Participants all along the dairy value chain are being squeezed, according to a new Rabobank report. Producer milk prices have fallen from lofty levels in 2022, while feed prices are at all-time highs. Processors and dairy cooperatives began the year by discounting costly inventory made with expensive milk. Meanwhile, rising interest rates and higher inflation are pressuring consumers to make more frugal purchases.
In the key export regions, year-on-year milk production growth has increased in 2023, compared to 2022’s low levels. Simultaneously, farmgate milk prices are catching up to global commodity market trends and have fallen. Expensive input costs continue to be a major headwind globally, and when combined with lower milk prices, they are putting pressure on farm-level margins. As a result, the slaughter of dairy cows has increased.
“Milk production from the Big 7 export regions is expected to grow by 0.7% year on year in 2023, following a 0.9% decline in 2022,” says Mary Ledman, Rabobank’s global sector strategist for dairy. “Rabobank reduced its 2023 forecast from 1% in the previous quarter. This slower growth is due to increased culling in the United States as well as weather-related production challenges in New Zealand, Brazil, and Argentina.”
Price Uncertainty Persists
Uncertainty in dairy market prices persists across regions and dairy products. A little more milk and a little less demand have both contributed to lower dairy commodity prices in the first quarter of 2023. Stock levels in key exporting regions, on the other hand, are not burdensome. Cheese and butter prices have fared the best, while the markets for skim and whole milk powder have yet to find a footing.
Consumers play a role in the story. In a complex macroeconomic environment, with core services inflation remaining high, there are growing signs of a slowdown in household consumption, which is likely to worsen in the coming months. “Consumers haven’t abandoned the dairy aisle,” Ledman says, “but they are looking for value.”
With an eye on Chinese demand
Lower global cheese, milk powder, and whey prices are expected to boost exports. To support dairy product prices in 2023, much will depend on internal Chinese policies and broader demand resilience.
Despite China’s retreat, global dairy trade in 2022 was better than expected. Exports to key importers such as Mexico, Indonesia, Japan, Algeria, and South Korea exceeded 2021 levels. “Through November 2022, total dairy product volume trade was within 1.5% of the previous year, despite a 20% reduction in Chinese imports,” Ledman notes. With China’s reopening, Rabobank expects foodservice revenues to increase by 1% to 2% over pre-Covid levels. “Looking ahead, China’s dairy imports in the first quarter of 2023 are expected to fall short of year-ago levels, with renewed buying interest developing in the second quarter of the year. Imports are expected to rise slightly year on year in the second half of 2023.”
