The real reason milk and dairy prices are so high

Dairy farmers have been cashing in on the cool, rainy conditions over the past few years. (Source: Getty/supplied)

If you want to see the tale of the rising cost of living, then go no further than your local supermarket.

The aisles tell the tale of Australian inflation. First, it was toilet paper, then vegetables but now, one category really stands out: milk and dairy. Prices are rising so fast, I’m starting to envy the lactose-intolerant.

The dairy section may be chilled but it’s a major hotspot when it comes to price inflation. My favourite yoghurt is up in price by 20 per cent, and milk is up at least the same. The days when it cost a dollar a litre? Tell kids about that and they won’t believe you.

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Australian households love dairy. We buy milk, cream, cheese and yoghurt in huge quantities. So, when dairy goes up in price, it matters and we feel it. The official ABS inflation indicator for February tells us just how much dairy has risen. It’s up 14 per cent over the past year. That’s more than bread, more than fruit and vegetables, and much more than meat.

(Source: supplied) (Jason Murphy)

I started wondering how much my own dairy grocery bill was. The answer came as a shock. It easily adds up to 10 to 15 per cent of my groceries. The last time I did a big online shop, my dairy selections cost me $24. What did I buy?

• Fancy cheese: a tub of Bulgarian sheep fetta for $11. (it used to cost $7).

• Also, the least fancy cheese in Australia: a little plastic packet of home brand granulated parmesan cheese for $2. It used to cost $1.60. I adore that stuff, even though I’ve had people try to diss me for eating it.

• Greek yoghurt. It used to cost $5 and is now $6 (It briefly went to $7, so $6 is kind of a relief).

• I got milk too. I was paying $2.39 for 2 litres back in 2021. Last night, at the Woolworths near my house, they wanted $3.10 for $2 litres.

Milk has risen 20 per cent in price since 2021. (Source: supplied) (Jason Murphy)

So, those four items have gone up 57 per cent, 25 per cent, 30 per cent and 20 per cent, respectively, since 2021. It’s a dairy price explosion. Wage Price Index growth in recent years is 2.4 per cent, and 3.3 per cent over the past two years is nowhere near that high. We’re clearly getting poorer in milk terms.

Where’s the money going?

I looked at the financial reports of Bega, the big cheesemaker. They are also the third-largest milk seller in Australia, selling well-known brands including Pura and Dairy Farmers. I thought they’d be making a killing but, instead, their profits are in the toilet. They made profit of just $7 million on revenue of $1.68 billion, which is possibly the thinnest margin I’ve ever seen. Turns out they’re paying farmers a lot more for milk and actually didn’t pass that price rise on immediately.

“Farm gate milk competition remains elevated with further reduction in supply,” their latest results presentation said.

Aha! So it’s not the milk brands making bank. It’s the dairy farmers. The cool, rainy conditions we’ve had over the past three years, plus the high rate of food inflation means it’s been a wonderful time to be in the cow-squeezing game.

Farming the profits

According to the Dairy Farm Monitor Project, where the state government of Victoria looks at profits on a selection of dairy farms, profits haven’t been this high and steady for many years. I bet there are some very nice new Land Cruisers driving around the lush regions of eastern Victoria and southern NSW.

I also hope those dairy farmers have paid down their bank loans though. El Nino is going to come back eventually (there’s a 50 per cent chance of it later in 2023, which is double the usual odds) and global dairy prices are falling thanks to higher production in the northern hemisphere.

“Milk production has increased across several key exporting regions, largely due to a mild winter in the northern hemisphere,” said Dairy Australia in its most recent industry outlook report.

“Increased exportable product, particularly out of Europe and the United States, has led to a significant commodity price downturn.”

You can’t trade fresh milk internationally, but you can trade milk powder and cheese. What that means is the global price of milk doesn’t hit the Australian market directly. It’s not like petrol where we simply pay the global price. But it’s not like housing either, where prices are completely local. It’s a bit of both.

Milk futures are traded on the Chicago mercantile exchange, alongside orange juice futures, coffee, cocoa, wheat and lumber futures. They tell you what the market expects prices to do. The recent trend is down, as the next chart shows, although with an ominous uptick in just the past week or so.

(Source: supplied) (Jason Murphy)

For my sake - and yours - let’s hope that blip up at the end is temporary and the price of dairy doesn’t keep rising, putting milk, yoghurt and cheese in the luxury category. I don’t want to have to turn to oat milk.

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