Milk prices look set to hold at current high levels through the first half of 2022, as reduced output globally and strong demand continues to underpin dairy markets, according to Rabobank’s latest Global Dairy Quarterly.

Milk production for the first quarter of 2022 in the world’s main exporting regions will fall by 0.7% compared with last year, Rabobank predicted.

The quarterly report noted that rising input costs, labour shortages and unfavourable weather in some regions have restricted farmers’ ability to take full advantage of the current high prices by expanding production.

Supporting prices

Although the quarterly warned that the high-priced dairy commodities “could take a bite out of importers’ appetites”, it pointed out that strong oil prices have supported whole milk powder prices in the past.

“Dairy commodities will stay elevated through mid-year amid the constrained supply. The longer-term outlook hinges upon consumer behaviour and normalised market conditions, both being very unpredictable,” Rabobank stated.

Tellingly, the report noted that buoyant demand for palm oil has limited the availability of lower-cost vegetable oils as a substitute for dairy fats.

Dairy farmers are reluctant to invest further to increase milk production, as they anticipate even higher input costs later this year

From a European perspective, the Rabobank quarterly forecast that the EU’s Q1 milk output will be back 0.5% compared with 2021, due to the increased input costs, while the quality of roughage also imposed constraints on the yield per cow in countries such as Germany, the Netherlands and France.

Overall, dairy farmers are reluctant to invest further to increase milk production, as they anticipate even higher input costs later this year. Milk output is also forecast to fall back slightly in the US and New Zealand.

Distorted markets

Rabobank dairy analyst Richard Scheper said the continuing war in Ukraine had distorted markets. It presents significant upside price risks for energy, fertiliser and agricultural commodities, he said.

Scheper maintained that dairy commodity prices were likely to remain high “for a longer period” as a consequence of the uncertainty, but he questioned whether farmers would benefit from the greater volatility given the hike in input prices such as feed and fertiliser.

“Despite the expected further strengthening in milk prices in the months ahead, input costs will potentially increase at a somewhat faster pace for many dairy farmers across the EU, limiting the potential to improve on farm margins,” he pointed out.

The strength of international dairy markets is reflected in Dutch spot prices. The butter price reached €6,150/t last week, which is up from around €4,000/t this time last year.

The skim milk powder price has increased by €1,300/t over the last 12 months to reach €3,870/t. Meanwhile, the cost of whole milk powder has strengthened by 50% since spring 2021 to top €4,850/t.

In other dairy sector news, British milk deliveries remained muted through February, with volumes estimated to be down 3.0% on 2021 levels.