Murray Goulburn managing director Gary Helou expects milk prices to be "challenged" in the next 12 months as the world is expected to be flooded with dairy products as a result of Moscow's sanctions.

About 3 billion litres of milk from the European Union is expected to be diverted from Russia to Asia, increasing competition for Australian producers.

Mr Helou said European dairy companies are more likely to process that milk, which is normally used for cheese and butter, into bulk dairy ingredients.

He said he plans to rebalance Murray Goulburn's export portfolio, which is split 50-50 between bulk ingredients and dairy products such as infant formula.

Mr Helou said his ideal balance would be 25 per cent ingredients and 75 per cent dairy products.

"We want to reduce our dependency on ingredients," Mr Helou said. "We have made huge inroads with infant formula."

Murray Goulburn has been steadily increasing its exposure to higher value-added products such as nutritional powders to gain a greater slice of the Asian "dining boom" and bolster farm gate prices.

In May, the farmer co-operative said it would spend $19 million on its Koroit factory in south-west Victoria to increase production of nutritional powers by almost 10 per cent as part of its shift to more "customised" high-value goods.

Mr Helou said that would help the co-operative lift farm gate prices by an extra $1 a kilogram of milk solids, which is expected to be paid by 2017.

"We are progressively delivering that," he said. "We are about 30¢ to 40¢ into it already."

Mr Helou said Moscow's sanctions were a blow, considering Russia is the world's second-biggest dairy importer behind China.

Australia has increased dairy exports to Russia almost fivefold in the past four years. It sent about 22,000 tonnes of dairy products to Russia last year, which was worth about $112 million, according to Australian Dairy Farmers. Of that, Murray Goulburn exported about $94 million.

"We see it has a growing and important market," Mr Helou said. "Unfortunately there is the geopolitics and we're out of the game for the next 12 months."

The European Union sends about 500,000 tonnes of dairy to Russia each year.

National Australia Bank agribusiness economist Phin Ziebell said while Australia's dairy exports to Russia were relatively small, he agreed with Mr Helou that the flow-on effects would put pressure on global milk prices, which – although dropping about 25 per cent this year – are still historically high.

"There is a risk that international prices will fall further as European Union producers look to find alternative buyers," Mr Ziebell said.