
anecdotal evidence suggests that the amount of grain fed to dairy cattle
is increasing. Industry analysts suggest that feedgrain rations across
industry have reached 1.3 MT/cow per year -- notionally placing
consumption of feedgrain by the dairy industry at 2.65 MMT per annum.

Australia essentially has two crop cycles, a winter crop and summer
crop. The 2006/07 winter cereal grains harvest (wheat, barley and oats),
due to be completed by the end of November, has been reduced by more
than half. The 2007/08 summer grain crop harvest (sorghum), not due
until March 2007, has also been trimmed significantly. Conditions for
fodder production and storage (hay and silage) range from difficult to
impossible for much of the industry.

Crops such as cotton and rice, which produce important by-products for
stock feed manufacturing, are also forecast to suffer dramatic
reductions in production.

Over the longer term, the Australian dairy industry sees itself to be
constrained by feed grain availability. Production of feed grain, and
grain more generally, has not kept pace with growing demand from
intensive livestock, domestic human consumption or the newly formed
ethanol industry. Lot fed cattle numbers recently reached record levels
and, together with other demands, have seen domestic demand in the
eastern states increase from 34 to 46 percent of grain production in
just seven years.

## Irrigation water outlook

Wide-ranging drought conditions have affected both coastal and inland
dairy regions. Also, catchment areas adjacent to inland irrigation areas
are equally affected. The Snowy mountains catchment area recently
recorded its lowest water inflow in 115 years of recorded data. This
will have greatest effect on inland irrigation areas that receive
irrigation water supplies from the Snowy Mountain catchment area (i.e.
southern NSW and Northern Victoria) -- where the bulk of the dairy
industry is located. The effects off this may be softened at farm level
through the ownership of high security water licenses and other risk
management tools.

## Trade

Australia looks set to maintain its position as the world's third
largest export of dairy products behind the EU and New Zealand, despite
the onset of drought. According to a recent industry report, Australia
accounts for around 12 percent of the world's dairy exports, largely
unchanged from the decade previous.

# SECTION TWO: STATISTICAL TABLES

<table>
<colgroup>
<col style="width: 20%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 9%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="11"><p><strong>PSD Table</strong></p>
<p><strong>Dairy, Milk, Fluid</strong></p></td>
</tr>
<tr class="even">
<td></td>
<td><strong>2005</strong></td>
<td><strong>Revised</strong></td>
<td></td>
<td><strong>2006</strong></td>
<td><strong>Estimate</strong></td>
<td></td>
<td><strong>2007</strong></td>
<td><strong>Forecast</strong></td>
<td></td>
<td><strong>UOM</strong></td>
</tr>
<tr class="odd">
<td></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td><strong>07/2004</strong></td>
<td><strong>07/2004</strong></td>
<td></td>
<td><strong>07/2005</strong></td>
<td><strong>07/2005</strong></td>
<td></td>
<td><strong>07/2006</strong></td>
<td><strong>07/2006</strong></td>
<td><strong>MM/YYYY</strong></td>
</tr>
<tr class="odd">
<td><strong>Cows In Milk</strong></td>
<td>2041</td>
<td>2041</td>
<td>2041</td>
<td>2045</td>
<td>2045</td>
<td>2045</td>
<td>0</td>
<td>0</td>
<td>2040</td>
<td>(1000 HEAD)</td>
</tr>
<tr class="even">
<td><strong>Cows Milk Production</strong></td>
<td>10429</td>
<td>10429</td>
<td>10429</td>
<td>10250</td>
<td>10250</td>
<td>10395</td>
<td>0</td>
<td>0</td>
<td>10000</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Milk Production</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Production</strong></td>
<td>10429</td>
<td>10429</td>
<td>10429</td>
<td>10250</td>
<td>10250</td>
<td>10395</td>
<td>0</td>
<td>0</td>
<td>10000</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Imports</strong></td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>0</td>
<td>0</td>
<td>3</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Imports</strong></td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>3</td>
<td>0</td>
<td>0</td>
<td>3</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Supply</strong></td>
<td>10432</td>
<td>10432</td>
<td>10432</td>
<td>10253</td>
<td>10253</td>
<td>10398</td>
<td>0</td>
<td>0</td>
<td>10003</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Other Exports</strong></td>
<td>84</td>
<td>84</td>
<td>84</td>
<td>88</td>
<td>88</td>
<td>86</td>
<td>0</td>
<td>0</td>
<td>84</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Exports</strong></td>
<td>84</td>
<td>84</td>
<td>84</td>
<td>88</td>
<td>88</td>
<td>86</td>
<td>0</td>
<td>0</td>
<td>84</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Fluid Use Dom. Consum.</strong></td>
<td>2083</td>
<td>2083</td>
<td>2083</td>
<td>2116</td>
<td>2116</td>
<td>2065</td>
<td>0</td>
<td>0</td>
<td>2000</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Factory Use Consum.</strong></td>
<td>8265</td>
<td>8265</td>
<td>8265</td>
<td>8049</td>
<td>8049</td>
<td>8247</td>
<td>0</td>
<td>0</td>
<td>7919</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Feed Use Dom. Consum.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Dom. Consumption</strong></td>
<td>10348</td>
<td>10348</td>
<td>10348</td>
<td>10165</td>
<td>10165</td>
<td>10312</td>
<td>0</td>
<td>0</td>
<td>9919</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Distribution</strong></td>
<td>10432</td>
<td>10432</td>
<td>10432</td>
<td>10253</td>
<td>10253</td>
<td>10398</td>
<td>0</td>
<td>0</td>
<td>10003</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>CY Imp. from U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>CY. Exp. to U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
</tbody>
</table>

