Dairy commodity prices have rallied this quarter – particularly for Australian and New Zealand origin product – despite the world’s milk supply continuing to grow and outpace demand, Rabobank says in newly-released research.
In its Q1 Global Dairy Quarterly report, the specialist agribusiness bank says overall global dairy prices have shown signs of recovery in recent months, with strong consecutive increases seen in Global Dairy Trade (GDT) auctions lifting sentiment in the sector.
However, the report, by the bank’s RaboResearch division, notes that global dairy markets continue to be well supplied, with strong milk production growth across all the world’s major dairy-exporting regions except Australia.
This global supply growth has been supported by relatively low livestock feed prices, which have encouraged production and kept milk supply levels elevated worldwide, RaboResearch says.
And current supply data does not yet indicate that the recent upward move in dairy markets is “structurally stable”, the report cautions.
Added to this, says RaboResearch senior dairy analyst Michael Harvey, geopolitical instability – particularly the recent conflict with Iran, but also ongoing tensions in other regions – could “quickly and temporarily disrupt global trade routes and import demand”.
“As the Middle East is an important market for milk powders, fat-filled powders and evaporated milk, the dairy market will follow the evolving situation in Iran and possible trade disruptions closely,” he said. “At the current time, it remains highly volatile and difficult to predict what will happen.”
Abundant global supply
Abundant global milk supply had led to a pronounced impact on global dairy prices in the final quarter of 2025, the report said, with the prices of a number of dairy products – including fats, whole milk powder, skim milk power (SMP), cheese and whey – declining.
Dairy ‘protein’ markets – including SMP, cheese and whey – had been more resilient, recording smaller price declines.
Mr Harvey said whey prices had even continued to rise during this period, supported by strong demand for high-end protein products in many markets.
The report says milk production remains well above last year’s level in the EU, the US, South America and New Zealand. “And – although the rate of growth is gradually returning to normal – the market is still flush with dairy products,” Mr Harvey said.
“Even so, after an extended period of price declines, it is reassuring for market participants to see that prices are capable of moving higher again, with the recent GDT rises.”
Outlook
In terms of outlook, the report said, as dairy farmer margins come under increasing pressure around the world, the dairy market is expected to gradually tighten, with supply growth slowing.
Output from the world’s ‘big seven’ dairy exporters (the EU, US, New Zealand, Australia, Brazil, Argentina and Uruguay) is forecast to end 2026 up only 0.2 per cent above the prior year, compared with an annual increase of 2.6 per cent in 2025.
Mr Harvey said this outlook is largely driven by softening supply growth in South America and Australia, as well as China. “Milk production is also expected to decline (by 0.9 per cent) this year in Europe, while the overall drop will be partly offset by the US, where farmer margins are supported by high beef prices, suggesting milk production growth will continue through this year,” he said.
Australia
For Australia, the report said, milk production is trailing last year’s levels – albeit with the declines moderating – and Australian milk prices remain shielded from global markets for the time being.
As of January this year, season-to-date Australian milk production (ie. from July 1, 2025) was down 1.2 per cent compared with the same period the previous year, Mr Harvey said, at 5.3 billion litres.
“Falls in milk production have been led by western Victoria and South Australia,” he said, “although monthly declines have slowed. In contrast, there has been a turnaround in New South Wales and Tasmania, with some production increases.”
RaboResearch expects Australian milk production to finish the current season (on June 30 this year) down 1.0 per cent.
“Milk production declines could continue to moderate, although the risk of potential unfavourable seasonal conditions lingers,” Mr Harvey said. “Soil moisture deficits are persisting in key production regions so more good rainfall will be needed leading into autumn.”
The report said the outlook for 2026/27 irrigated water storages is likely to be low unless winter and spring inflows improve.
“Current storage levels are the lowest since 2020, due to several years of below-average inflows, negatively impacting milk supply prospects,” Mr Harvey said.
While farmgate milk prices in Australia remain “shielded” from global markets for now, the report said, the local industry is closely watching the June 1 pricing deadline as the next dairy season approaches.
“There is likely to be some downward pressure on Australian farmgate milk prices if commodity prices in Australian dollar terms remain below prior-year levels,” Mr Harvey said. Competition for milk supply among processors would also provide some support for local farmgate prices, he said.
At retail level, dairy price inflation was running at 3.1 per cent in January 2026, on a year-on-year basis, Mr Harvey said. Inflation in the cheese aisle was more muted for the same period at 0.2 per cent, with liquid milk prices up 3.9 per cent and ice cream 3.5 per cent.
Mr Harvey said Australia’s drinking milk market has been contracting on a volume basis so far in the 2025/26 dairy season, declining by 0.5 per cent in the period from July 1 to October 31, 2025, compared with the same period in 2024. Flavoured milk, though, is “outperforming in the category”, showing volume growth.
In terms of Australia’s dairy exports, volumes were shown to have declined in the period between July 1 and December 31 last year – down 0.7 per cent on the same period the previous year, with large year-on-year falls in butter and whey exports.
Overall though, the report said, export values for the period were 5.6 per cent higher, reflecting improved cheese and liquid milk export returns.
Mr Harvey said Australia’s “exportable surplus” for dairy will remain squeezed in the first half of 2026 by ongoing pressure on local milk supply growth. “The shrinking local drinking milk market though creates a marginal lift in milk available for manufacturing and export markets,” he said.
The report said dairy imports into Australia in 2025 were higher for all product categories, except for skim milk powder.
“Booming demand for high-protein dairy products triggered a local shortage of whey and drove imports 76 per cent higher for the year, to 13,700 metric tonnes,” Mr Harvey said.
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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.
