Dairy Australia has warned a 'price retreat' spells trouble for processors

Its September Situation and Outlook Report found processors were paying high milk prices yet some of their markets were seeing falling product prices.

"Although margins are tight for milk processors, the domestic market has provided some relief," the report found.

"The 'dairy products' index published by the Australian Bureau of Statistics is up 5.2 per cent over the 2022 financial year indicating that processors and manufacturers are recovering some costs from consumers."

Under the Dairy Code of Conduct, current farmgate prices were all but locked in until June next year.

Although significant volumes of product were already sold or hedged, the remaining exposure would be a source of concern.

"Some milk processors or downstream ingredient buyers attempting to pass on higher costs are finding falling commodity prices add to the challenge of convincing customers that dairy products will be more expensive this season," the report summary found.

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The recent commodity price downturn was largely a function of demand-side influences, as buyers pulled back from a market at seven-year highs.

The invasion of Ukraine, mounting affordability challenges, broader economic concerns, and the impact of COVID-19 control measures in China all contributed to mounting buyer hesitancy.

Conversely, inventories built up in the second half of 2021 and beginning of 2022, together with reports of growing Chinese milk output, assuaged the fear of scarcity that had characterised previous months.

Increases in the 'dairy products' index published by the Australian Bureau of Statistics (up 5.2pc year on year in June) suggested dairy processors and food manufacturers were having some success in recovering higher costs from consumers.

"Nonetheless, price rises to date remain small in comparison to the pace of increasing farmgate prices and on-farm costs," the report found.

The realignment towards a more 'normal' retail/foodservice balance continued to unfold, with retail panel data from NielsenIQ indicating volume changes of between -1.8pc (cheese) and +0.9pc (liquid milk) across the key dairy categories over the year to June.

Read more: Inflation yet to have impact on dairy sales, says analyst

Average prices continue to rise; the total value of cheese and liquid milk sold rose 1.9pc and 3.6pc respectively in the same period.

Rising prices are increasingly likely to influence consumer purchasing behaviour.

"Indications suggested that purchase volumes are yet to be significantly affected; instead, consumers are buying more on promotion, bulk instead of single packs, downgrading to private label products and shopping less frequently," the summary found.

But Burra Foods chief executive Stewart Carson, Korumburra, said with production constraints in many dairy exporting countries, Australia was well positioned to take advantage of growing demand for dairy nutrition throughout Asia Pacific.

"As any domestic shopper will be experiencing, retail dairy prices are increasing," Mr Carson said.

"Wages growth is not keeping up with inflation so Australian consumers will decide whether they retain the same purchasing habits for dairy products as previously."

Global demand for dairy products had softened significantly, for various reasons, since opening prices were published

The GDT commodity price index had declined by about 20 per cent in the last eight weeks, putting pressure on price recovery from international markets.

"Burra Foods is continuing to optimise product mix and maximise yields to create value from every kilogram of milk solids collected,' Mr Carson said.

"Established long-term contracts are in place to reduce some of the volatility of global market dynamics."

Bulla Dairy Foods Dairy and Procurement general manager Rohan Davies said the processor had maintained its milk volumes, to support production this season.

There appeared to be plenty of opportunity for Australian dairy products and with the improvement in profitability on farms, in recent years, there was likely to be increased interest in investment.

"Longer term we do want the Australian milk pool and the local industry to grow, and we will continue to support the growth of the industry as much as possible," Mr Davies said..

"Like previous years, we will consider steps ups throughout the season as we monitor business performance," Mr Davies said.

Bulla had been working with customers to make price adjustments to address milk cost and other input cost increases.

Recently the company had expanded its supermarket range.

"In these ways Bulla's business model is adjusting well to the recent supply chain pressures with our teams in Colac continuing to focus on taste and quality and the value which we see in delivering products that use fresh milk and fresh cream," Mr Davies said.