#  

# 

<table style="width:100%;">
<colgroup>
<col style="width: 24%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 6%" />
<col style="width: 7%" />
<col style="width: 7%" />
<col style="width: 8%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="11"><p><strong>PSD Table</strong></p>
<p><strong>Dairy, Cheese</strong></p></td>
</tr>
<tr class="even">
<td></td>
<td><strong>2005</strong></td>
<td><strong>Revised</strong></td>
<td></td>
<td><strong>2006</strong></td>
<td><strong>Estimate</strong></td>
<td></td>
<td><strong>2007</strong></td>
<td><strong>Forecast</strong></td>
<td></td>
<td><strong>UOM</strong></td>
</tr>
<tr class="odd">
<td></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td><strong>07/2004</strong></td>
<td><strong>07/2004</strong></td>
<td></td>
<td><strong>07/2005</strong></td>
<td><strong>07/2005</strong></td>
<td></td>
<td><strong>07/2006</strong></td>
<td><strong>07/2006</strong></td>
<td><strong>MM/YYYY</strong></td>
</tr>
<tr class="odd">
<td><strong>Beginning Stocks</strong></td>
<td>51</td>
<td>51</td>
<td>51</td>
<td>26</td>
<td>26</td>
<td>25</td>
<td>14</td>
<td>14</td>
<td>14</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Production</strong></td>
<td>375</td>
<td>375</td>
<td>375</td>
<td>341</td>
<td>341</td>
<td>341</td>
<td>0</td>
<td>0</td>
<td>328</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Imports</strong></td>
<td>50</td>
<td>50</td>
<td>49</td>
<td>52</td>
<td>52</td>
<td>50</td>
<td>0</td>
<td>0</td>
<td>51</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Imports</strong></td>
<td>50</td>
<td>50</td>
<td>49</td>
<td>52</td>
<td>52</td>
<td>50</td>
<td>0</td>
<td>0</td>
<td>51</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Supply</strong></td>
<td>476</td>
<td>476</td>
<td>475</td>
<td>419</td>
<td>419</td>
<td>416</td>
<td>14</td>
<td>14</td>
<td>393</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Other Exports</strong></td>
<td>227</td>
<td>227</td>
<td>227</td>
<td>195</td>
<td>195</td>
<td>202</td>
<td>0</td>
<td>0</td>
<td>195</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Exports</strong></td>
<td>227</td>
<td>227</td>
<td>227</td>
<td>195</td>
<td>195</td>
<td>202</td>
<td>0</td>
<td>0</td>
<td>195</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Human Dom. Consumption</strong></td>
<td>223</td>
<td>223</td>
<td>223</td>
<td>210</td>
<td>210</td>
<td>200</td>
<td>0</td>
<td>0</td>
<td>185</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Use, Losses</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Dom. Consumption</strong></td>
<td>223</td>
<td>223</td>
<td>223</td>
<td>210</td>
<td>210</td>
<td>200</td>
<td>0</td>
<td>0</td>
<td>185</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Use</strong></td>
<td>450</td>
<td>450</td>
<td>450</td>
<td>405</td>
<td>405</td>
<td>402</td>
<td>0</td>
<td>0</td>
<td>380</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Ending Stocks</strong></td>
<td>26</td>
<td>26</td>
<td>25</td>
<td>14</td>
<td>14</td>
<td>14</td>
<td>0</td>
<td>0</td>
<td>13</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Distribution</strong></td>
<td>476</td>
<td>476</td>
<td>475</td>
<td>419</td>
<td>419</td>
<td>416</td>
<td>0</td>
<td>0</td>
<td>393</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>CY Imp. from U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>CY. Exp. to U.S.</strong></td>
<td>12</td>
<td>12</td>
<td>12</td>
<td>12</td>
<td>12</td>
<td>12</td>
<td>0</td>
<td>0</td>
<td>11</td>
<td>(1000 MT)</td>
</tr>
</tbody>
</table>

