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Dairy: March quarter 2019

​​​Andrew Cameron

Milk prices to fall by 2% fall to 46 Ac/L in 2019 20. This is due to increased production by major competitors 

Australian milk price forecast to fall over medium term

The Australian farmgate milk price is forecast to fall in real terms each year until 2023–24. This is the result of forecast global production outpacing demand and putting downward pressure on most dairy product prices. Higher exportable supplies are expected from New Zealand, the European Union, the United States and Argentina. Production in emerging markets is also expected to expand rapidly, especially in India. Higher milk yields will drive much of the increase in production, including in the European Union and New Zealand, where the number of dairy cows is likely to fall.

Fewer cows and less milk

Falling farmgate prices will continue to put pressure on the profitability of Australian dairy businesses. After a drought‑induced reduction in the dairy herd in 2018–19, dairy cow numbers are forecast to continue to fall until 2021–22. Yield increases resulting from improved productivity are unlikely to offset falling cow numbers. As a result, Australian milk production is expected to remain below 9.0 billion litres over the period to 2023–24, recovering only moderately in the second half of the projection period. Greater allocation of the milk pool to drinking milk, which is linked primarily to Australia's population growth, will leave less milk available for the manufacture and export of dairy products.

Australian milk utilisation, 2010–11 to 2023–24
Australian milk production can be used to make either drinking milk or to manufacture other dairy products such as cheese or milk powders. With falling overall milk production less milk is forecast to be available for the manufacture of such products. Between 2010 11 and 2017 18 the share used in manufacturing averaged 74%. This is forecast to fall to 69% by 2023 24.

f ABARES forecast. z ABARES projection.

Value‑added exports to rise but total exports to fall

By 2023–24 Australia's dairy exports are forecast to fall to $3.0 billion in real terms. This is towards the bottom of the $3.0 billion to $3.5 billion range for dairy exports since 2010–11. This is partly because higher domestic consumption is projected to reduce supplies of milk that can be used to manufacture exportable products. Export premiums and global prices are also expected to be lower.

Non‑traditional exports, including fresh milk and value‑added products such as infant formula, are projected to account for a higher share of dairy export earnings. Cheese is forecast to account for a stable share of export earnings over the projection period, but the other major commodities are projected to account for a reduced share. This reflects the industry's growing focus on Australia's competitive advantages in cheese and value‑added products.

Value of Australian dairy exports, 2010–11 to 2023–24
The value of Australian dairy exports is forecast to fall in real terms from around $3.5 billion in 2017 18 to $3.0 billion by 2023–24. Cheese and other dairy products will make up a greater share of the export value over this period than they did between 2010 11 and 2017 18, with the share of milk powders and butter falling.

a Other dairy exports include infant formula, fresh milk and whey. f ABARES forecast. z ABARES projection.
Sources: ABARES; Australian Bureau of Statistics

World dairy commodity prices to fall from current levels

The global prices of butter, cheese and whole milk powder are forecast to fall in 2019–20. Higher production in New Zealand and the United States over the first half of the 2018–19 season is placing downward pressure on commodity prices, especially butter. Increased production in the European Union in 2019–20 is expected to add to global supplies, assuming no adverse weather events occur.

Strengthening global demand for cheese will be driven by economic growth and an ongoing shift to more westernised diets in many countries. However, medium‑term prospects for cheese demand growth in Japan—Australia's most important export market—are less favourable given a weak economic growth outlook and a declining population.

Butter prices are expected to average more than US$4,000 per tonne between 2019–20 and 2023–24. This is well above the other major dairy commodities and reflects the latest health consensus on milk fats.

Skim milk powder prices are forecast to increase steadily to 2023–24 from a historically low base. In developing countries, income growth and growing consumer preferences for dairy are expected to drive demand.

In more price‑sensitive regions, manufacturers of food products are expected to substitute away from butter to fat‑filled powders (blends of vegetable oils and skim milk powder) in response to the higher relative cost of milk fats.

World dairy prices, 2008–09 to 2023–24
The world indicator price of butter is forecast to fall from US$6,000 a tonne in 2017 18 to just above US$4,000 by 2019–20 and then remain at roughly that level in real terms until 2023–24. The value of cheese and whole milk powder is forecast to fall in 2019–20 and then remain largely unchanged in real terms until 2023–24. The price of skim milk powder is forecast to rise by a small amount each year until 2023–24, from the historically low price of US$2,000 a tonne recorded in 2017–18. Dairy commodity prices have been highly volatile in the decade to 2017–18.

f ABARES forecast. z ABARES projection.

