Dairy commodity prices have rallied this quarter, particularly for Australian and New Zealand origin products, despite the world’s milk supply continuing to grow and outpace demand.
In its Q1 Global Dairy Quarterly report, Rabobank said 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 bank’s RaboResearch division reported that global dairy markets remain well supplied, with strong milk production growth across all 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. Current supply data does not yet indicate that the recent upward move in dairy markets is “structurally stable”.
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.”
The abundant global milk supply had a pronounced impact on dairy prices in the final quarter of 2025, with prices for several dairy products declining.
Dairy ‘protein’ markets, including SMP, cheese and whey, had been more resilient, recording smaller price declines. 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 said milk production remained 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. 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.”
In terms of outlook, the report said that as dairy farmer margins come under increasing pressure worldwide, 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 percent in 2025.
Harvey said this outlook is largely driven by softening supply growth in South America, Australia, and 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.
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 was down 1.2 percent compared with the same period the previous year, Harvey said, at 5.3 billion litres.
“Falls in milk production have been led by western Victoria and South Australia, 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 the 30th of June this year) down one percent.
“Milk production declines could continue to moderate, although the risk of potential unfavourable seasonal conditions lingers. 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.”
While farmgate milk prices in Australia remain “shielded” from global markets for now, the report said, the local industry is closely watching the 1st of June 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. Competition for milk supply among processors would also provide some support for local farmgate prices,” he said.
At the retail level, dairy price inflation was running at 3.1 percent in January 2026, on a year-on-year basis. Inflation in the cheese aisle was more muted over the same period, at 0.2 per cent, while liquid milk prices were up 3.9 per cent and ice cream 3.5 per cent.
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 to October 2025, compared with the same period in 2024.
Flavoured milk, though, is “outperforming in the category”, showing volume growth.
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 percent higher for the year, to 13,700 metric tonnes.
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