Dairy Australia's March 2023 Situation and Outlook report reveals 97 per cent of Australian households continue to buy dairy products.
And although cash-strapped consumers are seeking cheaper options, good returns from the domestic market, as local milk production contracts, are underpinning prices despite falling global commodity values.
Australian processors are also extracting a premium from export market on the back of their reputation for quality.
But the report warns the downward pressure on dairy commodity prices, to which the majority of Australian milk is exposed, will flow through to farmgate milk prices moving into the 2023/24 season.
Dairy Australia industry analyst Eliza Redfern said despite higher retail prices and financial pressures facing consumers, dairy remained a staple and trust in the dairy industry was at an all-time high at 76pc.
But recent data from NielsenIQ indicated more Australian households (33.8pc) were shopping between four or more retailers, as they looked for cheaper options, and were opting for private label products.
Australia's unique dairy market conditions
Ms Redfern said amid a global environment of change, Australia's dairy industry was supported by unique local circumstances.
Increasing retail prices in Australia, a contracting milk pool and competitive pressure on processors to secure supply were supporting farmgate milk prices at a time when global commodity values were falling.
"For Australia, however, the commodity downfall has been relatively marginal," Ms Redfern said.
"Simply put, Australian dairy exports are extracting a larger-than-usual premium on the global stage, held firm by limited product availability."
Australian products attracted a premium because of their quality, the relationships the Australian dairy industry had built in overseas markets and the provenance that helped attract higher retail prices.
The shrinking milk pool - the Situation and Outlook Report forecast a 4-6pc decrease this year - also meant processors had less excess exports to place in the spot market, where values were declining.
"A growing price disparity between Australian exports and product from other countries is not infinitely sustainable," Ms Redfern said.
"The lack of milk production growth in Australia has helped insulate the industry from some of the pressures emerging overseas.
"However, global economic and geopolitical developments, and a growing surplus of dairy on international markets will inevitably exert influence."
But any the impact of falling global prices would be moderated by continuing constraints on milk availability and competition at the farmgate.
Global forces at play
Ms Redfern said global forces were putting pressure on dairy commodity prices.
"Inflation has eroded consumer demand globally, and dairy ingredient buyers are increasingly looking for the cheapest product," she said.
"Global dairy buyers seem keen to wait until prices are deemed low enough, and purchase on an 'as needs' basis."
At the same time, milk production was increasing in several key exporting regions, after remaining stagnant for some time.
"A mild northern hemisphere winter has been a key contributor to this shift, particularly in parts of Europe and the United States," she said.
Farm input costs still elevated
Ms Redfern said farm input costs were still above long-term averages, despite a slight easing in recent months.
"The floods were also the catalyst for a surge in fodder prices," she said.
"With grain offering more attractive returns, Australia's hay supply leading into the harvest period was already under strain.
"As untimely rain impacted hay-making operations, most bales produced were weather damaged.
"Consequently, good quality and protein hay varieties remain scarce and in high demand, particularly as autumn calving begins in some regions."
Feed byproduct prices had eased, in line with grain prices on the back of a big harvest, particularly in Western Australia.
Fertiliser prices has also eased.
But the ongoing war in Ukraine would mean costs were unlikely to fall further.
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Carlene Dowie
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
Carlene Dowie is the editor of the Australian Dairyfarmer magazine and has more than 30 years' experience as a rural journalist.
