Dairy: September quarter 2021

Damien Thomson

Stronger global demand is forecast to push the farmgate milk price higher.

Key points

  • Farmgate milk prices are expected to increase due to stronger global demand.
  • Favourable operating conditions in Australia are leading to greater profitability for dairy farms and higher production.
  • Global dairy markets are being driven by China’s demand for imports.

Farmgate milk price to increase due to strong global demand

The Australian average farmgate milk price is expected to increase by 7% to 53 cents per litre in 2021–22 due to stronger global demand. Global prices are expected to ease towards the end of 2021 but remain higher on average in 2021–22 than 2020–21. Strong demand for imports is being driven by China, which has seen an increase in demand for dairy products and is experiencing a high domestic milk price. Global supply is expected to increase due to higher production in New Zealand and the United States and modest milk production growth in the European Union and Australia.

Australian dairy processors secured export contracts at high prices at the end of 2020–21. This boosted confidence and led to multiple revisions to opening milk prices before the start of the 2021–22 season. These revisions, along with a moderation of world prices, are expected to reduce the likelihood of further price step-ups towards the end of the 2021–22 season.

Global prices, in real terms, are broadly higher than the last 5 years (Figure 1). Prices are forecast to remain relatively flat in 2021–22 compared to 2020–21 for all product categories except cheese, which is expected to increase by 3% to US$4,400 per tonne. Prices for butter are forecast to fall by 2% to US$4,400 per tonne while whole milk powder prices are forecast to fall slightly to US$3,550 per tonne and skim milk powder prices are expected to stay flat at US$3,100 per tonne. Monthly prices have moderated so far in 2021–22 from historically high levels.

Figure 1 Global dairy prices, 2010–11 to 2021–22
Global dairy prices are at lower levels in 2021-22 than they were in 2010-11. Prices have converged since 2017-18 due to increasing cheese, whole milk powder and skim milk powder prices and falling butter prices from 2017-18 to 2021-22.
f ABARES forecast.
Sources: ABARES; Dairy Australia

Global demand riding the China rollercoaster

In the first half of 2021, global demand rallied through the ongoing recovery from the economic downturn caused by the COVID-19 pandemic. Demand in international markets is heavily influenced by a near-record high domestic milk price in China, 15% higher than the first half of 2020. The demand for feed grain increased as China's pig herd recovered from the damage of African swine fever. This increased the cost of feed for dairy farms, causing the domestic milk price to soar. The higher milk price coincided with a push to increase consumption of dairy products. These events saw China’s raw milk production increase by 3.1% in 2020 and is forecast to further increase by 4.5% in 2021 (US Department of Agriculture). These increased volumes have flowed through to liquid milk products, but manufactured products have been substituted with cheaper imports, driving demand on international markets.

Australian monthly exports of dairy products to China increased significantly in 2020–21 (Figure 2), reflecting China's demand for importing manufactured dairy products. Butter exports comprise a small fraction of Australia’s exports to China but have increased by 312%. Skim milk powder exports have increased by 79%, whole milk powder by 21% and cheese by 33%. China’s demand for Australian exports is expected to return to normal levels in 2021–22.

Figure 2 Dairy exports to China, July 2018 to June 2021
Monthly dairy exports to China generally average around 6.5 kt. However, from January to July 2021, monthly exports have averaged 11kt due to strong demand. The largest year-on-year increases are in exports of butter (312%) and skim milk powder (79%). However, butter exports are a small portion of total dairy exports.
Sources: ABARES; Australian Bureau of Statistics

Higher returns in China have seen a substitution of exports away from Japan, which is Australia’s second largest export market for dairy products and largest for cheese. Exports of cheese to Japan fell by 20% from 2019–20 to 2020–21. The share of Australia's cheese exports destined for Japan and China was equal for the first time in February 2021 at 29% each before returning to around 40% for Japan and 20% for China in March 2021. Japan’s share of Australia's cheese exports is expected to return to normal levels of around 50% due to falling demand from China in 2021–22.

