In other key dairy exporting regions, farm gate milk prices have dropped significantly alongside global commodity prices.
As such, significantly cheaper international dairy products are starting to undermine the competitiveness of Australian dairy in the current market environment.
Additionally, rising farm input costs remain a challenge, due to both international and domestic pressures.
The good news is farm gate milk prices set for the season will help to lessen the impact of rising input costs.
Competition for milk among processors was fierce following the announcement of minimum milk prices at the start of June — milk flows contracted five per cent over the 2022-23 season, after wet weather, flooding, labour challenges, competition for resources and farm exits impacted the national milk pool.
In the final months of the season, however, some growth was recorded (mainly against lower comparable figures) on the back of favourable autumn conditions leading into winter.
As the season moves into spring, the Australian milk pool is likely to see further year-on-year growth, after devastating floods dampened production during last season’s shoulder.
After easing over the first half of 2023, Australian farm input costs having started to climb again.
A significant proportion of world fertiliser and grain trade remains caught up in the conflict in Ukraine, particularly since Russia’s recent exit from the Black Sea grain corridor deal.
International demand has returned for Australian grain, as crop production prospects are diminished by unfavourable conditions in the Northern Hemisphere, and China lifts tariffs from Australian barley.
While global indicative fertiliser prices have eased, the Australian market tells a different story. Reports have surfaced of some suppliers rationing urea to customers in the face of growing demand.
Turning to home-grown feed, average yields are expected overall, but a range of heightened risks and increased regional variation pose challenges, alongside the potential impacts of delayed urea shipments yet to be realised.
Additionally, the just-declared El Niño event could bring drier conditions that Australian farmers are no stranger to.
Feed availability will vary region to region, as the legacy of past La Niña events wears thin in some but holds strong in others.
The net impact will likely equate to average yields overall, but with the unwelcome assurance of minimal feed price declines.
Other key global dairy exporting regions, including New Zealand, the United States and Europe, recorded production growth over the first half of 2023 but are now showing signs of stabilisation. Variable weather conditions and declining herd numbers are key drivers, with tightening margins exacerbating the trajectory.
Weakened global demand, particularly from China, has weighed substantially on dairy export prices.
Despite inflation easing in some parts of the world, cost pressures continue to drive consumer behaviour. Many are still spending cautiously, and importers continue to buy in a hand-to-mouth fashion.
As such, farm gate milk prices have significantly declined around the globe; in some places the inability of farmers to break even is in the spotlight.
The most notable example is NZ, where milk prices have rapidly retreated to a midpoint around A$6.65/kg MS, far below Australia’s farm gate milk prices.
Australian export commodity prices have followed the downwards trajectory.
Stiff competition from NZ and the Northern Hemisphere on product sales and high Australian farm gate milk prices, present a difficult situation for exporters.
Domestic dairy returns are also facing competition from cheaper international product.
For processors, the Australian market has held more attractive returns compared to exportable commodities, however, with local buyers importing 17.3 per cent more dairy (over 2022-23), domestic Australian dairy prices are now increasingly under pressure as well.
While competing in a weak global dairy market, Australian dairy processors are facing pressure.
Global dairy markets are sluggish and Australian farm gate milk prices have not followed international trends.
In the absence of a significant rebalance in global markets, exports will remain a tough business and import pressure will grow.
While there are many challenges at play and more lie ahead, strong farm gate milk prices set for the rest of the season will hold Australian farmers in the best possible position for what may come.
Isabel Dando is a Dairy Australia industry analyst.
