Shrinking milk pool puts pressure on Australia's dairy exports

But Australia would still be a player in the export market with a focus on higher value products backed by sustainability credentials.

Rabobank's senior dairy analyst Michael Harvey told the conference on February 14 the Australian dairy industry was passing through a major period of supply chain transformation.

The shrinking milk pool was part of a broader picture of change across the industry - including processor capacity adjustments and retailers rolling out new buying strategies.

Increased competition for milk had reduced milk price volatility, which was great for farmers, and was likely to be a feature going forward.

"But the industry is at a critical juncture ... milk supply growth has been elusive," Mr Harvey said.

There were well-known handbrakes on growth.

"But it does beg the opportunity to ask, what does the industry want to be long-term," Mr Harvey asked.

"There's an opportunity to change course.

"Growth for the sake of the growth is not the overarching ambition here ... this is a chance to rebuild trust along the supply chain, foster partnerships and get closer to the consumer."

Ever.Ag analyst Jo Bills told the conference Australian farmgate prices had risen steadily since 2000 as the milk supply pool had declined.

But the price advantage that Australian commodities had appeared to have opened up over the world price in the past few years had now disappeared.

"That gap has closed - and this is economics at work," Ms Bills said.

"We are an open market for imports ... we've got a little more milk to play with in the season, a little bit more cheese, a few developments in the global market, and we've seen that gap close really rapidly."

Ms Bills said if Australia's milk supply shrank to 6 billion litres (down from current 8.1billion litres), the industry would look substantially different.

Fresh milk and fresh products would use 40 per cent of the supply, up from 20pc now, and cheese about 40pc.

But this would challenge the industry's capacity to deal with peak spring milk production and would add cost as more fresh milk was transported around the country.

The added cost would make Australian cheese more expensive.

Australian consumers might be happy to pay more for home-grown cheese but where they couldn't see that cheese - for example in restaurants or catering - imported cheese would make inroads.

"And when we are smaller, we will have fewer buyers for milk in the short term and long term," Ms Bills said.

"We will be a more attractive import market."

The Australian head of the world's biggest milk producer Lactalis, Mal Carseldine, said the shrinking milk pool had created challenges for the company across Australia.

Lactalis operated in every Australian dairy market, selling fresh products into consumer markets.

The challenges had been different in different regions.

In Queensland and NSW it meant more milk was being shipped in from interstate.

In other areas, the challenge with the higher milk prices was what to do with the surplus milk.

Australian processors would continue to be under pressure.

"The natural element of a smaller milk pool means there's less milk available, and we have significant overcapacity at the moment," he said.

"That needs to get back to a normalised level between capacity and available milk."

For Lactalis, a shrinking milk pool would mean closely assessing the profitability of different categories.

"We would also need to be flexible with how we manage that milk," he said.

Mr Carseldine said the smaller the milk pool became, the bigger the challenges for processors.

The big question that needed to be answered was the consumer reaction.

"Their willingness to accept imported products over domestically produced," he said.

"That's probably the part that concerns me that we will see in the next 12 months.

"And now that we have across butter and cheese some significant imports, particularly from New Zealand, which I think will be acceptable to the consumer."

He said he wouldn't like to see the milk supply shrink further.

The key to building it lay in part in helping farmers grapple with some of the issues they were facing around sustainability, succession and labour availability.

Building confidence was also key to growing supply.

"For us ... that means continuing to invest in our brands ... to make sure we can continue to pay competitive milk prices," he said.

Consumers were looking for more value and affordability at the moment in response to increased cost of living.

Private label had increased share across the market - which would be expected to continue for at least another 12 months.

Mr Carseldine said Australia needed to use the geographical advantage it had into south east Asian markets.

"There's a big market there who have a growing appetite for dairy products," he said.

Consumers around the world had increasing expectations around sustainability of products.

Lactalis had made some big commitments around this - including being carbon net zero by 2050.

"The greenhouse gas emission is a big one," he said.

"And that has to be a shared journey because our reality is that 94pc of our emissions come from scope three, which is effectively the agricultural sector.

"So we need to help and be a big part of the solution of what that looks like."

Mr Carseldine said Australian dairy could compete well in this space.

"We have a natural advantage to a lot of other countries," he said.

"The way we produce relative to other markets, our footprint is already lighter."

Rabobank sees a spot in the global export market for Australia.

In an Australian Dairy Sector Outlook report released on February 13, Mr Harvey said Australia still would be sustainable dairy export sector in the long term.

Australia had had a long history as an exporter of dairy products.

However, it had been on a slow retreat from the global dairy export arena for some time.

"Dairy exports fell off a cliff in 2023," Mr Harvey said.

"For the calendar year 2023, dairy export volumes were down with double digits across most products, with the largest declines in liquid milk (down 41pc year on year) and butter (down 52pc)."

Despite the reduction, Australia remained a net exporter of dairy products and still ranked as the fifth-largest dairy exporter in the world, with 4pc of global trade.

But exports would increasingly focus on value, not volume.

"We expect this will continue to force export market consolidation," Mr Harvey said.

"(It will require) investment from dairy companies in innovation and new technologies and partnerships with milk suppliers."