Rising costs, labor shortages limiting dairy sector growth, says analyst

Mr Droppert told the annual DA Situation and Outlook breakfast that was mirrored in all the major exporting countries.

"Some of the medium-term pressures we are seeing in Europe and New Zealand do give us some reason to think we are not going to see it return to the growth rates we have seen in the past in those regions," Mr Droppert said.

"Milk production has been slow so commodity prices have been well supported - but we have seen things come back a little bit...due to wavering demand.

"There has been a lot of stock building, with the logistical hassles everyone has been having."

He said DA expected the full season's production to be down 3.3pc, or 8.5-8.6 billion litres, and next season would be similarly flat.

"We are still seeing a lot of exits," Mr Droppert said.

"The attractiveness of either selling cows and running beef, or selling the property and running to the beach, either/either are all part of the equation.

"In northern Victoria is groundwater and almonds, in the west it's beef and sheep and in Gippsland I think a lot of times, around Maffra, it's concrete and horticulture."

Read more: Milk supply shortages driving farmgate price rise

Rising costs and labor shortages would continue to have an impact, Mr Droppert said.

"We are going to see that cost pressure continue, we could probably say very similar things about conflict in eastern Europe and energy prices, I don't see any of these issues resolving overnight."

Labor shortages were one of the biggest issues facing the industry.

"It's encouraging people to downsize things, while preventing other people from expanding where they otherwise could," Mr Droppert said.

He said very strong opening prices, with some companies posting figures above $8.50/kilogram Milk Solids, reflected ongoing competition for a limited Australian milk pool.

"The announcements are into territory we wouldn't even have seen on Santa's wish-list a few years ago," Mr Droppert said. "It's part of the margin story, with costs and prices, but the reality is we are in uncharted territory in more ways than one."

The high opening prices were also made possible by buoyant global markets.

"While the returns are there and milk supply looks constrained, I think we will see farmgate pricing converge around this range for the coming season," Mr Droppert said.

"It's important to note of course that many of the major production costs on farm have increased dramatically, so a high farmgate price in historic terms is as much about preserving milk supply as encouraging growth - the latter of which we don't expect in FY23 due to labour constraints, resource competition and cost pressures."

Mr Droppert said despite the rise in input costs, and labor shortages, the annual National Dairy Farmer Survey indicated profitability had continued to improve, with 88 per cent of survey respondents reporting an operating profit in 2020/21, and 90pc expecting to do so in 2021/22.

The report revealed 82pc of Australian dairy farmers were confident about the future of their own businesses (up by 2pc on 2021), while 68pc of farmers were feeling positive about the future of the industry (up 4pc).

What was surprising was farmers' investment priorities - with only one in five farmers investing in growth, Mr Droppert said.

"What we are seeing instead is on-farm improvements," he said. "It might be catch-up maintenance from previous years, it might be labour-saving investments, because of staff shortages, it might be buying something you deserve because the consultant has been telling you - for many years - you shouldn't have that tractor and now it's finally time.

"While we are not seeing growth, the flip side of that is we are seeing farm systems are being increasingly robust, there are better tracks, better fences and updated machinery."