Domestic production buoyed by profitable environment

Australian milk production is expected to increase by 1.1% to 9.0 billion litres in 2021–22. Favourable seasonal and financial conditions are expected to continue, providing a profitable operating environment for dairy farms. These conditions include high rainfall, soil moisture and pasture growth. The Bureau of Meteorology’s September to November forecast is for a higher than 80% chance of exceeding median rainfall for southern and eastern Australia. This indicates that strong pasture growth over spring is likely, which will support milking yields and herd rebuilding efforts. The forecast increase in milk production will mark the third consecutive year that production has either remained flat or risen (Figure 3). Interest rates are expected to remain low in 2021–22, helping farmers to reduce debts and complete repairs and maintenance. Greater investment in expansion activities such as new equipment or improved infrastructure is expected.

Figure 3 Australian milk production, 2000–01 to 2021–22
Australian milk production has trended down from 2000-01 to 2020-21. However, the forecast increase in 2021-22 marks the third consecutive year of flat or positive milk production growth.
f ABARES forecast.
Sources: ABARES; Australian Bureau of Statistics; Dairy Australia

Milking cow herd numbers are expected to increase slightly to 1.38 million head. Favourable operating conditions are expected to lead to herd rebuilding, which will increase the number of cows per farm. However, farm exits are limiting herd population expectations. Some dairy farmers are taking the opportunity created by historically high beef and land prices to retire or transition onto smaller beef cattle farms for lifestyle reasons. This is temporarily accelerating the long-term trend of farm exits. See Trends in the Australian Agricultural Workforce for more information.

Opportunities and challenges

Greater access to markets will provide more options

Dairy Australia has been awarded a $310,000 grant from the Australian Government to reduce technical barriers to trade across 6 markets in South-East Asia. Greater access to these markets is likely to provide more options for exporters and reduce the impacts that individual markets can have on overall trade of dairy products.

Australia–United Kingdom Free Trade Agreement

The Australian–United Kingdom Free Trade Agreement (UK-FTA) was agreed in principle on 17 June 2021. Once finalised, the agreement will eliminate tariffs on dairy products in equal instalments over 5 years. This will include a duty-free quota for cheese of 24,000 tonnes, rising in equal instalments to 48,000 tonnes in year 5. This quota is equivalent to 16% of 2020–21 cheese export volumes in the first year and 31% in the fifth year. The agreement will also include a duty-free transitional quota of 20,000 tonnes for non-cheese dairy and 5,500 tonnes specifically for butter, which will increase to 11,500 tonnes by year 5. The quota on butter is equivalent to 22% of 2020–21 butter export volumes in the first year and 46% in the fifth year.

The UK-FTA is yet to be formally concluded, however additional information on the UK-FTA can be found on the Department of Foreign Affairs and Trade website.

Wet conditions have a net benefit, despite damage caused

Extremely wet conditions and localised flooding have been a feature of 2021. Total rainfall from January to July 2021 is in the top 8 to 9 deciles compared to the period between 1900 and 2021. This rainfall led to flooding in Northern New South Wales in March, affecting communities and farming land in the Mid North Coast and Hunter Valley regions. Heavy rainfall in June caused power outages and flooding of the Thomson and Yarra rivers in Gippsland, Victoria. For dairy farmers in these regions, flooding and access issues separated livestock from pasture and farmers from roads and paddocks causing increased costs of supplementary feeding. Flooded roads also temporarily restricted milk tankers from collecting milk, which affected production and revenue of individual farms. These impacts were localised and short-lived, with dairy farms bouncing back and benefiting from greater pasture growth in the following months.

Extended periods of high soil moisture softens up cows’ hooves and the cows can become lame after walking back and forward on gravel laneways and concrete yards. To prevent further lameness, farmers must dry off milking cows earlier than normal, which temporarily reduces milk production. However, positive effects of high rainfall –such as higher pasture production – outweigh the temporary and localised negative impacts, resulting in a net benefit for milk production.


Document Pages File size
Agricultural commodities: September quarter 2021 - Report PDF 77 6.2 MB
Agricultural commodities: September quarter 2021 - Outlook tables - data tables XLS 12 152 KB
Agricultural commodities: September quarter 2021 - Statistical tables - data tables XLS 33 578 KB

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Last reviewed: 14 September 2021
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