#  

# 

<table>
<colgroup>
<col style="width: 21%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 9%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="11"><p><strong>PSD Table</strong></p>
<p><strong>Dairy, Butter</strong></p></td>
</tr>
<tr class="even">
<td></td>
<td><strong>2005</strong></td>
<td><strong>Revised</strong></td>
<td></td>
<td><strong>2006</strong></td>
<td><strong>Estimate</strong></td>
<td></td>
<td><strong>2007</strong></td>
<td><strong>Forecast</strong></td>
<td></td>
<td><strong>UOM</strong></td>
</tr>
<tr class="odd">
<td></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td><strong>07/2004</strong></td>
<td><strong>07/2004</strong></td>
<td></td>
<td><strong>07/2005</strong></td>
<td><strong>07/2005</strong></td>
<td></td>
<td><strong>07/2006</strong></td>
<td><strong>07/2006</strong></td>
<td><strong>MM/YYYY</strong></td>
</tr>
<tr class="odd">
<td><strong>Beginning Stocks</strong></td>
<td>8</td>
<td>8</td>
<td>8</td>
<td>14</td>
<td>14</td>
<td>14</td>
<td>16</td>
<td>16</td>
<td>10</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Production</strong></td>
<td>131</td>
<td>131</td>
<td>131</td>
<td>132</td>
<td>132</td>
<td>129</td>
<td>0</td>
<td>0</td>
<td>124</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Imports</strong></td>
<td>10</td>
<td>10</td>
<td>10</td>
<td>11</td>
<td>11</td>
<td>11</td>
<td>0</td>
<td>0</td>
<td>12</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Imports</strong></td>
<td>10</td>
<td>10</td>
<td>10</td>
<td>11</td>
<td>11</td>
<td>11</td>
<td>0</td>
<td>0</td>
<td>12</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Supply</strong></td>
<td>149</td>
<td>149</td>
<td>149</td>
<td>157</td>
<td>157</td>
<td>154</td>
<td>16</td>
<td>16</td>
<td>146</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Other Exports</strong></td>
<td>70</td>
<td>70</td>
<td>70</td>
<td>75</td>
<td>75</td>
<td>82</td>
<td>0</td>
<td>0</td>
<td>74</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Exports</strong></td>
<td>70</td>
<td>70</td>
<td>70</td>
<td>75</td>
<td>75</td>
<td>82</td>
<td>0</td>
<td>0</td>
<td>74</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Domestic Consumption</strong></td>
<td>65</td>
<td>65</td>
<td>65</td>
<td>66</td>
<td>66</td>
<td>62</td>
<td>0</td>
<td>0</td>
<td>62</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Use</strong></td>
<td>135</td>
<td>135</td>
<td>135</td>
<td>141</td>
<td>141</td>
<td>144</td>
<td>0</td>
<td>0</td>
<td>136</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Ending Stocks</strong></td>
<td>14</td>
<td>14</td>
<td>14</td>
<td>16</td>
<td>16</td>
<td>10</td>
<td>0</td>
<td>0</td>
<td>10</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Distribution</strong></td>
<td>149</td>
<td>149</td>
<td>149</td>
<td>157</td>
<td>157</td>
<td>154</td>
<td>0</td>
<td>0</td>
<td>146</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>CY Imp. from U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>CY. Exp. to U.S.</strong></td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>2</td>
<td>0</td>
<td>0</td>
<td>2</td>
<td>(1000 MT)</td>
</tr>
</tbody>
</table>

