Dairy Australia's October Situation and Outlook report for the first quarter of the season shows record high farmgate milk prices continue to be weighed down by high input costs and a dry weather outlook.
Another warm and dry winter has impacted feed cost and availability, while the cost of irrigated water has continued to increase for farmers in the Murray region.
Feed supply is forecast to remain tight with a dry outlook for the remainder of the year and drought conditions persisting in some regions.
Australian milk production declined 6.9 per cent in the season to August as a result of cost pressures, low rainfall in some regions and reductions in herd numbers.
Dairy Australia retains its forecast of a 3-5pc decrease in national milk production to 8.3-8.5 billion litres for the full season.
Dairy Australia senior industry analyst John Droppert said Australian dairy farmers had entered a season of record farmgate milk prices, however milk production had continued to contract due to ongoing high production costs and dry conditions in many areas."
"There is a mixed picture across the country. For many farmers in southern Australia, good early-season rainfall has provided a head start on pasture growth and fodder conservation, but those in drought affected areas further north are facing a second season with few palatable options," Mr Droppert said.
Strong farmgate milk pricing is supported by buoyant international commodity prices (with subdued milk production in key dairy exporting regions and robust global demand) and intense competition for milk supply among processors due to reduced Australian milk production.
Higher retail prices have delivered value growth for all major dairy products in Australian supermarkets, mainly in private label and branded milk but also dairy spreads.
Premium priced speciality products like health-style yoghurts and deli-cheeses have also experienced sales growth.
"This season's farmgate milk price will provide some farmers with the chance to make up some ground financially, however, high costs of feed and water and ongoing drought will continue to hold back profitability. Whilst these challenges persist, milk production is likely to remain subdued," Mr Droppert said.
Dairy Australia managing director David Nation said the dry weather outlook for the remainder of the season was concerning.
"The outlook for continued dry conditions is likely to see ongoing pressure on feed costs," Mr Nation said.
"Conditions are favourable in some areas, but we're urging all farmers to monitor their feed plans and use the resources available via Dairy Australia's website to make informed decisions."
An updated forecast will be published in a new December Situation and Outlook report.
- Feed planning resources are available via Dairy Australia's website http://feed.dairyaustralia.com.au/