New Zealand dairy producers look set to capitalize on a sharp drop in Australian exports and a surge in dairy imports.

In a new report on Australia's dairy sector, Rabobank said these imports are expected to play a more significant role in Australia's domestic supply chain in the future as local milk production remains constrained.

The report says the overall trade profile of Australian dairy products is in transition, "driven by a number of factors, including declining domestic milk production, reduced export competitiveness and more favorable domestic market returns affecting product mix."

The report's author, RaboResearch senior dairy analyst Michael Harvey, said Australia was an important market for New Zealand's dairy products and New Zealand exporters were well-positioned to take advantage of the expected increase in Australian imports.

"After China, Australia is one of New Zealand's largest dairy export destinations, accounting for about 5 percent of New Zealand's total dairy exports by value," he said.

"New Zealand already dominates Australian dairy imports and is the largest supplier of butter and cheese to the Australian market.

"It seems fairly obvious that the continued shortage of milk solids will require Dairy Australia to expand its dairy and ingredient sourcing capacity in the medium term, creating growth opportunities for global dairy exporters for certain products and ingredients.

"Given New Zealand's proximity and existing strong trade relationships, New Zealand dairy exporters appear to be in a favorable position."

Dairy imports have long played a vital role in Australia's supply chain. However, annual dairy imports in liquid milk equivalent doubled between 2013 and 2023.

The pace of dairy import growth has shifted in recent years, with imports set to generally rise in 2022 and 2023.

Last year, Australia imported more than 1.4 billion liters of liquid milk equivalent dairy products (excluding casein).

The bank expects further growth pressure on dairy imports in the medium term due to declining milk production in Australia, the relative cost advantage of imported products and a surge in demand for low-budget dairy products from Australian consumers due to the cost of living.

Australia's 2022/23 milk production of 8.129 billion liters marks the "third consecutive year of decline" in milk production.

"More than 700 million liters of milk have been lost in the supply chain since production peaked in 2020/21, leading to a chronic shortage of milk for manufacturing - the total amount of milk available outside of domestic and export. drinking milk."

In 2022/2023, the country's supply of milk for manufacturing fell to its lowest level since the 1990s.

He said Australia had been on a slow retreat from the global dairy export stage for some time, with exports falling sharply last year.

"In 2023, dairy exports saw double-digit declines in most products, with fluid milk (down 41% year-on-year) and butter (down 52%) seeing the largest declines."

Despite the decrease, Australia remains a net exporter of dairy products, ranking as the world's fifth-largest dairy exporter and accounting for 4% of global trade.