Firmer footing for dairy

Australian has dairy steadied over the 2025–26 year after a turbulent start. However, rising input costs linked to the Middle East conflict are threatening late season gains and point to a softer 2026–27 outlook, according to Dairy Australia's latest Situation and Outlook Report.

The Dairy Australia mid-year report confirmed a strong turnaround in milk production through season 2025-26, supported by a decent autumn break. Milk production, which was down 2.4 per cent year-on-year in October, improved to 0.7per cent down by March.
Production for the remainder of this financial year is expected to be solid, driven by improvements to pasture conditions and soil moisture in the latter part of the season.
Dairy Australia analysis and insights manager Tom Youl said while well-timed rain in February and March sustained late season pasture growth, reducing the urgency of fertiliser requirements, price rises and supply disruptions will be felt more acutely in season 2026-27.
"Farmers will face margin and cashflow pressure with input cost and broader supply chain price pressures from fuel and fertiliser expected to remain a factor heading into the new season.
"However, although the outlook for on-farm impact remains highly variable, there are positives for farmers heading into the outlook period, with fuel price signals pointing downward and national stockpiles increasing from early-March," he said.
Against this backdrop of uncertainty, Dairy Australia projects a two per cent decline in milk production across the 2026-27 season, within a range of one to three per cent.
"External factors will be the driving influence behind production next season – a timely resolution to the Middle East conflict and favourable weather conditions could see production ease by one per cent, however it could fall by as much as three per cent if elevated input costs are sustained over the year," Mr Youl said.
"On balance, we are projecting a two per cent decline over the season."
The milk production turnaround through the 2025-26 season was reflected in the latest National Dairy Farmer Survey results, which revealed heightened optimism for the future. The number of farms reporting they were in 'expansion' phase rose to 26 per cent, up eight per cent from last year, with a further 38 per cent of farms increasing their herd size in the past 12 months.
The survey was conducted from about February 16 to March 10, with most responses recorded before the beginning of the latest Middle East conflict, although there was little shift in sentiment in responses received after March 1. However, further evolution of the conflict since then is likely to influence farmer sentiment post-survey.
Retail sales sustained positive demand for Australian dairy overall, despite category mix changes. Protein driven consumption remains a key demand driver, while momentum in plant based beverages has stalled as price pressures and awareness of ultra processed foods reshape consumer choices.
"The demand outlook in the retail sector remains positive, particularly from a volume perspective," Mr Youl said.
"Greek yoghurt, cooking cheese and butter are delivering strong volume growth within their categories, reflecting current consumer trends."
"However, performance varies by product and category as inflation and cost of living pressures increasingly push consumers towards more budget friendly choices."
Beyond our borders, export demand has been largely stable in 2025-26, despite the usual variance among specific product lines and trade partners. Global supply has trended upward; however, the resulting supply pressure has not translated into uniformly lower commodity prices.
"Global dairy prices have shown notable resilience despite strong supply growth across major export regionsl.
"While increased production in New Zealand, Europe and the United States has added supply pressure, prices – particularly for skim milk powder – have remained elevated due to tight availability and diversion of milk into whey protein concentrate."
On the demand side, the decline in Chinese dairy imports over recent years has largely been arrested, while exports to South-East Asia and the Middle East and North Africa increased in volume by around two per cent in 2026, with demand expected to remain resilient despite ongoing geopolitical uncertainty, as buyers continue to prioritise food security and continuity of supply.
"Looking ahead to season 2026-27, the positive momentum that saw the current season finish strong should see milk production remain stable through the first few months, though that will likely be slowed by high input prices, and elevated cost structures will remain a key challenge.
"There is uncertainty on the horizon, however, the positive outlook for domestic and global demand will hopefully help to offset some of those challenges," Mr Youl said.