Australian dairy production is tipped to fall two per cent this season and a further 2pc to 5pc in 2016-17, as farmer confidence levels plummet.
But farmers in Queensland, NSW and Western Australia, who primarily supply local markets, are still relatively upbeat about their profitability, despite the past month’s milk price collapse in southern dairy regions of Victoria, South Australia and Tasmania.
Most farmers in these regions still expect profit levels to be the same, if not higher than the previous five year average, according to survey feedback to Dairy Australia (DA) in the past two months.
DA says domestic markets, especially sales of butter, specialty cheeses and infant milk formula have provided a morale-boosting buffer from strong international headwinds battering export dairy earnings.
But DA’s latest Situation and Outlook report reveals farmer confidence levels had already declined before last month's Murray Goulburn and Fonterra farmgate price reductions hit most southern producers.
DA senior analyst John Droppert said the National Dairy Farmer Survey (NDFS) conducted in February and March showed the number of farmers feeling positive about the future had fallen from 74pc last year to 67pc.
A supplementary survey after the price cuts revealed this number had dropped to below 50pc.
Australia’s 6100 dairy farms are now tipped to produce 9.65 billion litres of milk in 2015-16 - down almost 2pc on last financial year, with initial forecasts for 2016-17 around 9.45b litres.
The continuing production slide compares with almost 11b litres produced 15 years ago.
The report provided little to boost confidence levels with global markets tipped to be unlikely to turnaround until at least next year.
The only glimmers of hope were continuing good sales within Australia, anticipated further depreciation in the Australian dollar and expected improved seasonal conditions in most dairy regions.
Increasing global dairy production - particularly by major exporters the US and the European Union - will slow recovery in the global market.
"Europe and the US continue to power ahead in year-on-year terms, and favourable weather in New Zealand has led to a much smaller decline than many had expected – even after a second season of bruising margins," the report said.
"Inventories in many parts of the world (most conspicuously Europe) are building.
"These stocks will likely slow any emerging price recovery."
European production is being driven by the removal of quotas, which have seen big jumps in production in the Netherlands and Ireland, and the expansion of support packages, which include the doubling of intervention purchases of skim milk powder and butter.
The report revealed the EU is making big inroads into China, with its exports to that part of the world up 59pc.
Australian exports to China also grew 21pc in volume and 29pc in value, particularly in high-value categories such as liquid milk and infant formula.
Demand from Russia, previously the world's second largest single country dairy market, has collapsed, after it placed an embargo on dairy imports from the US, EU, Australia, Canada and Norway.
But Dairy Australia’s report revealed the industry was one of two parts with producers in the domestic-focused milk production regions reporting higher profits.
NSW, Queensland and WA dairy farmers interviewed for the NDFS said they were more confident of making an operating profit this year.
Of farmers surveyed in Western Australia, 65pc said their profitability was higher in the past year compared with the five-year average – up from 55pc in 2015.
In the Dairy NSW and Subtropical Dairy regions, 52pc and 40pc of farmers respectively made a bigger profit in the past year compared with the five-year average.
Between 80pc and 90pc of survey respondents across these regions expected to make an operating profit this financial year - a stark contrast to their counterparts in the southern states.
But Mr Droppert said these farmers would be on high alert for flow-on impacts from the southern price cuts.
“These farmers are sitting okay but they are looking nervously on the horizon, scanning for impacts,” he said.
Milk sales in Australia continue to grow with the swing to fresh full cream milk continuing.
Fresh full cream milk now makes up 49.9pc of all total white milk sales compared with 47.7pc a year earlier.
Supermarket brand milk continued to grow market share, although DA’s information was collected before the recent consumer social media campaign in support of branded milk which saw milk company branded lines sell out from many stores while supermarket brands were left on the shelf.
The average price of branded milk fell to $1.92 a litre in the first half of this year, compared with the supermarket milk brands averaging $1.01/L.
Dairy spreads (butter and blends) grew 4.2pc in volume and 5pc in value.
"This continues a marked change in consumer preferences towards higher fat levels, as perceptions regarding the healthiness of dairy and the risks of fat content have altered," the report said.
The situation outlook report has noted the possibility of improved seasonal conditions as a potential bright spot for farmers, particularly in southern Australia.
The past year’s dry conditions, low allocations for irrigators and constrained pasture growth has coincided with a tight market for hay.
Lower international grain prices took some time to flow through to the Australian market because dollar’s depreciating trend until January.
“A more favourable rainfall outlook suggests farmers may be better placed to take advantage of the ongoing global oversupply to grow more feed on farm, where cash flow allows it,” Mr Droppert said.