Strong farm finances, stable milk prices and a resilient domestic market for milk and yoghurt could help mitigate the effects of inflation and widespread spring flooding.
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The December 2022 Situation and Outlook Report from Dairy Australia shows profitability remained above long-term averages in 2021-22.
This season, milk prices are, on average, higher and livestock trading conditions remain strong, but rises in key input costs outweigh the increase in gross farm income.
Despite inflationary pressure, Australian consumers were still buying dairy with sales of fresh milk and yoghurt up 0.3 per cent and 0.9 pc respectively for the year to October 2022.
Rather than forego dairy, consumers have begun to adjust their purchase decisions - buying products on promotion and trading down to private label products.
"The report found staffing is still an issue and identified an increased reliance on farm owners and family members as unpaid labour," Dairy Australia's Industry Insights and Analysis manager, John Droppert said.
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The eastern states have experienced widespread spring flooding and wet conditions.
The full impact on forward milk volumes was difficult to assess, yet Australia's milk production outlook for 2022/23 would almost certainly be revised downwards.
There had also been significant impacts on grain and silage supplies.
"While there is potential for opportunistic access to downgraded product, the overall effect will likely push feed prices higher - especially for high quality product," said Mr Droppert.
From an overseas perspective, milk intakes are growing in the northern hemisphere while the New Zealand milk pool was constrained with similar feed costs and labour challenges to Australia.
Demand in China was likely to remain subdued suggesting that global dairy commodity prices were likely to face some pressure in the New Year.
Bena, Gippsland, dairy farmer Bruce Glasgow said labor shortages were the biggest issue, facing his area.
"Work-life balance goes out the window," Mr Glasgow said.
"That's what I am focussed on at the moment, but the costs are a concern - it's going to be a tough 12 months, as far as getting fodder in, because of the failed hay crop up north," Mr Glasgow said.
"Dairy prices have increased and you would hope a bit more would trickle through to us, to help us with our costs."
He said the Australian Dairy Farmers Corporation and Union Dairy Company had stepped up their farmgate milk prices.
He said he was hoping to replace a quad bike with a side-by-side but the cost was "crazy".
"And for the bigger model you are looking at a delivery date of September next year - you have to keep shovelling money at repairing what you have already got," he said.
"The dealer will miss out on that money, as they can't supply."