Australia’s “cheese-centric” dairy sector looks to higher-value uses of scarce milk protein supply

Australia’s “cheese-centric” dairy industry is looking to higher-value uses of milk protein – such as nutritional supplements – as national milk production remains low, Rabobank says in newly-published research.

The specialist agribusiness bank says the structural decline in Australia’s milk production over the past two decades has seen available milk protein fall by approximately 30 per cent since 2015. And this is re-shaping the country’s dairy product mix.

Where cheese has long been the main focus of Australian dairy production, premium protein products – including protein powders, high-protein beverages and yoghurt – “increasingly offer greater value uplift than traditional cheese production”, it says.

In the report, Milk protein scarcity challenges Australian dairy’s cheese-centric model, the bank’s RaboResearch division says “the strategic question for the industry is shifting from how to process more milk to how to extract more value from a limited pool of milk protein”. 

Rabobank senior dairy analyst Michael Harvey

Report author, Rabobank senior dairy analyst Michael Harvey says the key strategic challenge for the dairy sector is determining what mix of product streams create the greatest value from an increasingly scarce pool of dairy protein.

“Overall, it is important to ensure milk protein is directed to the product stream, customer segment or market that generates the highest return,” he said.

“While cheese remains the dominant use for Australian milk (ahead of drinking milk) and a critical foundation of the dairy sector, ‘protein optimisation’ through use in high-protein products is emerging as the next growth frontier.”

‘Mature’ cheese

Mr Harvey said Australia’s dairy industry “has successfully built a ‘cheese-centric’ model”. However, cheese “value creation” is becoming harder to achieve.

“The sector has long pursued a shift toward a more cheese-focused product mix, supported by investment in cheese processing capacity,” he said.

“Although cheese demand among consumers remains supported at retail level and exports continue to provide opportunity, pricing power is constrained by category maturity, private label growth, import competition and soft global cheese value.

“As a result, although cheese is a protein-rich product, it is often priced according to staple and commodity market dynamics, rather than according to the rising value of dairy protein seen in recent years.”

Although the drivers of future value growth are changing, domestic cheese demand remains a stable and important base for the dairy sector, the report says.

Cheese is a “staple in Australian diets”, Mr Harvey said, with per capita consumption of approximately 10 kilograms annually.

“The domestic cheese market exceeds 270,000 tonnes, with growth driven mainly by retail, where volumes increased from 130,000 tonnes to 202,000 tonnes between 2015 and 2025,” he said.

However, as the cheese category matures, this demand growth is likely to moderate.

Reshaping cheese trade

Constrained milk protein supply is also reshaping Australia’s cheese trade, the report says.

“Increasingly scarce milk protein is also encouraging a more selective approach to Australia’s trade position, where commodity imports help satisfy lower-value applications locally, particularly in food service and processing channels, while domestically-sourced milk solids are directed toward higher-value cheese, ingredient and export opportunities,” Mr Harvey said.

Despite a rise in volumes of imported cheese, Australia remains a net exporter of cheese, the report says. However, it is no longer a “structurally-growing exporter” in volume terms.

“While international demand for cheese continues to expand and cheese remains one of the fastest-growing dairy product categories, Australia’s capacity to participate in this growth is limited by a smaller milk pool and declining exportable surpluses,” Mr Harvey said.

With limited prospects for milk supply growth, Australia’s cheese export strategy needs to become more selective, he said.

“Consequently, the role of cheese exports within the Australian dairy sector is evolving. Rather than pursuing volume growth, exporters are increasingly focused on maximising value from limited cheese export volumes through selective market participation and stronger positioning in markets where Australian dairy can command a premium,” Mr Harvey said.

Future cheese export success will increasingly depend on targeting markets that offer the strongest value returns, the report said, with Asia and the Middle East standing out as key opportunities given their favourable demand fundamentals and appetite for premium dairy products.

High-protein product growth

Capturing value from whey protein – a co-product in cheese manufacturing – has helped support returns in the cheese stream in recent years, the report said, with global whey prices having been on an extended rally, underpinned by “robust demand from sports nutrition, active lifestyles and health-focused consumers”.

Beyond the “cheese-whey stream”, though, growing consumer demand for other high-protein dairy products provides processors with additional avenues to monetise scarce milk protein.

“In Australia, as in many other markets, protein-focused dairy products are growing significantly faster than conventional dairy categories,” Mr Harvey said. “This reflects a broader global trend, as consumers increasingly prioritise protein for health, satiety, weight management, muscle maintenance and healthy ageing.

“Yoghurt has been the biggest beneficiary, with protein-enhanced products delivering growth rates well above those of standard yoghurt. Cottage cheese is also enjoying a resurgence, supported by its strong protein consumption. Milk has benefited from the trend as well, with high-protein milk recording positive growth despite ongoing declines in conventional drinking milk consumption.”

Mr Harvey said while these products represent an opportunity to “valorise” (create increased value from) whey and dairy proteins, it is not expected there will be a wholesale shift away from cheese production, which continues to be the dominant user of milk solids in most dairy markets. 

“Growth in high-protein dairy products is more like to complement than displace cheese production,” he said.

RaboResearch Disclaimer: Please refer to Australian RaboResearch disclaimer here   

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 35 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.