Dairy Australia's latest Situation and Outlook report shows the industry is facing a challenging global market, although there's strong growth in domestic retail value.
In the September quarter report, DA industry analyst Eliza Redfern said cost of living pressures continued to have an impact on consumer spending.
That had resulted in importers buying substantially reduced volumes of product.
"Weakened global demand, particularly from China, has weighed substantially on dairy export prices," Ms Redfern said.
"Many people are still spending cautiously, and importers continue to buy in a 'hand-to-mouth fashion'."
She said significantly cheaper international dairy product was undermining the competitiveness of Australian dairy, both in the domestic space and also on the global stage.
Ms Redfern said Australian dairy exporters were in a difficult position because of strong competition from NZ and northern hemisphere product.
The most notable example was NZ, where milk prices had rapidly retreated to a midpoint of around A$6.65/kilogram milk solids.
For processors, the Australian market had held more attractive returns compared to exportable commodities.
But with local buyers importing 17.3 per cent more dairy (during 2022/23), domestic Australian dairy prices were now increasingly under pressure as well.
"While this has been predominantly for the ingredient and foodservice sectors, the appetite from retailers is likely to grow as consumers continue to look to save costs," she said.
"There is a lot of pressure, within that space
"In the absence of a market rebalance from that global perspective, exports remains a tough business and import pressure grows."
Domestic dairy returns were also facing competition from cheaper international product.
The bright spot for Australian dairy farmers was the strong farmgate milk prices set for this season.
That followed growth in milk production in the final months of the 2022/23 season, despite a 5 per cent contraction in milk flows overall due to flooding, labour issues, resource competition and farm exits.
"As we transition to spring, the Australian milk pool is expected to see further year-on-year growth, recovering from last season's production dip due to flooding," Ms Redfern said.
"Strong farmgate milk prices place Australian farmers in the best possible position as the industry faces challenges."
Dairy retail prices had increased at the fastest rate compared to all other food groups, with the total value of dairy products sold offsetting any declines in volume.
Fresh milk ranked third in total retail market value growth, closely followed by cheese in fourth place and yoghurt in ninth
The volume of milk, cheese and yellow spreads had declined by about 2 per cent in the quarter, but yoghurt was bucking the trend, with an increase of 3pc.
"If you look at the total value of the product being sold in each of those categories, it has grown by 10 and 18pc, depending on the category - a lot of that is driven by the higher retail prices and inflationary pressures.
"That's essentially offsetting any of those declines in volume being sold in the milk, cheese and yellow spreads category."
The shift to a mix of working from the office and home continued to drive the increase in yoghurt sales.
"People are looking for healthy snacks and yoghurt is perceived as a healthy snack, which helps support sales," Ms Redfern said.
But, despite good farmgate milk prices, input costs were climbing again.
The Ukraine conflict had disrupted global fertiliser and grain trade, impacting Australia's market, the report found.
While global fertiliser prices had eased, Australian suppliers were facing growing demand, with reports of urea rationing.
"There has been stronger than anticipated demand, since those more favourable autumn conditions, so particularly for urea," Ms Redfern said.
Additionally, there are heightened risks and regional variations to the outlook for homegrown feed.
The yet-to-be-declared El Nino event could bring drier conditions, weighing on feed availability.
"Some regions have been able to retain moisture, from those past wet seasons, particularly within some Victorian area, but then if you go further up north and parts of the north coast there are areas where soil moistures have dried out," Ms Redfern said.
Robert Morrison, Yandoit, Vic, milks a 100-strong herd and supplies Saputo.
"We've got to be grateful for the prices we are receiving at the moment, given what the New Zealanders are facing," Mr Morrison said.
"The season is looking good, we have plenty of moisture underneath, so even if the spring does tail off a little bit it's not like we are going into a dry period, with dry soil.
"Everything is set up, it's looking good, and the prices are good."
But he said energy and insurance bills continued to remain a drag on increased returns from milk production.
"I haven't seen the insurance bill yet but I am frightened as to what that is going to look like - these things are tempering the good prices, but at least they will help us cope with those things, this year," he said.
He said it was "a little bit disappointing" when farmers were hoping to make the most of the prices to get ahead, but were faced with increasing costs.
"I guess that's farming, isn't it?," he said.
"We just have to hope it shields us from what's to come out the other side.
'We'll maybe miss the worst of those softening prices - at least it will get us further through, until when the price situation starts to turn around again.
"Considering what the beef and sheep job looks like, we are in a pretty fortunate position at the moment."
A delivery of urea had not turned up quickly enough to catch the last rain event.
"Now we are sitting back waiting for the next rain event before we can get that out - at the moment, it's in the lap of the gods and it's nothing but sunshine and blue skies," he said.
"But we are enjoying that, after how wet it was in the last couple of years - it's a bit more like a somewhat normal spring."
For more information and to view the latest Situation and Outlook Report visit dairyaustralia.com.au/sando.
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