#  

# 

<table style="width:100%;">
<colgroup>
<col style="width: 21%" />
<col style="width: 7%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 9%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="11"><p><strong>PSD Table</strong></p>
<p><strong>Dairy, Dry Whole Milk Powder</strong></p></td>
</tr>
<tr class="even">
<td></td>
<td><strong>2005</strong></td>
<td><strong>Revised</strong></td>
<td></td>
<td><strong>2006</strong></td>
<td><strong>Estimate</strong></td>
<td></td>
<td><strong>2007</strong></td>
<td><strong>Forecast</strong></td>
<td></td>
<td><strong>UOM</strong></td>
</tr>
<tr class="odd">
<td></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td><strong>07/2004</strong></td>
<td><strong>07/2004</strong></td>
<td></td>
<td><strong>07/2005</strong></td>
<td><strong>07/2005</strong></td>
<td></td>
<td><strong>07/2006</strong></td>
<td><strong>07/2006</strong></td>
<td><strong>MM/YYYY</strong></td>
</tr>
<tr class="odd">
<td><strong>Beginning Stocks</strong></td>
<td>28</td>
<td>28</td>
<td>28</td>
<td>46</td>
<td>46</td>
<td>46</td>
<td>44</td>
<td>44</td>
<td>44</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Production</strong></td>
<td>189</td>
<td>189</td>
<td>189</td>
<td>180</td>
<td>180</td>
<td>160</td>
<td>0</td>
<td>0</td>
<td>154</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Imports</strong></td>
<td>15</td>
<td>15</td>
<td>12</td>
<td>15</td>
<td>15</td>
<td>15</td>
<td>0</td>
<td>0</td>
<td>16</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Imports</strong></td>
<td>15</td>
<td>15</td>
<td>12</td>
<td>15</td>
<td>15</td>
<td>15</td>
<td>0</td>
<td>0</td>
<td>16</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Supply</strong></td>
<td>232</td>
<td>232</td>
<td>229</td>
<td>241</td>
<td>241</td>
<td>221</td>
<td>44</td>
<td>44</td>
<td>214</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Other Exports</strong></td>
<td>161</td>
<td>161</td>
<td>161</td>
<td>170</td>
<td>170</td>
<td>150</td>
<td>0</td>
<td>0</td>
<td>145</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Exports</strong></td>
<td>161</td>
<td>161</td>
<td>161</td>
<td>170</td>
<td>170</td>
<td>150</td>
<td>0</td>
<td>0</td>
<td>145</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Human Dom. Consumption</strong></td>
<td>25</td>
<td>25</td>
<td>22</td>
<td>27</td>
<td>27</td>
<td>27</td>
<td>0</td>
<td>0</td>
<td>29</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Use, Losses</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Dom. Consumption</strong></td>
<td>25</td>
<td>25</td>
<td>22</td>
<td>27</td>
<td>27</td>
<td>27</td>
<td>0</td>
<td>0</td>
<td>29</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Use</strong></td>
<td>186</td>
<td>186</td>
<td>183</td>
<td>197</td>
<td>197</td>
<td>177</td>
<td>0</td>
<td>0</td>
<td>174</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Ending Stocks</strong></td>
<td>46</td>
<td>46</td>
<td>46</td>
<td>44</td>
<td>44</td>
<td>44</td>
<td>0</td>
<td>0</td>
<td>40</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Distribution</strong></td>
<td>232</td>
<td>232</td>
<td>229</td>
<td>241</td>
<td>241</td>
<td>221</td>
<td>0</td>
<td>0</td>
<td>214</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>CY Imp. from U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>CY. Exp. to U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
</tbody>
</table>

