Dairy milk production outlook sours as households feel financial pinch

Household finance pressures are impacting global dairy product sales, resulting in reduced milk production volumes, with Australia’s production dropping by more than five per cent the last 12 months.

Rabobank senior dairy analyst Michael Harvey said the sharp 5.9 per cent fall in Australian milk production to 6.9 billion litres, is taking a toll on export volumes.

“Season-to-date, July 2022-April 2023, total export volumes are down 14 per cent,” Mr Harvey said.

“There are widespread declines across the product mix, and on a tonnage level, the most significant decreases have been in ingredients, particularly skim milk powder and butter.

“Liquid milk volumes are also under pressure, as high farmgate prices reduce competitiveness in key export markets.”

For Australia, the rate of decline in milk production continued to moderate in April, with national milk production down 1.7 per cent year-on-year.

The June 1 price offering by processors across the southern Australian region are broadly in line with the bank’s expectation, with a formal bandwidth of $8.60 per kilogram of milk solids to $9.10/kgMS.

“While generally lower than 2022/23 full-year prices, these signals ensure another season of historically elevated milk prices that will support farmgate margins,” Mr Harvey said.

In Rabobank’s latest Dairy Quarterly: “It’s always darkest before the dawn”, Rabobank Dairy senior analyst Andrés Padilla said global milk production is still rising but losing momentum, and that slower production increase could stabilize global market prices.

“Growth is attributed to European Union and United States gains, while Oceania and South America continue to see lower output in the first half of 2023,” Mr Padilla said.

“Dry weather in South America and parts of Europe must be monitored and could be a key factor impacting production during the third quarter, particularly in Europe.

“Our current outlook for lower production in the EU and US, with limited growth elsewhere, is likely to support global dairy prices this quarter and into 2024.”

According to Rabobank, the cumulative effects of high food price inflation over the past 24 months, along with slowing economic activity in 2023, have translated into lower dairy demand in developed and emerging markets.

“Various companies in western Europe, Australia, Brazil, China, and other emerging markets are experiencing weaker-than-expected sales in 2023 (mostly in volume terms),” Mr Padilla.

“Households in many regions remain under financial pressure, which is impacting food purchasing behaviour.

“One notable exception is the US, where current consumer demand for dairy products remains firm.

“Some price deflation in dairy could help sustain demand levels in key markets during the second half of 2023.”

Mr Padilla said continued optimism about Brazil’s second corn crop, combined with large Russian grain exports, renewal of the Black Sea Grain Initiative, a good upcoming EU harvest, and accelerated US corn planting, continue to drive global prices lower.

“More affordable feed provides dairy farmers some relief as farmgate milk prices decline globally,” he said.

“Although, Chinese dairy farm margins remain under pressure despite falling feed prices, and in the US, lower milk prices have outpaced the decline in feed costs, putting farmers’ margins under additional pressure and into negative territory — a sharp contrast to the close-to-record profitability farmers experienced this time last year.”

In China, farm expansions and continued gains in milk yields are driving domestic milk production higher, and supply may take longer than previously forecast to respond to weakening milk prices and comparatively higher feed costs.

Chinese dairy imports (liquid milk equivalent, excluding whey) declined in the first quarter of 2023, adding pressure to already weaker global prices in the short term.