However, milk price is not the sole determinant of a financially sustainable dairy farm business; just one side of an increasingly complex equation. 

This month’s chart shows how farm cash income has been significantly more variable than farmgate milk price over the last decade.

Statistical measures actually suggest very little relationship between these two measures. 

The two sets of data comes from ABARES annual farm performance surveys and Dairy Australia’s annual farmgate price surveys of the local dairy companies over the last two decades. 

The extremely variable seasonal conditions of the last decade have meant that factors other than milk price have been equally important in determining the level of farm cash income and therefore farm profitability.

There have been big shifts in the availability and, therefore, the price of key production inputs such as water, feed, fertiliser, fuel and finance costs.

The impact of the droughts in 2002/03 and 2006/07 can be clearly seen in the chart as farm cash incomes plunged to their lowest levels in the two decades shown as input volumes and costs soared. 

Droughts graphically demonstrate this point, as the impact on dairy farming income is threefold. 

Firstly, receipts are reduced because milk production is lower due to lower milk yields and often the reduction in milking cows and young stock.

At the same time, the amount of bought-in feed generally increases, because less water and home grown pasture is available, requiring increased supplementary feeding to maintain the core herd.

This lift in input requirements is then compounded when the increased demand meets lower available supply – again, due to drought conditions - and prices of the purchased inputs rise. 

Both the volume requirements and the increased unit price result in the rapid escalation in production costs in these conditions and, when combined with lower production, severely impact incomes – regardless of the milk price received.

The situation during the commodity [price] boom of 2007/08 was quite different.

Although the prices of all commodities rose to very high levels and the input costs of grains, fuel and fertilisers all rose significantly, local seasonal conditions were much better than they had been for years.

Consequently, the need for additional inputs was lower and farm cash incomes did see the beneficial impact of the corresponding boom in milk prices. 

Returns to Australian dairy farmers are fully aligned to market forces, and so risk management is the key to dealing with both market and climate volatility to ensure on-going viability of the farm business.

While the individual farmer’s ability to change their milk price is limited, they will generally have much more control over how they build resilience into their individual farming system and control costs. 

Consequently, controlling input costs and risk management skills are increasingly important to dairy farm profitability and long term financial sustainability.

Access to good market intelligence and significant management skills are required to deal with an increasingly complex farm business environment as the focus becomes one of margin management under the multitude of conditions that develop in any given season.

Peter Wilson is Dairy Australia’s national industry analyst and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it