AUSTRALIAN milk producers are receiving farmgate prices at record high levels but analysts warn most of this rise is being eaten by increased input costs, such as feed.
The Dairy Australia October Situation and Outlook report for the season's first quarter shows a warm and dry winter had impact on feed cost and availability.
SA senior industry analyst John Droppert said production would continue to contract due to high production costs and warm and dry weather.
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.
DA forecasts a 3pc to 5pc decrease in national milk production to 8.3 billion litres to 8.5bL for the full season.
DA industry analyst Sofia Omstedt said the high farmgate prices were being driven by two major forces - strong competition among Australian milk processors and "very well-balanced global market fundamentals".
She said the relatively low Australian dollar had also helped improve the cost-competitiveness of Australian products in overseas markets.
She said New Zealand, who had a good season, posed the biggest competition to Australia, but overall, the global supply situation was still favourable, while demand had increased 4.5pc to a new trade record for dairy.
Ms Omstedt said China and South East Asia were particularly driving demand, with import to China up 7.2pc and SE Asia up 10.2pc.
At the same time, China has decreased its dairy imports from the United States as much as 40pc, leaving opportunities for other nations.
Australian imports to China have grown 7pc in the past year.
Ms Omstedt there were also good signs in the domestic market, which remains Australia's strongest.
"Consumers are increasingly willing to actively pay a premium for products they believe offer additional value for them as consumers, even at a time when the general economy is slowing," she said.
She said this included yoghurts with added probiotics or protein, as well as deli cheeses.
"We've also seen a small average increase in chilled cheese, like cheddar, for the year, but that was off a very low basis," she said.
Ms Omstedt said these high value products were adding more value to the entire supply chain.
The DA report shows while domestic milk sales have dropped 1.3pc in volume, they have grown 3pc in value, while cheese sales were up 0.9pc in volume and 3.4pc in value.
Dairy spreads and yoghurts lifted 0.9 and 0.1pc in volume and 2.8pc and 2.1pc in value.
But while, these are positive, DA warns feed prices and availability will be difficult in the coming months.
"There is a mixed picture across the country," Mr Droppert said.
"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."
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In the Central SA district grain prices dropped 24pc in September, year on year, to an average $290, off the back of a big jump last year, while South East grain prices are also down 23pc to $315.
But hay prices have climbed in the past 12 months - up 6pc to $290 in Central SA and up 21pc to $425 in the SE.
DA 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," he said.
"Conditions are favourable in some areas, but we're urging all farmers to monitor their feed plans and use the resources available via DA's website to make informed decisions."
- Details: feed.dairyaustralia.com.au
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