It has been a record year for dairy prices globally, driven by weaker flows from the major milk producing regions for much of the year. Global dairy prices began climbing in mid-2020, and despite inflationary pressures felt right throughout the supply chain, prices maintained this trajectory to reach record highs in early 2022, before softening in recent months.
When analysing dairy markets, the starting point is always the supply and demand dynamics and in 2022 this was no different as the balance tipped firmly in favour of dairy exporters, due to a shortfall in global dairy supplies. Europe is the largest dairy exporting region in the world, and typically accounts for 40% of all global exports.
Production in Europe up to the end of September was back 0.5%, with Germany and France, Europe’s two largest dairy producers, accounting for most of the decline.
In 2021, Germany and France accounted for almost 40% of total European milk supply; however their dairy industries have come under pressure in recent years due to labour shortages, profitability and ever-growing environmental issues. The Netherlands is Europe’s third-largest dairy producer, and despite the challenges it is facing in relation to carbon taxation and widespread farmer protests as a result, its milk production is on par with 2022.
In Ireland, milk supply also fell short of expectations during peak months due to challenging weather conditions during the main grazing season, and a higher dairy cow culling rate in response to soaring input costs.
Up to the end of October, Irish dairy cow slaughters totalled over 222,000 head, representing an increase of 35,000 head on the same period last year. These factors led to a 0.6% reduction in milk supply for the first six months of the year. We have witnessed a return to growth in Ireland and other major European producers in recent months (up 0.8% for September) as farmers attempt to capitalise on strong farmgate margins.
New Zealand production falls
New Zealand is the second-largest dairy exporting region, accounting for approximately 30% of global dairy imports. The 2021/2022 milk production season ended in May, with total collections back 4% on the previous season. Similar to Europe, they have been struggling with labour shortages, environmental challenges and difficult weather conditions, resulting in the first negative full season since 2019/2020. The current milk production season began in June, and despite grass growth trending close to average, New Zealand experienced the wettest and mildest winter on record. This led to a slow start, with supply forecasts for the full season back 1%.
In the US, milk production fell in the first half of the year; however an increase in dairy cow numbers in the latter half of the year has resulted in milk collections now trending close to 2022.
Although the US is also a significant dairy importer, its exports account for approximately 20% of total global dairy exports.
Both Argentina and Australia account for approximately 4% each of total dairy exports globally, with Australia back over 6% for the year up to the end of September and Argentina being the only one of the ‘big-five’ dairy exporters to be in positive territory for the year with their milk collections up 0.6%.
Dairy import demand
Demand has remained robust for most of 2022, albeit the drivers have been some of the traditionally smaller importing regions.
China is the largest dairy importing region in the world, and in a typical year accounts for approximately 20% of all dairy imports.
Since March 2022, Chinese import volumes of dairy ingredients have witnessed significant year-on-year decreases, leading to a cumulative decline of 18% to the end of October.
The decline equates to 605,000 metric tonnes, which is the equivalent of more than 25,000 40ft containers of dairy powders. Sporadic lockdowns continue to disrupt economic activity around China. Imports stabilised in September and October, however early signs suggest November imports will be weak and with reported COVID-19 cases spiking again, it is difficult to be optimistic in the short term regarding Chinese dairy imports.
Imports from some of the other dairy deficient regions have remained positive during 2022 however, with total imports from the southeast Asian markets of Indonesia, Philippines and Thailand up 10%, 5% and 6% respectively. This bodes well for Bord Bia’s recently launched EU co-funded campaign targeted at promoting European dairy from Ireland in southeast Asia and Japan.
As we approach the start of a new year, market sentiment is cautious, though from relatively high levels. Recent months have seen an increase in milk supplies in some of the key exporting regions, and affordability challenges in some of the key importers, which has resulted in reduced buyer activity.
Commentators are anticipating a return to production growth from the major exporting regions in 2023, albeit against weak 2022 levels.
From a demand perspective, China remains in the driving seat. Supported by government policy, China has been increasing domestic milk production in recent years.
As the world’s largest dairy importer, this has dampened the appetite for imported products.
Rabobank is anticipating a conservative 3% growth in Chinese milk supply in 2023, which again sparks some uncertainty for their import requirement next year.
Grass-fed dairy update
Grass-fed has become an increasingly important claim in markets of strategic importance for Irish dairy in recent years.
In response to this, the grass-fed standard for dairy was developed, and launched in November 2019. Since then, 23 Irish dairy processors have gained certification against the standard, with 21 processors now on their second audit cycle.
Currently the only products that are eligible to carry the grass-fed logo are core dairy products such as butter, cheese and powders with a minimum of 98.5% grass-fed dairy included (allowing the remaining 1.5% for essential dairy processing aids). Bord Bia and the dairy industry are currently working together to expand this offering to more complex dairy products, with the view to enabling more processors to market their dairy produce as grass fed.
Consistent sustainability improvement
Dr Eleanor Murphy, Origin Green Sustainability and Data Analytics Manager reports on the consistent improvements in sustainability on member dairy farms.
Since its launch in 2013, Irish dairy farmers’ commitment to the Sustainable Dairy Assurance Scheme (SDAS) has enabled dairy exporters to position Irish dairy as a safe, sustainable source of nutritional dairy products. Bord Bia gathers a range of sustainability and productivity metrics on farm through the audit process. By analysing the most recent full-year SDAS audit data, from 2021, and comparing this information with previous years, we can see the areas in which Irish dairy farmers are making progress.
In 2021, average greenhouse gases emissions (GHG) per hectare on SDAS herds fell by 1.6% (of CO2 equivalent) from 2020. Carbon efficiency has also improved since 2019 alongside a sustained improvement in output per cow (kg milk per cow) by 5%.
SDAS herds are improving across several productivity measures as recommended by the Teagasc Marginal Abatement Cost Curve (MACC) with members increasing milk solids per cow, reducing chemical N, and reducing concentrates fed. Average grazing days remain high at 248 days. Uptake of low-emission slurry spreading (LESS) technology (shallow injection and trailing shoe) is increasing year on year. In 2021, 34% of SDAS farms reported using LESS, with splash plate usage falling significantly over the three-year reporting period.