Dairy production to increase slightly as global supply continues to be constrained

Domestic demand is expected to remain robust with 2022/2023 farmgate prices ranging from $8.50–$9.80/kg MS with an average of $9.21/kg MS

Higher farmgate milk prices due to limited global supply will see an overall improved
outlook for the dairy industry

Dairy production is forecast to see a modest increase for the remainder of 2022 according to Rural Bank’s Australian agriculture mid-year outlook.  

An extended La Nina period has replenished water supplies and feed reserves, with higher-than-average winter rainfall and temperatures forecast to fuel pasture growth. Herd numbers are predicted to remain stable or slightly decrease.

Higher yields from good seasonal conditions may support a slight increase in production for 2022/23, forecast at 0.5 per cent. Production growth is being curtailed by competition for land, high beef prices, rising input costs and labour shortages.

Global milk supply is likely to remain constrained until at least the closing months of 2022.

The four major producers, Europe, New Zealand, Argentina, and the US have seen tight supply which is not set to improve until the final quarter of 2022 when the US and Europe are predicting a modest recovery as herd numbers increase.

Meanwhile China has come off the back of two good seasons, allowing them to build inventories.

Demand is at the high end

Domestic demand is forecast to remain steady through the back half of 2022. Caf.s and restaurants have supported domestic demand over the last six months, while supermarkets have seen more stable consumer behaviours, though demand for yoghurt has increased.

Consumers consider milk to be a staple item even with inflation, with this trend expected to continue.

As a result, it is unlikely consumers will shift towards substitute products as inflationary pressures hit, although there may be a shift away from more expensive branded products to cheaper alternatives.

Left: Monthly average global dairy trade (GDT) skim milk powder prices forecast at 68% confidence interval. Source: Global Dairy Trade, Rural Bank. Right: Monthly average GDT cheddar prices forecast at 68% confidence interval

Global dairy demand will remain volatile for the coming six months, though generally firm.

The combination of COVID-19 related issues, and impacts of conflict in Ukraine will continue to create an uncertain market. Chinese import demand will be conflicted in coming months with eased lockdowns, contradicted by high Chinese supply and stockpiling.

Estimates suggest Chinese imports of whole milk powder, skim milk powder and cheese will decrease by 3.4%, 6.1% and 3.4% respectively.

While inventories are building the general global attitude is to obtain stock in these volatile times. Butterfat products are in high global demand with current price levels reflecting this.

Prices are on the rise

The combination of tight supply and robust demand will continue to drive dairy prices higher until global supply lifts later in the year.

Australian milk processors have recently announced the 2022/2023 farmgate prices which range from $8.50–$9.80/kg MS, with an average of $9.21/kg MS. Strong demand and multiple revisions to opening prices indicate the current strength of dairy markets.

Farmer margins will continue to be squeezed by higher fuel, fertiliser and grain costs, offsetting some of the benefits of higher prices. Despite this, farmer sentiment remains high with 68% of farmers feeling positive about remainder of 2022 according to a Dairy Australia survey.

Global dairy prices are likely to remain higher than average. Limited supply and generally high demand will likely further uplift dairy prices, particularly powdered products, despite inventories building.

A 20% increase in year-on-year prices for cheddar has reflected a strong market with this demand expected to continue.