Margins for dairy farmers in the Big 7 exporting regions are at breakeven or better, supporting milk supply growth, but weather and feed costs are likely to limit global production growth, according to Rabobank analysts.

Rabobank is expecting modest year-on-year production growth of just 1% during the next 12 months, the analysts said in their latest “Dairy Quarterly” report.

Nonetheless, they are forecasting expansion in combined exportable surplus in 2021 — with the U.S. doing most of the heavy lifting.

The top dairy exporters are the U.S., EU, New Zealand, Australia, Brazil, Argentina and Uruguay.

The U.S. dairy cow count in April was 9.49 million, the largest in more than 20 years and more than 135,000 head higher than the low of the pandemic in June 2020. Most of the additional cows are in Texas and the Upper Midwest.

“This represents a continuing movement from the coasts inward searching for fewer barriers to scale and the prospect of new processing capacity,” the analysts said.

U.S. milk production in April increased 3.3% year over year and was up 4.7% from April 2019. High feed costs, however, will challenge the pace of growth and lower producing cows are likely to be culled.

“Dairies that grow their own feedstuffs and those that purchased feed before the spike in prices are faring better than those buying spot feed,” the analysts said.

Herd expansions are also limited by higher construction costs, they said.

But the sizable and efficient milk-cow herd will carry momentum through the rest of the year for a 2.2% increase year over year in the second half of 2021. The analysts expect growth to slow to a 1.1% gain in the first half of 2022.

U.S. domestic demand is forecast to increase by 4.4% year over year in the second quarter of 2021 as reopening from the pandemic accelerates. The second half of the year should continue to show improvement over 2020, up 2% year over year.

“The first half of 2022 will give a mixed picture but will be net positive, up 0.6% year on year,” the analysts said.

On the broader stage, global dairy markets are delicately poised waiting for some direction. Further upside cannot be ruled out, but the peak is near, they said.

“An expected softening of Chinese import demand should be enough to trigger a price correction in the dairy complex that is likely to occur in the later stages of 2021,” they said.

China’s demand for hog feed will grow, but that’s really only relevant to whey, said Ben Laine, a Rabobank economist.

“That’s positive for U.S. exports since whey is the primary dairy product we sell to China, and we’re already seeing that in the strength of the whey market,” he said.

More broadly across other dairy commodities like whole milk powder is where there might be a cooling off in China’s import needs. That’s more of an issue for New Zealand, where trade with China is dominated by whole milk powder, he said.

“China has been working on growing their own milk production recently and while they will never be fully self-sufficient, it will start to slow down the growth rate of their import needs at some point,” he said.

Dollars per hundredweight

Class III

Q2 2021 – 18.14

Q3 2021 – 18.26

Q4 2021 – 18.28

Q1 2022 – 16.26

Q2 2022 – 16.76

Q3 2022 – 17.24

Class IV

Q2 2021 – 16.09

Q3 2021 – 16.78

Q4 2021 – 17.00

Q1 2022 – 16.57

Q2 2022 – 16.73

Q3 2022 – 16.91

Source: Rabobank