Analysis undertaken by Dairy Australia, as part of the Update, has also revealed instability within the world’s major developed economies is raising questions about the possible likelihood of another financial crisis and the impact it could have on dairy.

In an update of the February-March National Dairy Farmer Survey conducted in late August, 78 per cent of farmers are feeling positive about the future of the industry, compared to 72 per cent when surveyed in February.

Dairy Australia’s Manager Strategy and Knowledge, Joanne Bills, said seasonal variation had continued across regions, with southeast Australia the most confident off the back of strong southern opening farmgate prices and favourable operating conditions. However, farmer confidence in northern Australia, in particular NSW, and western Australia, is yet to make a big improvement as the regions still grapple with the supermarket price war, floods and drought.

“While seasonal conditions have become mostly favourable in the past few months, western Victoria and Gippsland farmers have received too much rain,” Ms Bills said.

“On the whole, the 2011/12 season has started positively, with southern opening farmgate prices three to five per cent higher than last year, and 60 per cent of farmers we contacted described their season as ‘about where they would like it to be’.”

Dairy Australia’s forecast range for full year, southern farmgate prices remains at $5.10 to $5.50 per kg milk solids (39 to 42 cents per litre), based on the outlook for the international market.

“However, given the softening in commodity prices and the strengthening of the Australian dollar since the forecast was made in May, expectations are now at the lower end of the range,” Ms Bills said.

“While this price outlook is down on final 2010/11 payments, improved seasonal conditions and lowered feed costs should preserve profit margins, making the current season one of consolidation for most dairy farmers.”

Analysis undertaken by Dairy Australia as part of the Update, forecasts a 1.5 per cent increase in 2011/12 national milk production to 9.25 billion litres. Despite a slow start to the season, due to wet weather in Victoria and flood and drought recovery in Queensland and Western Australia, production is expected to gain momentum as the season progresses.

China, Asia and the Middle East continue to drive international dairy demand. However, Ms Bills said international dairy commodity prices had softened in recent months on the back of increasing global economic and financial concerns, increasing supplies from New Zealand and Latin America and production growth in the US and EU.

Whole Milk Powder (WMP) prices, as measured by Dairy Australia’s spot commodity price series, have fallen 16 per cent from their peak earlier in the year, while Skim Milk Powder (SMP) and butter spot prices have fallen by eight per cent and 10 per cent respectively.

“While these falls are not insignificant, prices remain historically high, and after initial falls from their peaks, price movements have been limited, despite improvements in supply,” Ms Bills said.

“In view of the global economic turmoil, the international dairy market has remained remarkably stable and could stay that way if demand from China, Asia and the Middle East continue to grow."

“China will continue to be an important driver of dairy demand in the outlook period in two ways – directly through imports of WMP and other dairy ingredients, and indirectly by supporting economic growth in the region and the wider global economy. The threat of a renewed global financial crisis and what this might do to currency markets and demand for dairy products is the key challenge in the outlook.”

The September Situation and Outlook Update is available at www.dairyaustralia.com.au

The Situation and Outlook is one of the many examples of the dairy service levy at work. Farmers receive a benefit of $3 for every $1 invested by Dairy Australia on their behalf. For more information on this and other levy investments visit www.dairyaustralia.com.au