The latest Situation and Outlook report from Dairy Australia states that lower input costs – especially for grain which is at a three-year low – are also offering a more positive outlook for the industry.

Joanne Bills, Dairy Australia’s manager for strategy and knowledge, says the series of step ups in this season’s milk price in southern regions has eased some burden on dairy farmers.

"Milk prices are improving for farmers in southern regions, input costs – especially for feed – are lower than this time last year, and water allocations on some irrigated systems are at four-year highs," Ms Bills said.

"With domestic dairy consumption robust, there is some cause for cautious optimism for the industry in 2010.

"Farmers supplying the domestic market under contract, especially in NSW, Queensland and Western Australia will watch these developments with interest as many will be renegotiating contracts in the coming months."

However, she said, tough cash flow conditions throughout 2009 are tempering the improving market signals for farmers.

"Increased financing costs, reflecting short-term debt incurred last year, plus the pressure of rising interest rates will maintain pressure on profit margins and the ability and willingness of farmers to respond to improved operating conditions by increasing production."

While international fertiliser prices are firming, locally there are few limitations on feed supply, with good access to fodder of variable quality, and grain supply, offering flexibility for farmers.

Internationally, dairying has recently seen demand and supply more tightly balanced.

Ian Halliday, managing director at Dairy Australia, is optimistic that the outlook for the international market is reasonable.

"Spot prices have increased significantly in US$ terms over the past 12 months and the global supply of milk available for export finished lower than expected in 2009," Mr Halliday said.

"With our international dairy market now operating without EU or US export subsidies, dairying in Australia has been given a boost."

However, while commodity prices have recovered strongly in 2009 in US dollar terms, returns to the Australian industry have been limited by a surging Australian dollar.