Soaring costs of production and weather related events have led to a contraction in milk production in the seven major dairy producing countries of the world for the first time since 2016, according to a new report from Rabobank.

According to the analysts, global commodity markets have seen a fourth consecutive quarter of reduced milk production. In Q2 2022, milk production amongst the big seven fell 1.1% as a result of record high feed costs and poor weather in some regions affecting crop growth.

As a result, milk margins have been hit in many regions throughout the world leading to more cows being culled and inputs reduced.

“Global herds have contracted or are facing barriers to grow, making it harder for milk output to rebound after the current slump.

"If weakening commodity prices translate into lower farm gate prices in coming quarters, that could result in a less impress recovery,”​ the Rabobank report states.

According to the analysts, producers around the world are continually being faced with higher costs of feed especially corn and soya due to weather disruptions in Oceania and South America, which are expected to continue into 2023.

“Our most recent AgriCommodities markets monthly shows that price forecasts for Chicago Board of Trade (CBOT) corn have seen a slight decrease from the previous report but are still close to record-high levels. ​Corn is expected to peak in Q2 2022 and remain above USc/bu 700 into at least Q2 2023. ​

“The outlook for soya prices also remains challenging, with our forecasts suggesting prices above USc/bu 1500 for CBOT soya for the next 12 months.”​

The continued war in Ukraine is adding to the difficulties with increased pressure on grain and oilseed prices, as vast exports of corn and sunflower seeds from Ukraine are not entering the global market.

Limited Russian and Belarussian exports of fertilisers and other grains are also contributing to higher feed costs.​

Hence, farms that are able to grow most of their feed are expected to fare better than those that rely heavily on purchased feed.

“Expiring feed contracts will exacerbate this divide, forcing buyers to lock in at higher current prices.

"Producers will be keeping a keen eye on costs but should be cautious not to make cost-cutting changes to feed rations at the expense of negatively impacting the production of high-value milk components.”​

In addition, the report pointed out that consumers are being hit by global inflation which is weakening purchasing power and making it difficult for milk processors to pass increased production costs on to consumers.

“While developed country consumers are usually more resilient to higher prices, this time around the impact on energy and fuel prices are severe and are resulting in changing consumer behaviour. ​

“Some countries like the UK are already implementing measures to protect low-income families with one-off payments and energy bill discounts due to diminished purchasing power.”​​

China is lowering its imports, due to strong domestic milk production coupled with weaker consumer demand related to covid related measures, and high inventories.

“Overall liquid milk equivalent, excluding whey liquid milk equivalent imports are already 4% lower for the first four months of the year with some categories down sharply (whey -40%).”​

China’s non-whey import demand is expected to decrease by 34% year on year in 2022, they forecast.

The current slowdown in global milk output is directly related to higher costs of production and weather events.

In the past, production has recovered and surpassed previous peaks, but now there are structural issues that could limit a significant rebound in production from some key exporters, the report concluded.