The latest Dairy Australia Situation and Outlook report revealed better product returns and tighter milk production will support higher farmgate milk prices for the upcoming season.
However, high operating costs will continue to challenge profitability for the 2025/26 season, particularly if extreme weather conditions in many dairy regions do not improve.
"Higher product returns and tighter milk supplies will likely support an increase to farmgate milk prices next season," according to Dairy Australia analysis and insights manager Eliza Redfern
"However, operating costs are rising, and the weather outlook is unfavourable leading into spring. Retail price pressure and global trade uncertainties add to the complexity of the outlook."
While US tariff announcements have exacerbated global trade uncertainty, Australian dairy export prices have remained resilient.
The report warned that if tariff disputes escalate, the challenge for Australian dairy will be maintaining a strong position against potential displaced product and navigating any economic impacts in key export markets. Changing trade flows could however also present opportunities in some international markets.
"Tightened milk production and higher export pricing from key northern hemisphere exporters initially increased orders for Oceania products this season, as global demand somewhat recovered," Ms Redfern noted. "While recent US trade policy announcements have resulted in some buyers looking to secure product from non-US exporting regions, such as Australia, others have been attracted to weakened US pricing."
On the domestic front, dairy continues to perform well in the retail market, supported by behaviour linked to inflation and emerging consumer trends.
In the 12 months to February 23, volumes sold of milk was up 0.7 per cent, dairy spreads (up 3.3 per cent), cheese (up 4.2 per cent), and yoghurt (up 8.4 per cent) all increased, supporting total value growth. However, with ongoing cost-of-living pressures, the potential for further price easing could limit future value growth.
"Consumers are increasingly purchasing private label products and focusing on 'right-sizing' products to minimise food and financial waste. Increased in-home consumption has also supported the rise of social media as a recipe source," Ms Redfern said.
Australia is on track to maintain a national milk pool of 8.3 billion litres this season, but lingering climate impacts, margin pressures, and a lower appetite for farm business growth may result in easing milk production for the 2025/26 season. Dairy Australia currently forecasts a 0-2 per cent reduction in national milk production for next season, likely dropping to around 8.24 billion litres, however, it is a rapidly developing situation.
The report also highlighted the results of Dairy Australia's 2025 National Dairy Farmer Survey, showing that lower incomes, challenging weather, and changes in the processing landscape had negatively impacted farmer sentiment.