DESPITE a tough financial year for Victorian dairy farmers because of the impact of the US's crippling drought, experts are forecasting a strong start to 2013.
Farmers experienced a tumultuous year, with the US drought influencing the global market through high grain prices and limited dairy production and New Zealand enjoying a "booming" season, according to Dairy Australia (DA) manager of strategy and knowledge Jo Bills.
Ms Bills predicted dairy prices would lift in 2013.
Reflecting oversupply and weak commodity prices in global markets, farmgate prices for the 2012-13 season opened significantly lower than for the previous season in export regions, Ms Bills said.
"We saw a surge in milk production that drove the prices down significantly," she said.
"They really bottomed in May-June just as the prices were being formulated and announced for the 2012-13 season.
"As a result, opening prices were 8-10 per cent down in southern Australia."
Production is falling well below DA's forecast production for growth of about 2pc to 9.65 billion litres for 2012-13, with updated figures due to be released next month.
The season started well, with production up 3.5pc compared to July 2011, but recently dropped to below 1pc due to difficult seasonal conditions.
Ms Bills said the good NZ spring, which saw a 10pc growth in production, had not affected the Australian market.
"The fact we have had such strong growth out of a major export region that hasn't had a depressing impact on the market underlines how strong the demand for dairy commodity has been," she said.
"Looking forward, the expectation is that the NZ growth rate will slow because the second half of last year had ideal conditions and is unlikely to be repeated."
Ms Bills said dairy commodities had varied about 18pc since the mid-year trough but were well positioned for an improved market in the new year.
"They have gone sideways in the past few months because the concerns that were there about the US not producing as much as expected were offset by the good season in NZ," she said.
"We are in a positive position given that NZ will not grow at the same rate, the US drought impact will continue to tighten our production, and demand is good and will improve, so prices should be stronger (in 2013).
"That's going to flow through to farmers in step-up payments and in the opening prices that will be announced for next season."
With the new tariff year beginning, Ms Bills said China was likely to import more NZ products in the first part of 2013.
"Often at this time of year, buyers in China will wait until the new year to go back into the market because they can get the product at a cheaper tariff rate," she said.
However, contributing to a tough 2012 for the dairy industry was the high Australian dollar, which Ms Bills said did not appear likely to weaken in the near future.
"Our interest rates are on the way down but we still have the issue of other developing economies having interest rates lower that will keep our exchange rate high," she said.
Despite forecasting less than 2pc growth and a breakeven price of close to $5 a kilogram of milk solids at season's end, Rabobank senior analyst Michael Harvey said the market would be better positioned for the second half of the season.
"Lower milk prices and higher feed costs are underpinning the supply contraction and that will also ultimately bring the market into a better balance," Mr Harvey said.
Buyers who predicted the tough climate and invested in short-term cover would need to come back into the market, Mr Harvey said, but supplies would remain sluggish and weak through the first half of the year.
Even though prices were at levels last seen in 2009-10, the low $5/kgMS showed "the floor in the market was higher," he said.