#  

# 

<table>
<colgroup>
<col style="width: 23%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 6%" />
<col style="width: 8%" />
<col style="width: 8%" />
<col style="width: 8%" />
</colgroup>
<tbody>
<tr class="odd">
<td colspan="11"><p><strong>PSD Table</strong></p>
<p><strong>Dairy, Milk, Nonfat Dry</strong></p></td>
</tr>
<tr class="even">
<td></td>
<td><strong>2005</strong></td>
<td><strong>Revised</strong></td>
<td></td>
<td><strong>2006</strong></td>
<td><strong>Estimate</strong></td>
<td></td>
<td><strong>2007</strong></td>
<td><strong>Forecast</strong></td>
<td></td>
<td><strong>UOM</strong></td>
</tr>
<tr class="odd">
<td></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td><strong>USDA<br />
Official</strong></td>
<td><strong>Post<br />
Estimate</strong></td>
<td><strong>Post<br />
Estimate<br />
New</strong></td>
<td></td>
</tr>
<tr class="even">
<td><strong>Market Year Begin</strong></td>
<td></td>
<td><strong>07/2004</strong></td>
<td><strong>07/2004</strong></td>
<td></td>
<td><strong>07/2005</strong></td>
<td><strong>07/2005</strong></td>
<td></td>
<td><strong>07/2006</strong></td>
<td><strong>07/2006</strong></td>
<td><strong>MM/YYYY</strong></td>
</tr>
<tr class="odd">
<td><strong>Beginning Stocks</strong></td>
<td>5</td>
<td>5</td>
<td>5</td>
<td>19</td>
<td>19</td>
<td>39</td>
<td>15</td>
<td>15</td>
<td>48</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Production</strong></td>
<td>206</td>
<td>206</td>
<td>206</td>
<td>216</td>
<td>216</td>
<td>221</td>
<td>0</td>
<td>0</td>
<td>213</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Imports</strong></td>
<td>2</td>
<td>2</td>
<td>4</td>
<td>4</td>
<td>4</td>
<td>5</td>
<td>0</td>
<td>0</td>
<td>6</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Imports</strong></td>
<td>2</td>
<td>2</td>
<td>4</td>
<td>4</td>
<td>4</td>
<td>5</td>
<td>0</td>
<td>0</td>
<td>6</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Supply</strong></td>
<td>213</td>
<td>213</td>
<td>215</td>
<td>239</td>
<td>239</td>
<td>265</td>
<td>15</td>
<td>15</td>
<td>267</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Other Exports</strong></td>
<td>174</td>
<td>174</td>
<td>141</td>
<td>204</td>
<td>204</td>
<td>182</td>
<td>0</td>
<td>0</td>
<td>177</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Exports</strong></td>
<td>174</td>
<td>174</td>
<td>141</td>
<td>204</td>
<td>204</td>
<td>182</td>
<td>0</td>
<td>0</td>
<td>177</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Human Dom. Consumption</strong></td>
<td>20</td>
<td>20</td>
<td>35</td>
<td>20</td>
<td>20</td>
<td>35</td>
<td>0</td>
<td>0</td>
<td>35</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Other Use, Losses</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Total Dom. Consumption</strong></td>
<td>20</td>
<td>20</td>
<td>35</td>
<td>20</td>
<td>20</td>
<td>35</td>
<td>0</td>
<td>0</td>
<td>35</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Use</strong></td>
<td>194</td>
<td>194</td>
<td>176</td>
<td>224</td>
<td>224</td>
<td>217</td>
<td>0</td>
<td>0</td>
<td>212</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>Ending Stocks</strong></td>
<td>19</td>
<td>19</td>
<td>39</td>
<td>15</td>
<td>15</td>
<td>48</td>
<td>0</td>
<td>0</td>
<td>55</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>Total Distribution</strong></td>
<td>213</td>
<td>213</td>
<td>215</td>
<td>239</td>
<td>239</td>
<td>265</td>
<td>0</td>
<td>0</td>
<td>267</td>
<td>(1000 MT)</td>
</tr>
<tr class="even">
<td><strong>CY Imp. from U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
<tr class="odd">
<td><strong>CY. Exp. to U.S.</strong></td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>0</td>
<td>(1000 MT)</td>
</tr>
</tbody>
</table>

#  SECTION THREE: NARRATIVE ON SUPPLY AND DEMAND, POLICY & MARKETING

## Fluid Milk

### Production

Fluid milk production in 2006/07 is forecast at 10.0 MMT, down about 4
percent from the 10.4 MMT for the previous year, and down sharply from
the 10.43 MMT for 2004/05. Severe drought conditions have deteriorated
pasture and greatly reduced the availability of irrigation water and
fodder. A forecast of 10.0 MMT would equate to around 9.7 billion
liters, using a conversion factor of 1.03.

