That's according to Rabobank's new 'The cost of milk: dissecting milk production costs' report, which says dairy farmers in many regions have felt the pressure of increasing milk production costs over recent years.
Report author Emma Higgins said those cost increases have been broad based, with the majority on 'farm working expenses' rather than other ancillary costs such as servicing debt, taxes and depreciation.
"The latest cyclical cost jump has occurred amongst a unique backdrop, differing from other price hike cycles.
"Farmgate feed and fertiliser cost increases resulting from inclement weather, the fallout of the Ukraine war increasing energy prices, trade and supply chain disruptions and elevated shipping costs.
"This coincided with monetary policy cycles shifting in response to Covid-induced inflation. Interest rates lifted rapidly, increasing the cost of servicing debts alongside the resulting general overhead cost inflation.
"At the same time, labour costs moved higher in response to a combination of policy settings or staffing shortages in more producing regions."
Between 2019 and 2024, the average total cost for milk production across eight major exporting regions (Argentina, Australia, China, Ireland, New Zealand, the Netherlands, California and the US upper Midwest) increased by around US 6c/litre, or 14%, with over 70% of the increase occurring since 2021.
Last year saw all areas experience some relief, with interest rates declining in many regions. With feed expenses the largest culprit in cost increase across the eight regions (+19% from 2019-24), yield improvements and good weather saw feed receipts retreat alongside fertiliser costs, narrowing the cost band back to 2019 levels.
Higgins said that key cost categories varied by region, with feed costs generally lower for pasture based feed systems like New Zealand, the Netherlands and Ireland.
"In contrast, feed bill for more intensive farming systems like those in China and the US tend to make up a higher proportion of overall costs with this largely down to greater volumes of imported feed."
Of the eight regions assessed across the past five years, labour cost increases have been the most significant in Australia - jumping by over 50% since 2021 - while interest rate pressures have been felt the most by New Zealand, Australian and Argentinian producers.
With New Zealand and Australia competing over the past six years to hold the title of lowest-cost producer in US dollar terms among the eight assessed regions, New Zealand is currently in the lead with its cost advantage of US 5c/litre in 2024 (up from US 2c/litre in 2023) due to Australia's higher labour costs.
"The five-year average total cost of production sits at US 0.37c/litre for both New Zealand and Australia, compared to around US 0.48c/litre for the other regions," explains Higgins. "The Oceania region's strong reliance on pasture-grassing, supplemented with home-grown feed stuffs or locally produced feeds has more broadly supported its low cost of production positioning.
"With this comparison being made in USD, NZ and Australian production costs have also benefitted from a respective 9% and 8% discount in 2024 compared to 2019, based on a stronger USD compared to their local currencies.
"The downside of a stronger USD for non-US production regions is the impact on cost pressure for imported inputs. Fertiliser and fuel cost items tend to feel this pressure most keenly in Oceania, averaging around 15% of New Zealand farm working expenses in the last five years."
China Tops The List
Emma Higgins said China remains the highest cost milk producer due to its high reliance on feed (60% of total cost of production). However, it has become more cost-competitive in the past three years with weaker feed prices in 2023 and 2024 helping to improve costs, supported by double-digit percentage declines in corn and soybeans prices in 2024.
While the report does expect China to remain a dairy importer over the medium term, the increasing cost-competitiveness in domestic production will see ramifications for exporters who have historically relied upon a strong Chinese demand and a higher Chinese base price to support import price arbitrage.
Since 2019, the regions generating the best cash flow on a gross milk price margin calculation basis (i.e. milk price minus operating costs) have been New Zealand, Australia and Netherlands, with constant positive milk gross margins through the cycles and lower volatility compared to other regions.
However, Higgins says the dairy sector has experienced significant price and costs volatility during the past decade and that this will not change in the future.
"As the geopolitical environment becomes more unstable, continued cost structure management relative to milk output will be required to maintain dairy farmers' economic resilience in a potentially turbulent business operating environment - something Kiwi farmers have demonstrated in previous commodity price down cycles."
She further adds that RaboResearch anticipates a variety of implications for dairy value chains will exist in the years ahead.
These include volatile operating environments and increased regulatory pressure which will raise the complexity of dairy farming business as well as a need to focus on and optimise dairy cow nutrition and genetics.
"Dairy producers will need to maintain strong milk margins to fund such productivity improvements within an increasingly complex business environment."
