Despite falling milk prices and ever increasing costs, a modest growth in overall production is expected according to a new report.

While farm-gate milk prices peaked at the end of 2022 at the same time as feed values hit record levels, higher inflation and rising interest rates are pressuring consumers towards more frugal purchasing, according to Rabobank, which claims the entire dairy supply chain is feeling the pressure.

As a result, it claims processors and dairy co-ops entered the year discounting expensive inventory made with high-priced milk.

Figures from Kantar highlight these trends exactly, with volume sales for milk, cheese and yellow fats all down on the year as the price per kg increased.

During the 52 weeks ending February 19, volume sales of liquid milk fell 6.1% while the average price per kg increased 26.9%. Similarly, cheese and yellow fats fell 4.0% and 7.1%, respectively as value per kg rose 13.6% and 20.9%, respectively.

Meanwhile, greater year-on-year milk production growth has emerged in 2023 in the key export regions, compared to 2022’s low levels. At the same time, the report says farm-gate milk prices are catching up to global commodity market trends and have moved lower.

And, with margins being squeezed, dairy cow slaughter rates have escalated.

Global sector strategist for dairy at Rabobank, Mary Ledman said: “Milk production from the Big 7 export regions is anticipated to grow by 0.7% year-on-year in 2023, following 2022’s decline of 0.9%.

“This slower growth is attributed to increased culling in the US and weather-related production challenges in New Zealand, Brazil, and Argentina,” she added.

Market price uncertainty remains across all regions and all dairy products, with slightly more milk and reduced demand contributing to weaker commodity prices in Q1 2023.

However, stock levels in the key exporting regions are not burdensome. Cheese and butter prices have performed best, while skim and whole milk powder markets remain slow.

Consumers are part of the issue with inflation remaining strong, Ms Ledman, said.

However, lower global cheese, milk powder, and whey prices, year-on-year, are expected to support exports, according to the report, which points out that much will depend on internal Chinese policies and broader demand resilience to support dairy in 2023.

Despite China’s retreat from the market, the global dairy trade in 2022 was better than expected with exports to key importers to include Mexico, Indonesia, Japan, Algeria, and South Korea, surpassing 2021 levels.

“Through November 2022, trade in total dairy product volume was within 1.5% of the previous year, despite about a 20% reduction in China’s imports,” noted Ms Ledman.

With China reopening, Rabobank forecasts foodservice revenues there to improve by 1% to 2% compared to pre-Covid levels.

“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. We expect a mild year-on-year increase in imports in the second half of 2023,” said Ms Ledman.