Australian milk production is set to increase this season for the first time in three years, according to Dairy Australia's October Situation and Outlook.
DA's preliminary forecast is for milk production to grow 1-3 per cent in 2020/21.
Favourable weather, lower input costs and relatively firm farmgate milk prices supported some of the best dairy farming conditions of recent years, the report said.
Tasmania, Gippsland and South Australia are forecast to lead the lift in production, but milk supply is forecast to increase in most regions.
This is supporting 'cautious optimism' for improved farm profitability.
The report highlights significant changes in consumer purchasing habits resulting from COVID-19.
While foodservice and route channel sales have declined due to reduced hospitality sector activity and travel, retail dairy sales have been fuelled by increased levels of home cooking and baking.
Supermarket sales of butter have surged 18.2 per cent, cheese by 6.4pc and plain Greek yoghurt by 7pc in volume in the past 12 months, with larger value packs preferred over single serve items. By contrast route channel sales of flavoured milks in convenience and petrol stores fell 19pc.
"Two very different stories are emerging for the current season," Dairy Australia senior industry analyst Sofia Omstedt said.
"One tells the tale of consistently improving conditions at the farmgate and a positive flow-on impact on milk production.
"The other reflects depressed global economic growth, disrupted dairy demand and significant shifts in consumer purchasing habits from COVID-19."
Ms Omstedt said from a farmgate perspective several things were going well, with input costs easing and confidence rebounding.
"Whilst the story is far from finished, this year could finally provide the industry a much needed breathing window and farmers the time to build up equity again," she said.
Some of the new COVID-inspired consumer habits could continue to impact dairy demand.
"With more people staying home than ever before, cooking and baking at home has experienced a renaissance and dairy products used in these recipes are the ones that have grown the fastest since the start of the pandemic," Ms Omstedt said.
"It's likely some of these new habits will become permanent lifestyle changes.
"If realised, the industry's ability to capitalise on new growth trends will be key to ensure strong ongoing demand for Australian dairy, as we settle into a new normal."
Global supply of dairy is reported to be mounting.