Global dairy crash: Australian milk processors under the pump

Global skim milk powder prices have crashed 42 per cent in 12 months, cheddar by 37 per cent and butter has slumped 31 per cent.

Milk powder plants, such as Bega’s Koroit facility, are under pressure as global prices plunge.

Global cheese prices have crashed 20 per cent in a month, undermining processors’ strategy of boosting returns by cutting milk powder production and diverting dwindling supplies into more profitable cheese manufacturing.

Dairy Australia’s year-to-date manufacturing report shows processors have slashed whole milk powder production by 21 per cent and skim milk powder production by 13.7 per cent, pumping milk into cheese and whey production instead.

But even with this diversion of milk, cheese production has still slumped 4 per cent in the first half of 2022-23, as farmgate supplies crash by 500 million litres.

Across the board global dairy commodity prices have fallen by about 35 per cent since April last year, with Australia’s biggest export earners cheddar down 37 per cent and skim milk powder down 42 per cent.

DA’s cheese manufacturing data shows processors are seeking shelter in the domestic market, cutting cheddar production by 8.5 per cent and lifting other cheese production – such as cream and mozzarella - by 1.1 per cent.

Rabobank analyst Michael Harvey said the shift to domestic markets was also forcing processors to source flatter year-round farm supply to manufacture fresh cheeses for the food service and retail sectors.

But while Saputo, Fonterra and Bega Cheese are trying to boost domestic sales, they still have lines that are highly exposed to the global commodity slump.

Cheddar production is still set to reach about 200,000 tonnes, equal to about half Australia’s 400,000 tonne annual cheese production, with at least 150,000 tonnes to be exported into markets where NZ Global Dairy Trade prices have fallen from $US6472/t in April last year to $US4052/t last week.

Even with a 13.7 per cent cutback in SMP production, Australia will still need to offload about 130,000 tonnes of the powder, which has fallen from $US4599/t to $US2648 in the past 12 months.

Saputo has already closed its Maffra plant and powder production at Leongatha, but Bega’s Koroit and to a lesser degree Fonterra’s Darnum powder plants are still exposed to the global slump.

Mr Harvey said “the next three months are quite critical, because we’re heading into the spring peak in EU and US, so you might see driers come under pressure”.

While there will be some buffering effect from the local market, Mr Harvey said there will still be “downward pressure” on farmgate prices.