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Rabobank holds milk price forecast at NZD 9.00/kgMS despite weaker outlook for global dairy markets

Weaker global dairy markets remain a key theme as 2022 comes to a close, according to a new dairy report from agribusiness banking specialist Rabobank.

In its latest Global Dairy Quarterly report – Walking the tightrope in 2023, Rabobank says, after record farmgate prices in many exporting regions this year, milk supply growth has emerged at last. However, as demand falters, farmgate milk prices will follow global commodity market trends lower in 2023.

“Subdued supply growth has kept dairy commodity prices relatively elevated, but fragile growth is on the horizon,” report co-author, Rabobank senior agriculture analyst Emma Higgins said.

“And with many economies experiencing broad-based food inflation, dairy demand is likely to reduce in the short-term before any remarkable improvement.”

Despite the weaker dairy market fundamentals, Ms Higgins said, Rabobank has held its farmgate milk price forecast at NZD 9.00/kgMS.

Rabobank senior agricultural analyst Emma Higgins

Rabobank senior agricultural analyst Emma Higgins

“Our forecast is unchanged from last quarter, but it’s important to note the risks to this forecast are heavily skewed to the downside with any potential upside rally hinging on a supply shock in the northern hemisphere or a meaningful reopening of China in the new post-Covid world,” she said.

Supply expected to grow, farmgate prices to fall

After five consecutive quarters, the report says, the global milk supply recession looks set to end, driven by higher production in Europe and the US.

“Rabobank expects milk supply will gain modest momentum in 2023 in most regions apart from Australia, which saw another period of weather-disrupted production in the fourth quarter of 2022. In 2023, milk production from the ‘Big 7’ export regions – New Zealand, Australia, the EU, the US, Uruguay, Brazil and Argentina – is anticipated to grow by one per cent compared to 2022, enough to offset the 0.8 per cent decrease in 2022 and remain on par with 2021’s production,” Ms Higgins said.

“Clear price weakness in dairy markets for the final quarter of 2022 has diverged between regions and products. The large, domestically-supported cheese and butter markets in the EU and the US remain elevated, but off highs posted earlier this year. Meanwhile, a nine per cent decline in Oceania GDT index prices over the last three months has permeated through the global milk powder markets.

“In the year ahead, we also expect expensive input costs will remain a clear headwind for dairy producers worldwide, and result in farm-level margin pressure.”

Waning consumer confidence tests demand

The report says global dairy demand is complex and multifaceted.

“The demand resilience shown so far will be tested by waning confidence levels as disposable incomes take a hit. Emerging markets are most at risk due to projected inflationary impacts on consumer budgets in the first half of 2023,” Ms Higgins said.

“Consumption growth in some export regions is becoming more challenging as consumers juggle significant price increases in the dairy cabinet. Dairy demand in the US has remained defiant in the face of cost-of-living challenges, while European consumers are now feeling the pinch at the retail level. Some resilience in Southeast Asia is evident, but smaller sales volumes and downstream margin pressure illustrate the headwinds.”

At the same time, Rabobank says, all eyes remain fixed on China, as future developments in Covid-19 policies remain unclear and the country works through local inventories and imported stock.

“We expect buying patterns will remain subdued across the first half of 2023, due to the potential for continued rolling lockdowns, milk production growth, and wavering consumption as challenging economic conditions take hold. China is likely to re-enter markets in Q2 with a bigger presence from Q3 2023 onward,” Ms Higgins said.

New Zealand update

The report says fickle spring weather has had a tangible mark on New Zealand milk production for the second consecutive season.

“In a clear theme for this season, milk supply through to October 2022 is trailing by 3.6 per cent year-on-year,” Ms Higgins said.

”Otago/Southland is the sole region that is showing signs of milk production life, with feed plentiful in the south from warmer temps. Grass is now playing catch-up in the North Island following a cold, wet spring – although volatile weather is still throwing up challenges.

“Following the slow start to the season, we’re now expecting New Zealand milk production for the full 2022/23 season to slide by up to two per cent year-on-year.”

Ms Higgins said leaping interest rates, fuel costs, and feed costs are leading the on-farm inflation challenge.

“The Reserve Bank of New Zealand has hiked the Official Cash Rate to 4.25 per cent – the highest in 14 years – while the The Farm Price Index suggests dairy farm expenses were up by 17 per cent in Q3 2022, compared to last year,” she said.

Ms Higgins said New Zealand’s trade has kept up at a steady clip for the past three months, but nevertheless is down year-to-date to October 2022.

“Export volumes for the three months to October 2022 lifted 16 per cent from the same period of the prior year, helping to clear inventory. North Africa, Southeast Asia and the Middle East have in part filled the gap left by China,” she said.

“This trend will need to continue over the coming months to hold farmgate milk price forecasts, with an expectation for China to remain largely on the sidelines until Q2 2023.”

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 customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank Group is structured as a cooperative and operates in 38 countries, servicing the needs of about 8.4 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 28 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