New Zealand’s dairy boom backfires amid Australian drought

New Zealand’s milk surge has flooded global markets, turning what should be a record-breaking season into a price dilemma. Farmers are expanding output under strong farmgate prices, but the oversupply is backfiring across global markets. Meanwhile, Australia’s drought-stricken producers face the opposite struggle, with farmers struggling under a contracting production.Milk production in New Zealand reached 2.67 million tons in September, the highest level for that month since 2020, and a 2.5% increase compared to the previous year. Milk solids production grew even faster, up 3.41% year-over-year to 228,839 tons.With a remarkable seasonal peak in sight, cumulative production stood at 13.14 million tons as of September, representing a 1.6% year-on-year increase. Meanwhile, milk solids output rose by 2.5%, reaching 1.22 million tons.Favorable milk prices are encouraging farmers to expand output. Fonterra’s farmgate price forecast remains at $10 per kilo of milk solids for the 2025/26 season, with only a minor adjustment to the forecast range announced on August 21.Under this favorable pricing environment, Fonterra expects additional farmer investment in machinery, facilities, and herd expansion, which could further strengthen New Zealand’s position as a competitive global supplier. However, this expansion also implies that rising milk volumes may continue to weigh on prices in the near term.The overflow of milk in key producing regions has led to a notable decline in global dairy commodity prices. Although dairy demand continues to grow in developing countries, it has not been sufficient to offset the current oversupply. Butter prices were particularly affected, as its long shelf life has encouraged processors to increase production for storage purposes.While prices are expected to recover once milk and fat output stabilizes, the current price decline has not yet been passed on to farmers. As a result, producers are still receiving positive signals to expand production. Given the typical lag between price movements and production adjustments, a short-term downward price trend remains likely.Some production challenges persist, notably low dry matter content in grasses in the Waikato region and slower grass growth due to cold weather. However, feed supplement prices remain manageable, supporting profitability and maintaining a generally positive production outlook.AustraliaThe Australian situation contrasts with New Zealand’s strong performance. Milk output fell by 2.99% year-over-year in August, reaching 661.5 million liters.Lower volumes in Victoria (-4.3%), the country’s largest milk-producing state, played a central role in the decline. This was compounded by decreases in South Australia (-8.2%), New South Wales (-0.1%), and Western Australia (-6.8%), partially offset by modest growth in Queensland (+3.5%) and Tasmania (+1.1%).Overall, the monthly contraction contributed to a cumulative production decline of 2.89% year-over-year, totaling 4.87 billion liters as of August. A key driver behind the reduced volumes has been drought conditions in southern regions. As of September 30, soil moisture remained below average across the South, with below-average rainfall in the East. Short-term forecasts suggest higher rainfall between October and December in the eastern half of the country, offering limited relief for the western states, where dryness is expected to persist through the rest of the year.