Fonterra Australia director of farm source Matt Watt said supply issues in Europe had combined with sluggish production in Australia and New Zealand to create the worldwide scarcity.

He sought to assure local consumers that supermarket shelves wouldn't run dry.

"We will always prioritise domestic supply," he said.

But he warned the global demand would affect local prices.

"Product will remain available, but price pressure will be there from the export market.

"We've seen retail prices go up already and we'd expect that to continue," he said.

READ MORE:

A Rabobank global dairy industry report released on Thursday described worldwide milk supply as "teetering on the edge", with supplies at their lowest point in nearly a decade.

Fonterra regional manager for Western Victoria Andrew Nevill said an exceptionally wet winter had stymied local milk production in recent months.

"When it's too wet it's hard to get cows onto graze pastures, and cows will damage a really wet pasture" he said.

As milk production recovers, long-term supply chain issues brought on by COVID have made it difficult to export product.

"The latest issue has been a lack of shipping pallets, which we have had to micromanage to ensure product gets where it needs to go," Mr Watt said.

Labour supply is also an issue, particularly for corporate-sized farms that rely on migrant workers.

"That's been a particular issue for Australia and New Zealand, which have had some of the strictest border controls," Mr Watt said.

Constrained supply isn't the only factor putting pressure on prices.

Fertiliser prices have surged recently after China, which provides most of Australia's supply, opted to restrict its phosphate exports to protect its domestic supply.

The move directly affects dairy farmers fertilising their pastures, but it will almost certainly push up the cost of grain as grain farmers are hit by the price rise.

Most dairy farmers are happy though, according to Mr Nevill, with the farm gate milk price "as strong as it's been in years".

Kirkstall dairy farmer Chloe Brown said it was "a great time to be a dairy farmer" with production high, mild, wet conditions forecast and plenty of market competition.

"If you're not making money as a dairy farmer now, you're doing something wrong," she said.