Australian milk production in decline while global supply surges

AUSTRALIAN MILK production is set to fall again in the current season, as ongoing feed shortages and a smaller milking herd in drought-affected areas continue to impact. That is the conclusion drawn in the latest Rabobank research on the sector.

This comes as global milk supply surges, with production increasing across other key dairy-exporting regions across the world.

In its quarter three 2025 Global Dairy Quarterly, the agribusiness banking specialist’s RaboResearch division forecasts a 1.7% decline in Australian milk production for the full 2025/26 season, to reach 8.05 billion litres.

This follows a 0.7% year-on-year fall in the 2024/25 season, with Australian milk production falling 61 million litres to 8.315 billion litres.

Report co-author, RaboResearch senior dairy analyst Michael Harvey said this decline had reflected drought conditions and feed shortages, which had dragged on milk production, “particularly across the south-east corner of the country”. 

“This included the western districts of Victoria, where production dropped more than five per cent,” Mr Harvey said.

“Unfavourable conditions also dragged production lower in eastern Victoria and Tasmania.” 

July production down 4%

The report said overall July milk production in Australia was down 4% to start the new (2025/26) season, which commenced on July 1.

Mr Harvey said – “in welcome news” – there had been good rainfall in July for many key dairy regions in Australia, helping to ease rainfall deficiencies in drought-impacted areas. 

“However, soil moisture is still an issue with more rainfall needed and feed shortages are expected to persist,” he said.

“Positively, though, above-average rainfall is forecast by the Bureau of Meteorology across many regions over the next three months.”

Mr Harvey said “very high hay prices” were the “main pressure point” for dairy farmers in local feed markets.

“Strong demand for supplementary feed to bridge winter feed gaps, combined with limited supply, has pushed hay prices higher in 2025. And prices are expected to remain at higher levels for some time.”

Farmgate prices are holding up

The report noted Australian farmgate milk prices for the 2025/26 season were locked in at higher levels than the previous season. 

“Across Australia’s southern export region, 2025/26 prices are around 10% higher than last season’s closing prices, at A$9/kgMS or higher,” Mr Harvey said.

When it comes to dairy exports, the report said, Australia had a “solid” season in 2024/25, with exports rising 1.5% on the previous season in volume terms and 12%  in value terms.

Mr Harvey said there was a strong surge in the country’s butter exports, which jumped 34.6% on a volume basis to 16,350 metric tonnes, while skim milk powder and whole milk powder also posted double-digit gains in exports.

“In addition, Australian cheddar cheese exports increased 26.4% last season, reaching 30,639 metric tonnes,” he said.

In the domestic market, retail prices had been edging higher again, Mr Harvey said, following two previous quarters of deflation across local dairy aisles.

In terms of local demand though, Australian consumption of drinking milk was shown to have fallen (by 1.8%) to total 2.34 billion litres in the 2024/25 season, the report said.

Global picture is buoyant

 While Australian milk production remains at subdued levels, it is a different picture globally, the report said, with global milk supply on the rise across key dairy-exporting regions.

RaboResearch expected milk supply growth across the ‘Big 7’ dairy-exporting regions – New Zealand, the EU, Argentina, Uruguay, Brazil and the US, as well as Australia – to increase by 1.8% year-on-year in the second half of 2025 to peak, before slowing to 1.1% year-on-year growth in 2026.

The report said this growth was being driven by overall improving farm margins, recovery from disease outbreaks last year (avian influenza in the US and foot and mouth disease in parts of Europe) and favourable weather conditions.

In the US, milk production posted its strongest growth rate since 2021 – with July production up 3.4% year-on-year, while New Zealand experienced a record start to its new season production.

Mr Harvey said China – one of the world’s largest dairy importers – was still battling a consumption slump, while there are mixed recovery signals in South-East Asia.

“In the US, concerns around the labour market and the impact of tariffs are weighing on consumer confidence,” he said. 

Despite the increase in global supply, international dairy markets faced headwinds on the demand side, Mr Harvey said, leading to a growing exportable surplus that could put downward pressure on dairy commodity prices into early 2026.

“Globally, weak consumer confidence, particularly among low and middle-income earners, continues to weigh on discretionary spending,” Mr Harvey said.

“The ongoing sluggish demand is evident across many food service channels. Dairy demand in grocery channels is also underwhelming in many countries. Household are paying more for dairy products, as inflation in dairy aisles is rising in some regions.”

Tariffs come to bear on milk too

The report said there had been some progress made on the global dairy trade front, with several trade deals concluded.

“The US and China have agreed to extend their trade truce, and the EU is working on new dairy import quotas,” Mr Harvey said.

“These are promising steps, but it’s still unclear how much they’ll actually influence global dairy trade.”

Meanwhile, the report said, La Niña climate conditions  could affect southern hemisphere milk production, with too much rain in Australia and too little in South America.

“Going forward the global market appears well supplied,” Mr Harvey said. “If demand picks up gradually, it should be enough to counter the volume without overwhelming the market, although we could still see some downside pressure on prices in the short term.”

www.rabobank.com.au

ends