Global dairy prices underwhelming so far

Since the start of the year, overall prices have slid by around 5%, while whole milk powder prices have fallen by around 1%. But Penny is optimistic about the outlook for the rest of the year: “The Chinese economy has reopened, and as a result we expect economic activity to rebound over 2023. After growing at a paltry 3.5% over 2022, we expect the Chinese economy to grow at around 6% over 2023.”

Global dairy prices have largely yet to budge. The exception to the overall weakness is the butter prices, which have firmed by around 3% so far this year. “This is the first sign that dairy demand is improving. That said, butter accounts for only a modest 8% or so of the dairy products that count towards the calculation of the milk price, whereas whole milk powder accounts for around two-thirds. In other words, we need a broader lift in dairy prices for this to translate into a higher milk price.”

Key dairy markets

Penny expects it is a matter of when, not if, lifting Chinese demand translates into higher dairy prices. “China is New Zealand’s largest market and has an oversized impact on global dairy prices. With that in mind, it is notable that the share of New Zealand’s dairy exports going to China fell from 43% in November 2021 to around 30% currently.”

“New Zealand’s other key markets in the rest of Asia picked up some of the slack, although at lower prices than China had been paying. But we expect global dairy prices to firm over the course of 2023. While the lift will come too late for this season’s forecast, it does set up 2023-2024 for a bumper milk price.”

Rabobank also confirms in its Australia Agribusiness Monthly that dairy markets were weaker again in February. “This is a sustained downturn in the commodity basket,” Rabobank points out. “Since peaking in the second quarter of 2022, spot prices have fallen between 20% and 40% depending on the product. The weaker fundamentals are expected to keep a lid on any price recovery in the near term.”

Milk production growth outside of Australia is gaining momentum, Rabobank says. “A return to growth is being led by the northern hemisphere. The latest numbers are showing solid growth across most of the European Union. Milk production is expanding in the US and South America.”

Meanwhile, Rabobank explains, milk production is growing modestly in New Zealand on a milk-solids basis. “The impact of cyclone Gabrielle is still to flow through.”

In Australia, the impacts of adverse weather and industry consolidation continue to plague milk production. Senior analyst, Michael Harvey, explains that at the halfway point of the 2022-2023 season, milk production is trailing last season by 7.1% and currently standing at 4.5 billion litres. “It will be a slow turnaround, but there are some green shoots. Milk production has fallen in all regions, but the rate of decline has slowed in some regions.”

Dairy cow feed

Harvey emphasises that many dairy farmers will enter autumn with good food reserves. “The availability of irrigation water and supplementary feed – after a decent winter crop – is good news as preparations begin for next season. There are some issues around fodder availability; the cost of purchased feed remains elevated. Fertiliser prices are heading back to more normal farmgate price levels.”

French company Danone has told Reuters that it is getting more whey from parts of Asia. Analysts say this move could help to cut costs but also antagonise European suppliers. The dairy company, that makes products such as yoghurt and infant formula has so far largely relied on Europe for raw materials. But cost inflation has left the industry struggling to protect margins. The move to source whey from outside Europe could put pressure on Danone’s relationships with dairy farmers in its home country and the rest of the continent.

The February 2023 USDA Milk Production report showed a rise in milk production in January. Production was up 1.5% from January 2022 in the 24 major states, with a total of 18.5 billion pounds (8.4 billion kgs). Production per cow in the 24 major states averaged 2,069 pounds (939 kg) for January, which is 18 pounds (8.2 kg) above January 2022. The number of milk cows on farms in the 24 major states was 8.93 million head, or 51,000 head more than January 2022.