Global milk production is set to contract in 2026 for the first time in two years, as rising input costs and geopolitical uncertainty squeeze farmer margins and slow supply growth across key exporting regions.

The research arm of Rabobank, RaboResearch, has forecast supply growth of 1.5% in the second quarter of this year.

However, this will be followed by a levelling off in milk output in the third quarter, and a contraction of 1.6% in the fourth quarter.

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Should global milk output fall at the end of this year, this would mark the first quarterly decline since mid-2024 and signal a rebalancing of markets after a prolonged period of excess supply.

Expansion in retreat

“Global milk production surged through 2025, with year-on-year growth peaking at 5.2% in the fourth quarter, one of the strongest increases on record. However, this expansion is now firmly in retreat,” RaboResearch stated in its Global Dairy Quarterly for Q2 2026.

“The emerging constraint on dairy supply is not demand but rising costs. Energy, fertiliser, and financing costs are increasing across most producing regions, driven in part, by continued instability in the Middle East,” the RaboResearch report pointed out.

“The unresolved disruption around the Strait of Hormuz is raising uncertainty in global oil markets, with cascading effects on agricultural inputs and feed costs,” it added.

Higher costs are already eroding profitability, particularly in Europe where milk prices have fallen by 17% since last September, the RaboResearch report stated.

“While some regions, including the US and New Zealand, are seeing relatively stable milk price outlooks, the broader trend points toward margin compression. This dynamic is expected to play a central role in limiting future production growth,” the report added.

“In Ireland, milk prices have fallen below the cost of production, signalling that further supply growth is no longer economically viable,” the RaboResearch report claimed.

Input inflation

“Across Europe, input inflation (particularly for energy and fertiliser) is compounding the collapse in milk prices. The supply response is slow but inevitable and gradual: farmers are likely to maintain output as long as possible before cutting back,” RaboResearch predicted.

Consumer sentiment will also have a major impact on dairy markets, the RaboResearch report said.

While dairy consumption remains relatively strong, RaboReserch cautioned that rising food price inflation and weaker consumer purchasing power are beginning to shift buying behaviour.

Lower prices for dairy products had helped support consumption, but RaboResearch pointed out that consumer demand remained “price elastic” and, consequently, its impact limited.

Reduced commodity values were unlikely to drive a broader price recovery beyond protein-related products, or encourage purchasing to such an extent that the current supply surplus was fully absorbed, RaboResearch argued.

Any reduction in global milk output will be welcomed by Irish dairy farmers, as it should help bolster a recovery in domestic farm-gate prices.