Australian dairy market outlook – “solid fundamentals and global headwinds”

Australia’s dairy sector is looking to the new season with “solid fundamentals”, but facing global headwinds caused by trade and economic uncertainty, Rabobank says in its just-released 2025/26 Australian Dairy Market Outlook.

The annual report, by the agribusiness banking specialist’s RaboResearch division, says market dynamics for Australia’s dairy sector “currently appear reasonably sound”, with commodity prices and export returns for bulky dairy ingredients having rallied ahead of the new season (which commences on July 1). And, despite deflationary pressure, domestic dairy market returns also remain elevated.

However, the report cautions, “a complex and uncertain global backdrop cannot be ignored”, which could lead to a dampening of dairy demand.

Report author, RaboResearch senior dairy analyst Michael Harvey says “while solid fundamentals support higher farmgate prices for dairy producers, these are set against an uncertain global backdrop”.

And this will see dairy companies face “a delicate balancing act” when setting new- season milk prices, as required by early June, he says.

“Recent tariff measures introduced by the US administration have unsettled many international markets. The complexity in global markets – exacerbated by trade turbulence and headwinds in the global economy – could dampen dairy demand both locally and in Australia’s export markets,” he said.

RaboResearch senior dairy analyst Michael Harvey

However, Mr Harvey said, there “should be enough confidence to ensure guaranteed minimum prices are higher than the closing levels of the current season, and potentially reaching AUD 9.00/kgMS across southern Australia.

“Australian dairy companies will, though, need to carefully balance the risk of a potential downturn in market performance in both the local consumer market and the commodity market over the course of the 2025/26 season,” Mr Harvey said.

Stronger footing

Returns from the dairy commodity basket are on a stronger footing compared with this time last year, the report says, after firmer dairy commodity markets throughout the 2024/25 season.

“For Australia, cheese and skim milk powder (SMP) prices are particularly significant due to the industry’s product mix,” Mr Harvey said. “As of May 2025, the cheese and whey value stream is 23 per cent higher than in June 2024, while the SMP/butter value stream is up six per cent over the same period.”

In addition, the RaboResearch report says, a weaker Australian dollar is expected to provide some price support for the country’s dairy exporters.

“At a macro-economic level, the dollar is acting as a shock absorber amid ongoing global uncertainty,” Mr Harvey said. “Since the US administration’s tariff announcements, the Australian dollar has been on a roller-coaster ride, but nonetheless through May to date it has been trading at least five per cent lower against the US dollar compared with the start of June last year,” Mr Harvey said.

“And RaboResearch maintains a 12-month forecast for the Australian dollar to be at USD 0.65, which is below the 10-year average (of USD 0.72) and a positive factor for export returns.”

Storm clouds

However, there are some storm clouds over the wider global trade environment, the report says, following the US introducing a baseline tariff of 10 per cent on imports from trading partners across the globe in April this year.

While this is likely to see minimal direct disruption for Australia’s dairy sector – given the local industry’s product mix and market exposure – Mr Harvey said, from a broader perspective, several key dairy trade flows “remain under scrutiny’.

“Australia’s dairy exports to the United States are limited,” he said, with less than USD 20 million worth of Australian dairy exported to the US in 2024. In contrast, Australia imported USD 150 million worth of dairy products, mostly cheese, from the US last year.

On the broader global markets though, the trade of whey and lactose from the US to China is significant, Mr Harvey said, and at risk of being impacted by the trade war. “This could potentially create additional opportunities for Australian dairy exporters, though these may be constrained by available export volumes,” he said.

Fears of an escalating trade war between the US and the EU are also mounting, the report said, with some EU dairy exports – primarily cheese – now subject to additional tariffs, which is likely to lead to reduced volumes sent to the US.

“As a result, a reallocation of these cheese volumes to other export markets is anticipated,” Mr Harvey said, though the impact on Australia’s export sector should be limited.

Weaker consumer demand

Weaker consumer demand also looms as a ‘downside risk’ for the dairy sector, the report says.

Mr Harvey says global market fundamentals are forecast to remain mostly balanced through 2025, with RaboResearch expecting “commodity markets to remain elevated in the near term”. This will likely “limit the upside” for prices from the current higher-than-average levels, he said.

“RaboResearch remains cautious about the outlook for broader consumer markets globally,” Mr Harvey said. “This is against a backdrop of the softer demand conditions that have been a common feature through 2024 and into early 2025. Household income pressures continue in many economies, and weaker consumer confidence can shift spending habits.”

The report said Australia’s domestic market can serve as “a safe haven amid global trade uncertainty, however there are also headwinds closer to home”.

Mr Harvey said the latest quarterly Consumer Price Index (March 2025), from the Australian Bureau of Statistics, had shown dairy to be the only food category experiencing price deflation, albeit mildly.

“Broadly speaking, Australian consumers continue to face pressure from a significant income squeeze,” he said. “This is leading to trading down and increased promotions and discounting are driving sales, particularly among low and middle-income consumers. Additionally, the food service and out-of-home sectors are encountering ongoing headwinds.”

Looking ahead, Mr Harvey said, the outlook is improving for Australian households as inflation moderates, income tax adjustments take effect and wage growth provides some support to incomes. “However, the focus on value and the trend of trading down are expected to endure in 2025,” he said.

Production

The strength of Australian milk production through the 2025/26 peak will also be crucial for the sector, the report said.

Local milk availability is tightening heading into the new season, Mr Harvey said.

“Adverse seasonal conditions have impacted milk flows in western Victoria, South Australia and Tasmania in the 2024/25 season,” he said. “With national milk production flat year-on-year through March and rainfall deficits persisting, the risk of a production contraction in Australia in 2025/26 remains high unless seasonal conditions improve.”
 

Rabobank Australia & New Zealand Group is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 125 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 38 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 87 branches throughout Australia and New Zealand.