The Australian dairy industry is feeling the effect of Russian trade sanctions following a sharp drop in world prices for milk powder.
Russia banned imported food products from Australia, the United States and the European Union in August this year in retaliation to trade sanctions by those regions.
Though Russia is not a big market for Australian dairy products, farmers have been hit by the flow-on effect of the bans.
European dairy products that would normally be sold into Russia are now being sold in other global markets, contributing to the fall in milk powder prices.
At the start of the year whole milk powder was selling for around US$5,000 a tonne, but since then the price has almost halved to US$2,600, the lowest level in five years.
Dairy industry analyst Joanne Bills, of Fresh Agenda, says increased supply from countries like New Zealand, and weakening demand from China have contributed to the price fall, but the Russian trade bans have also had a significant impact.
Oversupply of milk powders
"A lot of European production that would have been made into cheese, that would have turn been sold into that Russian market, is now where possible being diverted into production of skim milk powder, and to an extent whole milk powder," Ms Bills said.
"On top of the fact that New Zealand's having a reasonably good season and they're a big supplier of whole milk powder, that's really adding to the oversupply, particularly of milk powders, for the international dairy market."
With just under half of Australia's milk production destined for export markets, Australian milk prices are strongly influenced by the international market.
"So when we see commodity prices pushed to very low levels, that will inevitably flow through to Australian farm-gate prices," Ms Bills said.
She says a lower Australian currency has provided some relief for local dairy manufacturers, but the prices they pay farmers are not likely to increase any time soon.
"Most dairy companies have already flagged that there won't be any step-ups in prices this season, and they'll really be holding on to make sure that they can deliver the opening price that they've put out there for farmers."
Dr Mark Melatos, an economics lecturer at the University of Sydney, predicts the sanctions could lead to significant changes in global trade of farm products.
He expects the European Union will be worst affected by the food bans.
The EU's exports to Russia are worth about $15 billion a year and it also produces about a third of world dairy products, with much of that sold into Russia.
"The stuff that Russia doesn't buy has to go somewhere," Dr Melatos said.
"With this reorganisation of exports, Australian farmers might find themselves competing against European dairy farmers, for example, in markets where that competition didn't exist before."
One of Australia’s major dairy processors says Russian sanctions on agricultural products such as dairy won’t have a direct impact, but the knock-on effect is a major concern.
Bega Cheese chair Barry Irvin says Russia and China are the world’s two major importers of dairy products.
He says Moscow shutting the door will mean the European Union, which presently supplies much of Russia’s dairy imports, will now be looking elsewhere to unload its product.
“It will see a major shift in global supply and demand. It is not good news for the Australian dairy industry," Mr Irvin said.