DAIRY Australia has predicted a "modest" increase in farmgate milk prices as estimated production volumes drop.
It comes as the industry's national lobby group confirmed it was putting a package together looking for assistance from the State and Federal Governments.
According to Dairy Australia's Situation and Outlook report, released today, southern farmgate prices are expected to finish the season at $4.90 to $5.10/kg of milk solids or 36-38c/litre - down 8-10 per cent on last season.
It is a slight rise from the $4.70-$5/kg closing price forecast in September.
Dairy Australia analyst Norman Repacholi said there had been strong demand for milk products since September, commodity prices had increased a little and the Australian dollar had remained relatively stable.
"Many companies have forward-sold manufactured product, locking in US dollar prices - the primary downside risk to this payout remains a higher Australian dollar," the report says.
"Major Australian banks are forecasting the Australian dollar to be US100c-107c by mid-2013, but expectations diverge heading toward the end of 2013 when the forecast range is US99c-108c."
Mr Repacholi said buyers were not willing to lock in prices too far ahead "in case they fall".
The report indicated a growth of 8.5 per cent in Chinese consumer spending this year and strong demand for infant formula.
Domestically, Dairy Australia said national milk production was 0.5 per cent ahead for the six months to December, but December production was 1.3 per cent less than for 2011.
Dairy Australia forecast a milk production rise of 4 per cent in May last year.
Australian Dairy Farmers president Noel Campbell said the current dairy environment was "tough".
He wouldn't elaborate on the details of the government proposal because it was "too early".
Mr Campbell said high imported feed prices, low returns and a high Australian dollar were contributing to difficulties on farms.
Meanwhile, ANZ head of agribusiness Mark Bennett said southwest Victoria's dairy industry is seeing strong international demand.
"While dry conditions and higher costs are making it tough over the short term, the opportunities over the medium to long term are significant," Mr Bennett said.