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Global milk production set to return to growth while demand outlook hinges on China

A weaker tone has set into the global dairy market during the second half of 2022, reflected in the broad-based softening of Oceania dairy commodity prices, which have dropped significantly from their peak in quarter two.

And with year-on-year global milk production now expected to return to growth and Chinese import demand anticipated to continue slowing, further downside in global dairy markets is possible in the months ahead, according to a new report by agribusiness banking specialist Rabobank.

In its Global Dairy Quarterly Q3 2022: Potential Collision Ahead? Rabobank says global dairy fundamentals have shifted course in Q3 2022, from extreme tightness to visible but modest loosening.

“We expect the combined Big-7 (New Zealand, Australia, the EU, the US, Brazil, Argentina, Uruguay) milk pool to return to growth in Q4 2022, ending five consecutive year-on-year quarterly declines,” Rabobank senior agricultural analyst Emma Higgins said.

Rabobank senior agricultural analyst, Emma Higgins

Rabobank senior agricultural analyst, Emma Higgins

"However, milk production across the export engine is not yet running on all cylinders and any growth will be modest. Farmgate milk prices are elevated in the Big-7 export regions, but high production costs, weather risks and emerging feed shortages will help keep the global milk supply response in check."

On the demand side, the report says, everyone will be looking at China’s dairy market.

“Lockdowns in major Chinese cities during the first half of 2022 had a negative impact on dairy demand. These restrictions eased in Q3, but the government policy is unchanged, and the risk of further disruption remains, along with underlying weaker economic conditions. Rabobank remains cautious on Chinese dairy market assumptions, which already point to a more absent Chinese buyer into 2023. Import demand from other emerging markets is unlikely to fill the void, loosening the global market somewhat,” Ms Higgins said.

“Since our last report in June, we’ve also seen macroeconomic conditions deteriorate around the world with high energy and food prices lingering. And, as a result, the coming 12 months present uncertainty and risk around underlying consumer demand signals.

In consideration of these factors, the report says, Rabobank’s farmgate milk price forecast remains at NZD 9.00/kgMS, but with increased downside risk.

“Tepid global milk supply growth and weaker Chinese demand were factored into our original 2022/23 farmgate milk price forecast back in May, and, accordingly, our forecast remains unchanged,” Ms Higgins said.

“But it’s important to note there are a host of variables which have the potential to drastically move the milk price needle up or down and we’d urge farmers to prepare themselves for further commodity price volatility during the months ahead.

What to watch

The reports says key watch factors for the remainder of the season include the macroeconomic outlook and global weather patterns.

“The global economy is losing steam and the recent trend has been to downgrade the global growth forecast for this year and next,” Ms Higgins said.

“This forms part of the weak demand outlook for dairy, and further erosion in the outlook could dampen demand even more, given the risk in energy markets, the Chinese economy and the rising interest rate environment.”

Ms Higgins said a close eye would also be kept on weather patterns with the re-emergence of La Nina over coming months now more likely.

“Should this eventuate, it would bring a cocktail of risks and positive influences on the milk production outlook depending on the region,” she said.

Other watch factors identified in the report include the gas crisis in Europe and its impact on food and beverage production, and the cost of palm oil (which has ramifications for dairy product prices).

New Zealand update

The report says the start to the new dairy season has been soggy, with high rainfall for most dairying regions across July and August.

“The saturated ground underfoot has made calving all the more difficult and this hasn’t helped sentiment among dairy farmers, which is also being eroded by soaring farm input costs, higher finance costs and challenges sourcing labour,” Ms Higgins said.

“With Fonterra recently revising their farmgate milk price forecast downwards to 9.25kg/MS, New Zealand dairy farmer margins are coming under increasing pressure and it’s essential farmers continue to look closely at their cost structures.”

Ms Higgins said milk production for June held steady against last year, but July milk flows were significantly lower than last year – the result of an extended dry autumn period.

“Our base case scenario is that New Zealand’s milk production for the 2022/23 season will end up marginally higher than last season – between 1.5 and two per cent - compared to the prior season. However, there is some risk that wet winter conditions may still set a weaker tone for the rest of the season,” she said.

Ms Higgins said this production forecast was reliant on New Zealand’s farm gate milk price remaining above break-even cost.

“Rabobank’s initial forecast suggests the break-even milk price sits around NZD 8.50/kgMS. The risk that the farmgate milk price forecast will weaken below break-even cost remains. If this risk were to materialise, the shoulder of New Zealand’s milk production season would be most impacted, as farmers would pull back on supplementary feed to reduce costs,” she said.

The report says New Zealand’s trade performance slowed in quarter two.

“Export volumes for the three months to June 2022 slumped 13 percent on the prior year period,” the report says.

“Shipments to China were lower by close to 40 per cent over the same period. Export volumes for the remainder of 2022 will continue to decline compared to last year, in line with our expectations for weaker Chinese purchasing, against exceptional 2021 volumes.”

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