Australian dairy processors are warning they may have to rationalise their operations in the face of tough market conditions.
Processors say they are being squeezed by rapid growth in competition from imports, declining global prices, falling milk production and being locked into paying high farmgate prices.
The current operating conditions for manufacturers were tough, Australian Dairy Products Federation (ADPF) executive chairman John Williams said.
This needed to be countered so that Australian regional jobs and economies were not hit hard if processors were forced to rationalise their operations, he said.
The warning comes as global dairy prices failed to consolidate recent gains at auction on Tuesday night.
The Global Dairy Trade index fell 0.9 per cent, with key Australian commodities cheddar and skim milk powder both down (3.4pc and 1.6pc respectively).
The cheddar price is about 10pc lower than at the start of the season while skim milk powder is 32pc down.
The ADPF said the concerns it had expressed at the start of last season about the pressure record farmgate prices would place on manufacturers had been realised.
The Australian Milk Value Portal's current Oceania (NZ export) Commodity Milk Value (CMV) was $6.49 a kilogram milk solids.
This was 29pc down on its June 6, 2022, value of $9.15/kg MS and 32pc lower than the weighted average announced southern region farmgate milk price for the 2022-23 season of $9.60/kg MS.
Mr Williams said processors were facing pressures on all fronts.
"In the lead up to the new milk season, on top of the decline in global prices, Australian dairy processors are contending with low volume growth, exorbitant overhead and input costs (inclusive of energy, transport and raw milk), a tough and highly competitive domestic trading environment, and rapid growth in import competition," Mr Williams said.
The volume of dairy imports from the United States was up 46pc this season, while NZ imports were up 22pc.
"Further, the current 20pc higher farmgate milk prices being paid in Australia compared to New Zealand, places Australia at a competitive disadvantage not only in export markets but it is also being reflected on our supermarket shelves with New Zealand made cheese and butter priced significantly cheaper than Australian made products," Mr Williams said.
Declining milk production was also a major concern.
"However, to participate as a viable supplier to meet this demand and provide confidence in the security of Australian manufactured products to our customers, we need more of that core ingredient of 'raw milk' and this currently is a leading challenge for the Australian dairy sector," Mr Williams said.
"Australia is home to some of the world's most advanced and modern milk processing technology available but without confidence current milk production trends will turn the right way, the Australian dairy processing industry will have to make decisions to reduce capacity and capability."
Mr Williams said Australia was the only dairy commodity market in the world that required processors to announce farmgate milk prices 13 months out from the season's end.
Under the Australian Competition and Consumer Commission (ACCC) Dairy Code of Conduct, on June 1 dairy processors must complete and make publicly available milk supply agreements, including milk price, for the 2023-24 milk season.
The ADPF said this requirement risked processors' viability in a market where the costs of Australian products were not competitive with imports.
There is still a great deal of uncertainty about global dairy prices for 2023-24.
Westpac NZ senior agri economist Nathan Penny said Tuesday night's price fall was not completely unexpected.
"Coming late in the season, the result also doesn't change the outlook for this season's milk price," he said.
"We also retain our positive outlook for next season, albeit it is still very early days.
"We anticipate that as the Chinese economy gains momentum over the course of the year, improved Chinese demand will lift global dairy prices.
"Very subdued global milk supply will provide additional support for prices."
But his counterpart at ASB economist Nat Keall was not so upbeat.
"We remain cautious about the outlook for Chinese demand," he said.
"With local whole milk powder production strong and inventories coming off recent highs, China has only partially returned to the auction party, taking only about half the WMP on offer.
"April economic data released yesterday also showed the Chinese economic recovery remains mixed, with retail sales underperforming market expectations."
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Carlene Dowie
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
