Truth or dairy: are milk prices going up or down?

After breakfast and that first coffee, did you check how much milk was left in the fridge this morning? Ah yes, and did you check the use by date?

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There is a good reason.

“At a domestic level, these high farmgate prices, combined with other drivers of food inflation, have seen strong rises in the retail price of many dairy products, such as butter, cheese and yoghurt.”

In Australia, some dairy products such as butter, cheese and yoghurt may well get more expensive in coming months.

These products sit at the heart of a $4.4 billion a year industry producing 8.8 billion litres of milk, employing 46,000 people and spanning trade relationships and evolving consumer trends across several continents.

But what are the global factors impacting prices?

A luxury item?

On a broad level, global dairy product prices continue to remain relatively low, as Chinese demand remains subdued. As a result of this reduced demand, impacted by both COVID and tight economic conditions, global dairy products are currently in relative oversupply.

Globally, dairy prices have continued to fall in recent months.

The Global Dairy Trade (GDT) Index has suffered from the major reduction of China’s participation in the market, as Chinese consumers continue reduce their consumption of dairy products through tough economic times.

Due to its sheer size China is the world’s largest dairy market, importing more than 3,400,000 tonnes of product in 2021/22.

To a degree, this process highlights the greater vulnerability of a market such as China, where consumption of dairy products is relatively new compared with some other major markets.

While dairy is a cornerstone of the Australian diet, it has until recently been considered somewhat of a luxury in China. As a result, where these products are more discretionary to consumers, consumption is more likely to drop in economic downturns.

As a result of China’s downturn in purchasing, the GDT has fallen to almost 20 per cent below its five-year average levels.

The global dairy product market is currently experiencing a period of oversupply and given the time this may take to fall, any recovery in global dairy prices, even when consumers begin to increase their purchases, is likely to be a long-term one.

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Retail price rises

While global dairy levels may be in oversupply, for Australia the opposite situation continues to be the challenge.

The opening of the farmgate pricing season saw different dairy processors competing for the dairy producers by bidding prices to near record highs as they sought to gain access to a share of Australia’s continually shrinking national milk pool.

Having set these high prices with producers, a number of Australia’s dairy processors now find themselves in the challenging position of high fixed supply costs, while facing reduced export prices.

At a domestic level these high farmgate prices, combined with other drivers of food inflation, have seen strong rises in the retail price of many dairy products such as butter, cheese and yoghurt.

Many Australian consumers may reduce their retail purchases – including food – in 2024 and it remains to be seen whether this will ripple through the supply chain to processors.

Interestingly, at the domestic production level, Australian milk production has seen a small and rare increase in output for a period this year, rising by around two percent in May. Possibly as a result of some post-drought herd rebuilding and pasture improvement.

Overall, however national milk production levels may continue their ongoing fall. For 2022/23, national milk production looks set to fall to around an 8 billion litres, its lowest in 30 years, while the year ahead may potentially even fall further.

For the dairy processing sector, as well as retailers, this will only increase the need for them to look closely at their ongoing strategies. So what could this mean for households already paying increasingly close attention to their food bills?

With farmgate prices already high and dairy production volumes falling, it could mean prices of a number of dairy products could well stay high for some time.

For politicians – who are regularly quizzed on the price of milk as a gauge of their sympathy with normal families – they would be well advised to keep an eye on rising prices.

‌Michael Whitehead is Executive Director for Agribusiness Industry Insights, ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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