Global dairy prices beat the odds but face fragile demand
RaboResearch Q2 report: Dairy sector must navigate bullish supply signals and shaky demand fundamentals in 2025.
By Kristin BakkerGlobal dairy commodity prices continued to rise in recent months across most key export regions, defying expectations and economic headwinds, according to a new RaboResearch report. The situation may be too good to be true, however.
Milk production growth has been modest, which is positive news, but ongoing trade tensions continue to affect global trade flows and consumer sentiment. The sector will need to navigate a mix of bullish supply signals and fragile demand fundamentals during 2025, RaboResearch noted.
Supply and demand factors
Milk production grew slightly across the Big 7 exporting regions in the first quarter, expanding just 0.5% year over year, RaboResearch said in a news release. However, that growth is anticipated to accelerate to 1.1% in the second quarter and 1.4% in the third quarter – the strongest quarterly increase since early 2021 – driven by growth in the U.S., European Union and South America.
In its Global Dairy Quarterly Q2 2025 report, RaboResearch forecasts total 2025 milk production from the Big 7 at 326.7 million metric tons, an increase of 1% year over year and the highest annual volume gain since 2020.
In many economies, consumer sentiment has waned amid weak and uncertain global economic conditions. “A number of factors are weighing on the demand outlook,” said Mary Ledman, global dairy strategist at RaboResearch. “These include: near-record-low consumer confidence in the U.S., troubling indicators of economic struggles in China and declining sales data from restaurants and consumer packaged goods companies across many regions.”
Nearly all regions experienced retail price deflation during parts of 2024, but higher milk and dairy product prices in the second half of 2024 carried into 2025, meaning higher retail and foodservice prices for consumers.
Dairy product prices have surged to multiyear highs, particularly in Oceania. Fonterra announced a record-high price forecast for New Zealand’s 2025-26 season. In the U.S., most dairy commodities showed bullish trends into late May, and dairy exports remained strong through the first quarter, even as retaliatory tariffs from China and Canada loomed, RaboResearch stated.
Still, ongoing trade tensions and tariff volatility are key risks, said Ledman, adding, “Global trade conflicts remain elevated, with volatility and rapidly changing tariffs emerging weekly. These factors are influencing global dairy trade flows.”
Demand trends are expected to weigh on prices, especially as milk production increases. Concerns persist about weak demand from China, slowing economic growth, trade tensions and high Oceania whole milk powder prices.
“Dairy companies and downstream multinational consumer packaged goods companies will find it challenging to pass on higher dairy costs to consumers still grappling with post-Covid inflation,” Ledman explained.
“We anticipate downside risks emerging in the second half of the year, driven by expanding supply and demand uncertainty,” she cautioned. “However, rather than a sharp downturn, we expect a recalibration from recent multiyear highs – a natural correction following a period of strong performance.”
Regional summaries
The U.S. dairy sector is finally seeing milk production expansion, with April up 1.5% year over year – the largest gain since August 2022 – and with 1.4% growth expected for 2025, RaboResearch reported. The growth is driven by an expanding dairy herd and output. Higher heifer retention is helping offset the tight supply of cows, and avian influenza outbreaks have waned, leading to better milk yields.
Shaky trade relations and the risk of renewed escalation remain a critical concern for the U.S. sector, especially with China, the report said. Although exports started the year strong, some softening is expected with the tariffs in place. Domestic demand and producer profitability have been solid and are expected to help the industry end the year on a positive note.EU milk production dropped in the first quarter, even with producer profitability, and RaboResearch projects total EU-27 + U.K. production will see just a slight increase of 0.3% for the year. Outbreaks of foot-and-mouth disease and bluetongue disrupted production and exports in the time period, and while no new cases have been reported thus far in June, disease issues remain the leading concern for the region.
Domestic dairy demand has been strong, but trade negotiations with the U.S. will have a major effect on exports if talks break down and higher tariffs come into play, as the U.S. is the top destination for EU cheese shipments, RaboResearch pointed out.
China’s dairy industry is going through a major structural change, with a trend toward consolidation of small and medium-sized farms and growth in larger farm operations. Trade tensions with the U.S. could lead to higher feed and ingredient costs, which would further hurt a dairy industry struggling with profitability.
Though larger operations helped contribute to 1.7% higher first-quarter milk output, RaboResearch projects production to decline 2.8% for 2025. Exports increased significantly – although from a low starting level – and should continue to increase this year.
New Zealand dairy exports for the first quarter were up 5% from the year-ago period, helped by rising prices and a weaker currency. RaboResearch expects the good export pace to continue through 2025 and beyond. Milk production is also expected to increase 2% for the production year thanks to farmer profitability and high confidence levels.
Australia is seeing higher farmgate milk prices and strong dairy exports, RaboResearch reported. However, weather challenges in key production areas are tempering output, and the bank is forecasting slightly lower production and further downside risk if the dry conditions continue.
Brazil recorded higher milk production in the quarter, but at a lower growth rate. Despite current profitability and stable feed costs, greater supply and inflation-weakened demand are expected to pressure margins, according to the RaboResearch report.
Argentina’s milk production continued to recover, lifted by good farmgate margins, but RaboResearch projects the growth to moderate and end lower for the year. Domestic demand is turning around, but exports are underperforming due to the stronger peso. A delicate balancing act is at play for prices and margins. The industry is leaning toward more consolidation and automation.