Production for 2006/07 is expected to fall despite a five percent
increase for the first quarter of the forecast year (although falling on
a monthly basis). According to industry data, the month of July in
2006/07 saw a 7.7 percent increase in milk production over the same
period for the previous year and August showed a 6.3 percent increase.
However the month of September showed an increase of only 2.3 percent
over the same period for the previous year as drought conditions began
to take effect. October figures were not available at time of writing
this report, however poor climatic conditions experienced during this
period will likely lead to a decline compared to year previous.

According to historical data, Australian dairy production peaked at 11.6
MMT in 2001/02, or 11.26 billion liters when high rainfall and cooler
summer conditions boosted production. The 2006/07 forecast of 10.0 MMT,
or 9.7 billion liters, is considered below the ten year average of 10.5
million liters or 10.2 MMT.

![](media/image2.wmf)

Source: ABARE data

Post has trimmed cows numbers for 2006/07 in line with early industry
reports. However, it should be noted that post has assumed a return to
more normal weather conditions from the month of December onwards, and
although this is not expected to reverse the effects of the current
drought situation, continued below average rainfall over the course of
the outlook period would likely further reduce cow numbers. Industry
analysts are concerned that although many producers have culled cattle
in response to drought conditions, continued below average rainfall
could see the cull cattle increase significantly.

### Exports

Exports of fluid milk in 2006/07 are forecast to fall to 84 TMT,
consistent with the drop in fluid milk production. Fluid milk exports
are forecast to remain at about one percent of total production.

### Consumption

Domestic consumption of fluid milk for 2006/07 is forecast to fall to
2000 TMT, or about 20 percent of total production, in line with the
decline in fluid milk production. Post considers that fluid milk
consumption is unlikely to change greatly in the foreseeable future and
is generally not considered a growth market compared with uses such as
cheese for export.

Post uses industry figures for supermarket sales of fresh milk for
domestic consumption numbers.

### Marketing 

A recent industry report stated that although fresh milk consumption
remains steady at around 20 percent of total production fluid milk
consumption, domestic consumption of dairy products accounts for the
equivalent of another 30 percent of whole milk production.

The marketing of milk domestically continues to face many challenges
with major supermarket chains handling about 30 percent of total
production and around 62 percent of domestic dairy consumption.
Supermarkets are expected to continue branding their own milk, thus
improving control over margins.

Dairy consumption via food service (fast food) channels is expected to
grow at higher rates than via retail chains but is more sensitive to
changes in disposable income. Post believes that overall domestic market
growth has been slower than export growth in the past and is expected to
remain fairly steady in the foreseeable future.

### Policy 

About one in every ten liters of milk produced in Australia is consumed
in Japan. Dairy Australia, the industry's service providing body,
considers maintaining access to existing foreign markets to be as
important as opening new markets. One example of market maintenance is
how closely Dairy Australia worked with Japanese authorities on the new
food safety laws in Japan setting maximum residue limits for
agricultural and veterinary chemicals. Dairy Australia's strategy was to
demonstrate the comprehensive nature of Australian veterinary and
chemical management systems.

## Cheese

### Production

Total cheese production is forecast at 328 TMT, down almost four percent
from the previous year and in-line with projected declines in fluid milk
supply over the forecast period. The forecast decline comes despite
increased production in the first quarter of 2006/07 and the longer-term
trend of increased cheese production over the past decade.

Historically, strong prices for cheese over the past five years have
seen production rise at the expense of other dairy commodities.

![](media/image3.wmf)

Source: ABARE Data (July-June)

### Export

Exports of cheese in 2006/07 are forecast at 195 TMT, a decrease that
reflects the decreased production. This forecast relies on recent price
relativities. Post advises that stocks of cheese remain significant and
that exports could remain firm if world prices were to rise
significantly.

## Butter

### Production

Butter production for 2006/07 is forecast at 124 TMT, down on the
previous year. Year-to-date industry data also shows sharp increases in
cheese production. However, monthly figures show the production growth
diminishing rapidly on a month-by-month basis. Post expects monthly
production to begin declining on year-previous levels from November
onwards.

According to ABARE reports, butter prices have fallen relative to the
prices of other dairy products in recent times and if this trend were to
continue, butter production could fall below the current forecast.

![](media/image4.wmf)

Source: ABARE Data (July-June)

### Exports 

Butter exports for 2006/07 are forecast at 74 TMT, a reduction in line
with forecast declines in butter production. ABARE reports forecast
butter prices to fall further in 2006/07 and this will likely see
exports slow.

