The report, by the specialist agribusiness bank’s RaboResearch division, said escalating input costs — led by fuel, fertiliser, water, labour and interest rates — remained the dominant pressure for the nation’s dairy producers.
And these are eroding sector confidence and pushing cost of production to levels that leave current milk prices near “break even”.
Report author, RaboResearch senior dairy analyst Michael Harvey, said while seasonal conditions had improved in many Australian dairying regions and dairy commodity prices have also staged a partial recovery, “these positives are insufficient to fully offset the compounding cost pressures now embedded across the farm and downstream value chain”.
And this will result in “a need for careful cost control and strategic planning” for those in the dairy sector, he said, with a focus on “operational resilience” critical for the season ahead.
“Navigating the 2026-27 season will require disciplined cost management and careful capital allocation as well as — for processors — prudent farmgate milk pricing strategies,” he said.
Cost pressures
Mr Harvey said input cost pressures were intensifying across the on-farm dairy cost base, exacerbated by the impacts of the Middle East conflict.
“Prices for fuel and fertiliser — particularly urea, the most-heavily applied nutrient in dairy systems — have risen sharply.
In addition, fuel surcharges are indirectly increasing the cost of a wide range of farm inputs and service provisions,” he said.
Added to that, the report said, higher borrowing rates and a tight labour market were further reinforcing margin pressures.
Meanwhile, dairy farm businesses operating across the Southern Murray-Darling Basin had also faced substantial increases in water allocation prices, which have more than doubled over the past 12 months.
And rising costs in the dairy supply chain were not confined to inside the farmgate, RaboResearch said.
“Pressure is building across the broader value chain,” Mr Harvey said.
“Processors are facing higher packaging costs, driven by a spike in global resin prices due to the oil supply crisis.
“At the same time, energy and processing costs have increased as have distribution costs, reflecting higher energy and freight prices, further adding to the cost of getting product to market.”
Prices
At the consumer level, Mr Harvey said, retailers had already moved to lift prices of private-label (retailer-branded) milk, and further pricing adjustments from branded players in the domestic market are likely.
“A renewed cycle of food price inflation, including for dairy, would further test consumer resilience,” he said, “with households already adjusting behaviour, increasingly trading down to private-label products and prioritising value over brand.”
On the farmgate milk price outlook for the 2026-27 season ahead, RaboResearch expects guaranteed minimum prices at near prevailing levels “to be achievable” (excluding temporary support payments), supported by the lift in dairy commodity values in recent months.
Constrained production
While improved rainfall has alleviated soil moisture deficits in key dairying regions in south-west Victoria and South Australia, national milk production for the current season is “broadly flat’, the report said, with annual output sitting at approximately 8.3 billion litres, as of March.
Mr Harvey said milk production output continued to differ across regions, with growth being led by the northern states, while year-on-year declines in Victoria and South Australia are weighing on national production.
Looking ahead, national milk production growth is expected to stay constrained in the coming season, RaboResearch said, with “cautious on-farm decision making” limiting expansion across most dairy regions — and keeping competition “uneven” across processors.
“Despite improved growing conditions, farmers are responding to elevated fertiliser prices by reducing application rates and applying fertiliser more strategically,” Mr Harvey said.
“This is likely to constrain homegrown feed production and increase reliance on purchased feed.
“While some herd management practices are being adjusted to partially offset these impacts, feed costs remain a key pressure point.”
Against this backdrop, RaboResearch forecasts national milk production to decline by 1.2 per cent in 2026-27, marking a third consecutive, albeit modest, annual contraction.
Competition for milk supply among dairy processors was expected to remain mixed, the report said, reflecting differences in processing companies’ strategic priorities and regional exposure.
