The head of Australia's peak dairy processor body has warned of the risk of rationalisation of the industry, if costs remain high.
Australian Dairy Products Federation executive director Janine Waller said processors were facing higher input costs in a number of areas.
"Dairy processors are contending with surging input costs across the board, at a rapid rate of change confounded further by the difficulty and inflexibility to pass full price increases through the supply chain," Ms Waller said.
"Raw milk is only one input cost that is going up - when you overlay that with packaging, fuel, freight, labour costs, energy, it's the ability to pass those on, and if that's not possible, there is a high risk of rationalisation needing to occur.
"That will flow back into jobs and investment and back into local communities, brands and innovation."
She said the pressure was also compounded by high container costs, affecting exports, which accounted for nearly a third of milk production.
"We have seen sea freight increase by around 300-375 per cent so any predictions that costs will soften are welcomed," Ms Waller said.
"But we still have some way to go in terms of freight costs returning to pre-pandemic levels - whilst also needing to address the ongoing disruptions due to poor accessibility and reliability of shipping containers."
It comes as Dairy Australia reported a further drop in Victorian milk production, for May.
In Gippsland, production dipped nearly 12 per cent, on April, for a cumulative total of 4.9pc for the month.
In the northern region, production was down 6.3pc on the previous month and 2.1pc for the year, while in the west it dipped 6.2pc on April and 3.8pc for the year.
Ms Waller raised the concerns in light of the recently released second-quarter Dairy Market Insights report (June 2022).
The report looks at the variables having an impact on market fundamentals in the short to medium term
Key insights from the report include:
- Spot dairy commodity prices have fallen over the June quarter, but the impact on local returns has been cushioned by a significant fall in the Australian dollar. The Commodity Milk Value (CMV), recalculated for 2021/22 to account for spiralling energy and fuel costs, has fallen 3% since the end of March, to $9.54/kg Milk Solids.
- Despite the easing in commodity prices, 2022/23 opening farmgate prices have climbed since June 1 as processors compete for dwindling milk supplies.
- Milk prices offered in southern regions for the 2022/23 season are currently averaging $9.55/kg MS, more than $2/kg MS above the 2021/22 season.
- The ability to pass on full input cost increases in retail, foodservice and industrial markets will be critical but challenging in the face of broad-based inflation.
The Commodity Milk Value (CMV) index was developed by the ADPF as an indicator of the value of milk.
It's based on a weighted basket of Oceania spot prices of major commodities - cheese, butter, skim milk and whole milk powder, converted to Australian dollars.
The CMV calculation uses the industry's average annual product mix and conversion costs to estimate the corresponding milk value.
Ms Waller said 20 years ago, Australia produced 11 billion litres of raw milk but in the 2020/21 season that was expected to be down to about 8.6 billion litres, or a 3.5pc drop on the previous year.
Processors wanted to see the milk pool grow, to remain competitive, she said, but that was not certain.
"It's hard to know, who would have anticipated this was where we would be, from the start of June?," Ms Waller said.
"How do we arrest the decline in the milk pool and turn it around to a period of growth?
" Let's hope $2 is an investment back into the industry and we start to see that growth."
Imports were not as attractive, to fill the gap.
"Import costs are higher, where previously there was the option to import cheaper products, that is not necessarily an option," she said.
She said there was often talk of "unprecedented times" but high milk prices had been driven by competition and the weakness in the southern milk supply.
"It does leave us with the question as to whether this is the new normal and how sustainable those prices are?" she said.
The ADPF looked forward to speaking with federal Agriculture Minister Murray Watt to help him understand the pressures facing the dairy industry and collaborative opportunities for change, she said.
"It's important that all parts of the dairy supply chain need to be viable to encourage investment into product innovation, new technology and production capability," Ms Waller said.
"Our new three-year strategic plan will deliver a roadmap to greater profitability and sustainability for our sector and focus on addressing the barriers to profitable raw milk production growth, attracting skilled labour, and prioritising strategic international trade partnerships."
Urgent attention needed to be given to arrest the decline in raw milk production volumes and move the industry to profitable growth; on ways to attract more workers to the dairy industry, particularly skilled workers in regional areas and to prioritising strategic international trade partnerships.