Farmgate prices tipped to lift but pressure remains

In its latest annual seasonal outlook, Thirsty work - A journey to rebuild begins, the agribusiness bank highlights the pressures mounting on Australia's dairy supply chain, despite the favourable price outlook, and the clear downside risks to farmgate margins if the season remains unfavourable.

It also warns dairy companies will not be immune to the margin squeeze with "record levels of surplus processing capacity" - in excess of two billion litres - expected in the new season.

Rabobank senior dairy analyst Michael Harvey said Rabobank's global market forecasts point to an indicative weighted average farmgate milk price in the Southern Export region of $6.40 a kilogram milk solids - a mark only attained or exceeded once in the past.

He said the ability of dairy farm operators to capitalise on the higher farmgate milk prices will be determined by seasonal conditions and feed costs.

"The importance of a timely autumn break this season cannot be overstated," he said.

"The volume of milk solids in the system is at a 24-year low, and milk supply will drop further without an autumn break."

Even with an 'average' autumn, national milk production is predicted to fall by a further 0.8 per cent in the next year, he said.

Even with good seasonal conditions, Mr Harvey said the milk pool recovery would be slow with the national herd and number of dairy farm businesses reduced.

Farmgate margins are also expected to remain tight in the coming year.

"Soil moisture profiles are below average, there are shortages of home-grown feed, and high water and purchased feed costs are leading to elevated cost of production," Mr Harvey said.

"While dairy farm operators are mitigating the margin squeeze by making adjustments to their feeding programs and reducing herd sizes, the need for a timely autumn break is critical if farmers are to grow their own home-grown feed and create a feed 'wedge'."