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Global dairy production is ‘teetering on the edge’

(Source: Bigstock.)

Global dairy production is falling to a level not seen since 2014, according to Rabobank’s Q4 Global Dairy Quarterly report.

And retail price increases are inevitable next year as rising inflationary pressures and higher commodity prices are passed through to consumers.

Weather-related issues have impacted peak milk production in New Zealand and Australia, and supply growth has been stymied in the US and Europe by squeezed profit margins for producers. Favourable gains in South America have been insufficient to offset the decline in other markets, leaving the industry “teetering” at low milk production levels, said the report’s co-author, Rabobank senior dairy analyst Michael Harvey. 

Q4 milk production across the big seven dairy exporting regions – New Zealand, Brazil, Argentina, Uruguay, EU, US and Australia – is expected to decline by 0.3 per cent compared with Q4 last year, marking the first quarterly year-on-year decrease since 2019, he said.

Farmgate milk prices have followed commodity prices higher worldwide, with more potential upside still to come in some regions, the report concludes. But rising costs for inputs, labour shortages, unfavourable weather and questionable feed quality will limit the production response by producers, Rabobank said.

Logistic disruptions, rising transportation costs, and higher commodity prices have slowed global dairy exports, which – based on product volume – ran 7 per cent ahead of the prior year during the first half of this year, but slowed to 1 per cent in July and August, the report said.

Harvey said a slowdown in demand for dairy inputs from China is expected, which will have a welcome effect of cooling global prices in the face of limited supply-side increases.

“Chinese buyers are torn between the bullish sentiment outside China and the current weak fundamentals within China to decide whether, when, and at what price levels they should return to the market,” he said.

New variants of Covid-19, inflation, labour and logistic challenges, along with other challenges weigh on the global economic recovery with the potential for global dairy markets to “teeter or totter”.

Australian market

In Australia, many dairy farms had been dealing with a wet spring – particularly in Victoria and Tasmania.

October – the peak dairy production month in Australia – saw output down 2.1 per cent below last year. This means season-to-date production is down 2.9 per cent, Harvey said.

Rabobank has lowered its milk production forecast, to -1.8 per cent for the 2021/22 season, back to 8.68 billion litres.

He said dairy companies in Australia’s southern export region are upwardly adjusting their initial (June) announced farmgate milk prices.

“Australian dairy farmers continue to enjoy good margins. There are, though, production and margin risks beyond the weather, which will remain into the new year. Input costs have spiked for fertiliser and herbicide, with supply risks lurking in the next few months.”

New Zealand market 

A sluggish spring milk production peak in New Zealand – the world’s largest dairy exporter – also contributed to a global supply slow down.

Harvey said New Zealand milk production has only recently started to benefit from more sunshine and warmth for much of the country.

“Unfortunately, the change to more favourable weather was too late for the peak milk month of October, when collections dropped by 3.3 per cent year on year. There have now been three consecutive months of milk supply slipping backward against 2020 since August 2021,” he said.

“Rabobank’s New Zealand milk production forecast for the entire 2021/22 season is -1 per cent year-on-year. In a high milk-price environment and depending on cow condition, it is possible that there will be a late run to recover some of the lost production so far. But our base case assumes the weaker peak will be hard to recoup across the season – especially given lingering challenges to milk production in parts of Canterbury and in addition to high comparables to match from February onwards,” he said.

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