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Weaker global milk demand set to push dairy commodity prices marginally lower in remainder of 2022 – global report

Despite global milk production looking set to decrease for the fourth consecutive quarter in Q2 2022, weakening global demand is expected to create a scenario that will see moderate price declines in dairy commodities during the second half of the year, according to new global report by agribusiness banking specialist Rabobank.

In its latest Dairy Quarterly report – Are we there yet?, Rabobank says milk production in the “Big-7” dairy export regions (New Zealand, Australia, the EU, the US, Uruguay, Brazil and Argentina) has contracted year-on-year (YOY) for three consecutive quarters and is forecast to contract for a fourth consecutive quarter in quarter two 2022 —something which hasn’t happened since 2012-2013.

“The current slowdown in global milk output is directly related to higher costs of production and weather events. In the past, production has recovered and surpassed previous peaks, but now there are structural issues that could limit a significant rebound in production from some key exporters,” Rabobank senior analyst Emma Higgins said.

Rabobank senior agricultural analyst Emma Higgins

Rabobank senior agricultural analyst Emma Higgins

“Dairy herds in New Zealand and Europe have limited scope for growth and are more likely to contract under current and proposed regulations and environmental pressures. In South America, competition from grains and oilseeds for land and capital continues to intensify, limiting dairy expansions.

“Milk producers around the globe are facing higher corn and soybean prices, and weather disruptions are affecting certain regions, especially Oceania and South America. Overall inflation pressures in energy, fuel, and wages are also impacting profitability across the Big-7.”

Ms Higgins said the anticipated weak growth in milk supply was likely to be met by lower dairy demand across most regions over the coming months, as consumers feel the significant impact of inflation on their purchasing power.

“In the US and the EU, inflation is at a 40-year high, shocking consumers and impacting lower-income families disproportionately. In emerging markets, inflation is not new, but the severity of the current rise in prices, especially for commodity-importing countries, has been amplified by the effects of the war in Ukraine and a very strong dollar. However, high oil prices could support dairy import demand for some oil export countries, as seen in previous commodity cycles,” she said.

“Weakening consumer purchasing power is making it difficult for milk processors to pass increased production costs on to consumers. And in some regions, like the EU, some retailers continue to resist additional price hikes for some low-margin products.”

New Zealand update

The report says New Zealand dairy farmers, like many farmers around the world, are juggling inflationary input cost pressures.

“We anticipate key input costs for dairy farming in New Zealand — fuel, fertiliser, feed, and labour – to remain elevated throughout 2022 and into 2023,” Ms Higgins said.

“Farm profitability remains likely for most New Zealand dairy farmers, but with a jump in their cost base for 2022/23, profit margins will be smaller than the previous season.”

As flagged in the bank’s New Zealand Dairy Seasonal Outlook report released in late May, Ms Higgins said the bank was forecasting $9.00/kgMS for the 2022/23 season.

“Our forecast for the new season remains unchanged, but we stress there are both considerable upside and downside factors to this price given the heightened uncertainty in the operating environment,” she said.

“In recent weeks we have seen geopolitical tensions — one of downside risks flagged in our Seasonal Outlook report — jump front and centre after China voiced their displeasure at New Zealand’s recent joint statement with the US that followed Prime Minister Ardern’s meeting with President Biden at the White House late last month.

“The statement was critical of China, and this has raised uncertainties over the ongoing trade relationship between the two countries.”

Ms Higgins said around 40 per cent of New Zealand’s dairy exports sail to China, its largest trading partner.

“China also relies heavily on New Zealand’s dairy imports, with nearly 90 per cent of China’s whole milk powder, 80 per cent of butter and fats, 40 per cent of skim milk powder and 60 per cent of cheese coming from New Zealand,” she said.

“In a worst-case scenario, the geopolitical tensions could further escalate leading to New Zealand, even temporarily, losing part or all of its Chinese market access. And this would be a huge blow to both countries and the wider global dairy market.”

Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 120 years’ experience providing customized banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 36 countries, servicing the needs of about 8.6 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 30 offices throughout New Zealand.

Media contacts:

David Johnston
Marketing & Media Relations Manager
Rabobank New Zealand
Phone: 027 477 8153

Denise Shaw
Head of Media Relations 
Rabobank Australia & New Zealand 
Phone: +612 8115 2744 or +61 2 439 603 525