Competition drives milk pricing

Farm gate milk prices have been driving conversations for a number of months now, and with a lot of price movement within the month following June 1, competitive pressure to secure supply among processors reigns supreme as the key driver of farm gate milk prices offered to farmers.

In addition to the longer-term headwinds around competition for land and farm exits, Australian milk production faced a number of other challenges within the 2022-23 season.

While many were already facing inflated input markets, flooding emerged as an acute and immediate blow to production in a number of regions.

After initial expectations of a steady milk pool, this led to a forecast contraction of between four and six per cent from the previous season’s volumes.

While there has been year-on-year growth recorded in some regions in the final months of the season, these events were the catalyst to declining production across the country.

This has reinforced a supply landscape where there is less milk available and excess processing capacity (particularly across Victoria), resulting in processors raising prices offered to farmers in order to stay competitive.

Moving into this new season, Dairy Australia is forecasting that milk production is likely to find some stability around the eight billion litre mark, ensuring the competition to secure milk seen last season flows through into 2023-24.

This is despite export commodity prices diving substantially compared to the same time last year.

Presenting a significantly different global dairy market to a year ago, supply growth out of the United States, parts of Europe and New Zealand (particularly during the second half of the season), and wavering demand from importers, has dampened commodity prices.

Inflation has hit the purses of consumers globally and importers are only willing to purchase as needed, or as they find a ‘good deal’.

As such, the influx of exportable product available over the past 12 months has been struggling to find homes, particularly as domestic consumption in key exporting markets also adapts.

Even though the more export focused Australian processors are facing these pressures at the opposite end of the supply chain, they have had little room to move in terms of offered milk prices.

Throughout the more export-focused southern regions, milk price declines of up to 10 per cent were apparent since minimum opening milk price announcements, reflecting the adjustments made to account for significantly lower export returns and an attempt to ease manufacturing cost pressures.

This was quickly followed by subsequent step-ups from both large and smaller processors across the country.

By July 1, offered milk prices for the season finished close to where they sat in 2022-23, despite suppressed prices for exported product now being a reality.

So, while there are significant challenges being presented at one end of the supply chain for many processors, it is evident that the competition to secure milk remains just as strong as last season, with above average milk prices setting the scene for another season.

Isabel Dando is a Dairy Australia industry analyst