As of the second quarter of 2022, milk production in the Big 7 dairy export regions is expected to have contracted for the fourth consecutive quarter.
That hasn’t happened since 2012-2013, according to Rabobank analysts.
Global milk output is expected to have declined by 1.1% year over year in the second quarter after declining 1.9% in the first quarter. Positive year-on year growth versus a low comparable is anticipated in the second half of the year, resulting in an estimated decrease of 0.5% for 2022, they said in the latest “Dairy Quarterly” report.
Farmgate milk prices are high across most regions, but that hasn’t resulted in production growth. Producers are facing higher corn and soybean prices and weather disruptions in some regions.
“Overall inflation pressures in energy, fuel and wages are also impacting profitability across the Big 7. Despite higher milk prices, production growth and the feed-costs scenario remain challenging,” they said.
That supply shortfall is running up against weaker demand, with consumers in most regions feeling the impact of inflation in their purchasing power. Inflation in the U.S. and European Union is at a 40-year high.
“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,” they said.
China will be key to global dairy demand moving forward. Dairy imports to China, excluding whey, are already down 4% year over year in the first four months of the year.
“Strong domestic milk production coupled with weaker consumer demand due to COVID-related measures at a time of high inventory is resulting in lower imports,” the analysts said.
Whey imports by China are already down 40%, and non-whey imports are expected to drop 34% year over year in 2022.
In addition, New Zealand 30% to 40% of its dairy exports go to China, and China is not pleased with New Zealand aligning with the U.S. in its criticism of the country. China closing part or all of its markets to New Zealand even temporarily would be a huge blow to global dairy markets, and all parties would lose, they said.
In the U.S., the milk cow herd hit bottom in January after posting monthly declines since June 2021. Producers added to the herd in February and March. The herd held steady in April but was down 98,000 head from a year earlier.
Milk production was down 1% in April and 0.7% in May year over year. The analysts expect it to turn positive by April. But growth is forecast to remain below trend with a 0.9% growth year over year in the second half of the year and a 1.1% growth in 2023.
While supply constraints have pushed milk prices higher, demand is beginning to push back.
“This demand response will trigger heightened volatility as markets search for equilibrium,” the analysts said.
U.S. dairy exports have been mixed but only fell 1% in volume year over year in the first quarter. Exports to China fell 9%, driven by lower whey exports, but there were gains in Mexico and Japan.