Australian dairy imports to grow

With lower forecast milk production and a growing population, Australian imports of dairy products are projected to increase over the medium term. Australia already imports a considerable volume of dairy products, primarily cheese from New Zealand, the United States and the European Union. Imported dairy products provide food manufacturers with competitively priced ingredients and consumers with more affordable and diverse food options.

Australian dairy imports, 2017–18
Australia imported 110,000 tonnes of cheese in 2017 18. New Zealand accounted for 57,000 tonnes, the United States 28,000 tonnes and the European Union 25,000 tonnes. Australia imported 36,000 tonnes of butter and 29,000 tonnes of whole milk powder over the same period.

Source: Australian Bureau of Statistics

Opportunities and challenges

EU–Japan trade agreement to boost cheese competition

The European Union and Japan have entered into an Economic Partnership Agreement, which came into force on 1 February 2019. The agreement is not likely to have a material impact on Australian dairy exports over the medium term due to the long implementation schedule of tariff reductions. But in the long term it could lead to a significant increase in competition for a share of the Japanese cheese market. Japan is a significant importer of cheese. It is Australia's largest export market and the European Union's second largest.

Japan currently imposes tariffs of between 21% and 38% on cheese imported from the European Union. The EU–Japan agreement will establish a European‑specific tariff‑rate quota for cheeses, which will gradually become a duty‑free quota over a 16‑year implementation period. The quota will also expand from 20,000 tonnes to 31,000 tonnes over that period. This will leave the European Union with a larger duty‑free quota than Australia's 20,000 tonnes, placing EU cheese exporters in a more competitive position than Australian exporters.

The recently signed Comprehensive and Progressive Agreement for Trans‑Pacific Partnership entered into force on 30 December 2018. Read a summary of the ke​y agricultural outcomes for Australia here.

Chinese dairy markets at risk in trade war

The Chinese dairy sector is expected to continue to undergo significant structural change over the medium term in an effort to become more productive and competitive. China's goals for agricultural sector reform include significant increases in milk yields and milk product manufacturing. The growing intensive dairy sector in China relies partly on imported feed, such as hay. The United States supplies between 70% and 80% of these imports, followed by Australia which supplies around 15%.

Hay is among those imported US goods to which China applied tariffs in September 2018 in response to the US application of tariffs on US$200 billion of Chinese imports. US hay exports fell immediately and by October 2018 reached their lowest level since January 2014. This is likely to curtail Chinese milk production and boost dairy import demand temporarily until alternative feed sources are found or tariffs are removed.

Monthly hay exports to China from United States and Australia, 2012 to 2018
Hay exports from the United States to China fell sharply in September 2017 and remain well below historical levels. The United States exports around 80,000 tonnes of hay a month to China. Australia exports just over 20,000 tonnes a month.

Note: US data shown for HS code 1214900010. Australian data shown for HS code 12149019.
Sources: ABS; US Census Bureau

Over the medium term, China's development of its dairy sector is likely to stimulate demand for imported milk powders to be used in manufacturing. However, the effect of trade tensions on consumer confidence and consequent spending on dairy products remain the largest near‑term risk to world dairy commodity prices.

Australian dairy industry code of conduct

The Australian Government is consulting on a code of conduct for the dairy industry. The scope and content of a code had not been finalised at the time of publishing. The second round of public consultation on draft clauses closed in February 2019.

The Productivity Commission inquiry into the regulation of Australian agriculture found that codes of conduct can be an effective regulatory tool for addressing unacceptable forms of commercial behaviour. The proposed clauses for the code of conduct are aimed at improving the transparency of milk supply contracts between farmers and processors, and balancing the management of production and price risk between them. More transparent prices can improve the efficiency of dairy markets, with benefits extending to farmers, processors and consumers. However, codes of conduct do not alter global market conditions, so their adoption is unlikely to result in higher milk prices in general.

All parties in vertically integrated value chains are mutually dependent on one another to remain competitive in world markets. While codes of conduct can be effective at guiding good commercial practice, their potential misuse to solve other perceived problems could have unintended consequences. In particular, it will be important to ensure that the code of conduct does not unnecessarily constrain the ability of milk producers and processors to rapidly adapt to changes in world markets and effectively manage risk.


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Dairy outlook – March 2019 PDF5588 KB
Forecast data – March 2019 XLS1265 KB
Historical data – March 2019 XLS​451.4 MB

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Last reviewed:
05 Mar 2019