Challenging market conditions prevail as new milk season approaches

Key points: 

• From 1 June 2023, farmgate milk price offers and contract terms from processors for the 2023-24 milk season will be announced.
• Australian dairy processors are contending with a tough domestic trading environment marked by low volume growth, exorbitant overhead and input costs, a decline in global prices and rapid growth in import competition, leaving dairy processors with less margin than ever before.
• As of May 2023, the Oceania (NZ export) Commodity Milk Value – a forward milk price indicator – has dropped around 30% since June 2022 to $6.49kgMS, compared to the weighted average announced southern region milk price of $9.60kgMS. The Australian Wholesale Commodity Milk Value is down 17% during this same time.
• The 20% higher farmgate milk prices paid in Australia compared to New Zealand is placing Australia at a competitive disadvantage, domestically and globally.
• Australia’s raw milk production volumes are forecast to fall a further 6% in 2022-23, ending the season slightly below 8 billion litres, and are forecast to drop another 3-4% in 2023-24.
• Without an increase in raw milk, it is expected that some processors will need to continue to rationalise their operations, impacting jobs, local economies and farmers who may no longer benefit from these assets in their region – realities we have witnessed in the past six months.

One year ago, the Australian Dairy Products Federation cautioned that the then unprecedented record farmgate milk prices that were on offer were going to place enormous pressures on dairy manufacturers. What has played out over the last 12 months has been even more concerning for the sustainability of dairy manufacturing in Australia.

Less than one month out from the new 2023-24 milk season opening, the volatile global markets, challenging local conditions, and inflationary pressures have grown.

According to the industry’s Milk Value Portal[1], as of 15 May 2023 the Oceania (NZ export) Commodity Milk Value (CMV)[2] – a forward milk price indicator of how the global market may affect dairy product prices in coming months – has dropped around 30% to $6.49kgMS since 6 June 2022 ($9.15kgMS), compared to the weighted average announced southern region farmgate milk price for the 2022-23 season of $9.60kgMS.

The Australian Wholesale CMV (ACMV) has dropped 17% during this same time, to $8.25kgMS (versus $9.99kgMS, 6 June 2022)[3].

Executive Chairman of the Australian Dairy Products Federation (ADPF), John Williams, said the current operating conditions for manufacturers are tough and need to be countered so that Australian regional jobs and economies are not hit hard if processors are forced to rationalise their operations.

“In the lead up to the new milk season, on top of the decline in global prices, Australian dairy processors are contending with low volume growth, exorbitant overhead and input costs (inclusive of energy, transport and raw milk), a tough and highly competitive domestic trading environment, and rapid growth in import competition,” Mr Williams said.

“For example, year-to-date (February 2023), the volume of imports from New Zealand are up 22% and imports from the US are up 46%. Further, the current 20% higher farmgate milk prices being paid in Australia compared to New Zealand, places Australia at a competitive disadvantage not only in export markets but it is also being reflected on our supermarket shelves with New Zealand made cheese and butter priced significantly cheaper than Australian made products,” Mr Williams said.

Despite inflation related cost of living pressures, encouragingly the demand for nutritious dairy products continues.

“However, to participate as a viable supplier to meet this demand and provide confidence in the security of Australian manufactured products to our customers, we need more of that core ingredient of ‘raw milk’ and this currently is a leading challenge for the Australian dairy sector,” Mr Williams said.

Australia’s year-on-year national raw milk production volumes are decreasing, down to 8.5 billion litres in 2021-22, and forecast to fall slightly below 8 billion litres for the 2022-23 season or a further 6% drop compared to the 2021-22 season. This downward trend is forecast to continue in the 2023-24 season, falling a further 3-4% to 7.8 billion litres.

“Australia is home to some of the worlds most advanced and modern milk processing technology available but without confidence current milk production trends will turn the right way, the Australian dairy processing industry will have to make decisions to reduce capacity and capability,” Mr Williams said.

From June 1, 2023, Australia’s dairy farmers will have a month to assess farmgate milk price offers and contract terms from processors as the annual 2023-24 milk season opens.

Under the Australian Competition and Consumer Commission (ACCC) Dairy Code of Conduct implemented in January 2020, buyers of raw milk are obligated to complete and make publicly available Milk Supply Agreements (MSAs) by June 1, including milk price. This requirement is unique to Australia – no other commodity market in the world requires processors to announce farmgate milk prices 13 months out from the seasons end, risking processors viability in a market where the costs of Australian products are not competitive with imports.

Australia’s dairy processing sector continues to be challenged by the market dynamics at play, in the lead up to the new season announcements. A tight supply market is putting immense pressure on processors to get their product mix selection right.

[1] milkvalue.com.au

[2] Oceania (NZ export) CMV is calculated based on a weighted basket of Oceania spot prices of major commodities – cheese, butter, skim milk powder (SMP) and whole milk powder (WMP) converted to an Australian dollar-denominated value of milk.

[3] ACMV is calculated from Australian wholesale dairy product prices, as distinct from spot CMV (NZ export) prices.