## Whole Milk Powder

### Production 

Whole milk powder production for 2006/07 is forecast to fall to 154 TMT,
down from the 160 TMT produced the previous year and in line with the
forecast fall in fluid milk production. Year-to-date data show a strong
increase over the same period for the previous year, however the rate of
increase falls sharply on a monthly basis and is expected to end the
overall forecast period with a four percent decline in production.

![](media/image5.wmf)

Source: ABARE Data (July-June)

### Exports

Exports of whole milk powder in 2006/07 are forecast at 145 TMT, down
almost four percent on the previous year and in-line with the forecast
decline in Whole Milk Powder production.

## Skim Milk Powder

### Production 

Skim Milk Powder production in 2006/07 is forecast at 213 TMT, down on
the 221 TMT estimated for the previous year. Year-to-date industry data
shows sharp increases in production, however the rate of increase has
fallen on a monthly basis. Post anticipates monthly production to fall
from the previous year's level with overall production almost four
percent lower overall.

![](media/image6.wmf)

### Exports

Skim Milk Powder exports for 2006/07 is forecast to fall to 177 TMT.
This reduction in exports is reflective of the forecast decline in
production over this period due to drought conditions.

**Recent Reports from FAS/Canberra**

The reports listed below can all be downloaded from the FAS website at:
<http://www.fas.usda.gov/scriptsw/AttacheRep/default.asp>.

  ---------- ----------------------------------------------------- ----------
  **Report   **Title of Report**                                   **Date**
  Number**                                                         

  6071       AWB Rejects Export Applications for 3 MMT, Sparks     11/09/06
             Controversy                                           

  6070       Australia Revises Import Conditions for California    11/06/06
             Table Grapes                                          

  6069       Ag DownUnder Vol. 16                                  11/03/06

  6068       Australia Considers Grain Imports; Additional Drought 10/31/06
             Aid Announced                                         

  6067       Government Announces Changes to Import Risk Analysis  10/31/06
             Process                                               

  6066       Grain Quarterly Update                                10/20/06

  6065       Frost Affects Fruit Production in Goulburn Valley,    10/18/06
             Victoria and Tasmania                                 

  6064       A\$350m Additional Drought Aid                        10/17/06

  6063       Ag DownUnder Vol. 15                                  10/12/06

  6062       Corish Report: Australian Government Response         10/04/06

  6061       Sugar Semi-Annual                                     09/29/06

  6060       Exporter Guide                                        09/29/06

  6059       Export Certificate Report                             09/27/06

  6058       Ag DownUnder Vol. 14                                  09/26/06

  6057       Livestock Annual                                      09/13/06

  6056       Ag DownUnder Vol. 13                                  09/08/06

  6054       Drought Update                                        09/05/06

  6053       Cotton Quarterly Update                               08/31/06

  6052       Ag DownUnder Vol. 12                                  08/25/06

  6051       Australia Launches Strategy to Gain Access to         08/10/06
             Southern Indian Food Market                           

  6048       Food & Agriculture Import Regulations & Standards     08/03/06

  6047       Grain Quarterly Update                                08/01/06

  6046       Ag DownUnder Vol. 11                                  07/21/06

  6045       Citrus Update                                         07/17/06

  6042       Australian FTA with Gulf States                       06/30/06

  6041       Poultry Meat IRA Released                             06/28/06

  6040       Worst Frost in 20 Years Affects Australian Citrus     06/27/06
             Production                                            

  6039       Agricultural Biotechnology Annual                     06/28/06

  6038       Ag DownUnder Vol. 10                                  06/23/06

  6037       Sugar Smut Outbreak in Queensland                     06/20/06

  6036       Wine Annual                                           06/08/06

  6035       Australia Actively Pursuing FTAs                      06/07/06

  6034       Ag Down Under Vol. 9                                  06/02/06

  6033       Wheat Australia sells 350,000 MT to Iraq              05/31/06

  6032       Dairy Semi Annual                                     05/30/06

  6031       Ag Down Under Vol. 8                                  05/19/06

  6030       Review of Permitted Seeds List for Australia          05/19/06

  6028       Justification for Requirement for Wood Packaging      05/15/06
             Material to be Bark Free                              

  6027       Cotton & Products Annual                              05/15/06

  6026       Ag Down Under Vol. 7                                  05/09/06
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