While global milk production is set to have decreased for at least four consecutive quarters - from quarter three in 2021 to the current quarter two in 2022 - expectations of weakening demand are creating a scenario for moderate price declines in dairy commodities during the second half of 2022, Rabobank said in its latest global Dairy Quarterly report.
Milk production in the Big-Seven dairy export regions (the EU, US, New Zealand, Australia, Brazil, Argentina and Uruguay) contracted year-on-year for the past three consecutive quarters.
And Rabobank forecasts that Big-Seven production will contract for a fourth consecutive quarter in quarter two of 2022, something that hasn't happened since 2012/13.
Milk output is expected to decline by 1.1 per cent year-on-year in quarter two of 2022 after dropping by 1.9pc in quarter one of 2022.
But milk production is expected to recover modestly in coming quarters.
Positive year-on-year growth is anticipated in the second half of 2022, bringing/pulling estimated 2022 calendar year milk production back up to just a 0.5pc decline compared to 2021.
Preliminary forecasts for 2023 milk production suggest a below trend gain/increase for the calendar year of 0.5pc.
The Rabobank report said structural issues could, however, limit a rebound in milk production growth.
"The current slowdown in global milk output is directly related to higher costs of production and weather events," the report said.
"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."
In addition, the report said, milk producers around the globe are facing higher corn and soybean prices, and weather disruptions are affecting certain regions, especially Oceania and South America.
Overall inflation pressures in energy, fuel, and wages are also impacting profitability across the Big-Seven.
Despite higher milk prices, milk production growth and the feed costs scenario remain challenging.
Rabobank senior dairy analyst Michael Harvey said Australian milk production continues to trail last season, with widespread declines across all regions.
"As of April 2022, national milk production was down 3.4pc at 7.3 billion litres," he said.
"The new season begins on July 1, and Rabobank still expects milk production to return to marginal growth in 2022/23, albeit off a low comparable base.
"There are keen eyes on new season (2022/23) milk price signals leading up to the July 1 kickoff.
"Rabobank's modeled farmgate milk price forecast for southern Australia in 2022/23 stands at Australian $8.40 a kilogram milk solids.
"This is broadly in range with already announced official price offers, which range between $8.25/kgMS and $8.90/kgMS."
As a result, Mr Harvey said Australian dairy farmers are enjoying record milk price signals for 2022/23, and the early timing of announcements will provide confidence and cashflow support early in the season.
"This is important as dairy farmers face cost headwinds on a number of fronts," he said.
"The cost of homegrown feed and supplementary feed will be more expensive, among other inflationary pressures.
"Against this backdrop, labour availability remains a handbrake on expansion.
"There is a likelihood that farm margins will be lower in the new season not higher, despite a circa 15pc lift in milk prices to record levels."
Mr Harvey said there were bright spots on the horizon.
"Seasonal conditions remain supportive for spring pasture growth, and water market conditions are good for irrigation farmers," he said.
"Non-milk incomes remain elevated, supported by a very firm beef market."
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