In 2023, farmers will see a weak global dairy market, say analysts

The dairy market's fourth quarter is coming to a close, and as this year wraps up, dairy economic analysts reveal that the beginning of 2023 looks grim for the dairy industry. A weak global dairy market will be a central issue, with regions and products showing quite a difference in price weakness, according to the Global Dairy Quarterly Q4 2022 report by RaboResearch Food & Agribusiness.

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Analysts found that at the close of the year, farmers worldwide will be seeing an increase in milk production, strong cheese stocks, and slightly better milk prices. However, their 2023 predictions hinge on the continued challenges with input costs and China's efforts to remain competitive in the space.

Milk production in the U.S. is up.

Overall, milk supply has grown in areas such as the United States, Canada, and Europe. In the fourth quarter, the USDA reported that United States milk production was up 18.50 billion pounds, which is a 1.2% increase year-over-year compared to last year's quarter. The nation's dairy herd numbers had a .3% increase, ending the year at about 31,000 head. Milk production per cow also saw a slight boost of less than 1% at 2,001 pounds compared to 2021. The breakdown equals 74.2 pounds per lactation per day, which is a half-pound a day more than last year.

But farmgate milk prices are catching on to global commodity market trends, and experts believe they will be lower coming into 2023. In mid-November, USDA announced that the international dairy trade price was trading lower than the U.S. price, or around $2.57 for the month.

Experts also say input costs will remain a headwind worldwide; high costs combined with lower milk prices could result in farm-level margin pressure. And the recent momentum of milk supply growth will continue into the first quarter of 2023.

All eyes on China.

Analysts are watching China as the country continues to purchase dairy stocks such as cheese, butter, and cream cheese that accumulated over the last year. It's an opportunity for buyers to enter a quieter market.

One of the key elements that will affect Chinese buyers is New Zealand's zero tariff milk powder quota that comes from under the Free Trade Agreement. Buyers are running short on time to acquire New Zealand's milk powder purchases in 2023's late third and early fourth quarters and securing the zero tariff quota for its milk powder imports. The quota applies to 2023 and was fully drawn down at the beginning of this year and will be gone by 2024, say RaboBank forecasters.

As a result, there could be a shift in Chinese buying patterns in 2023, mainly because there is a lot of uncertainty over the country's slow implementation of its new measures to relax the zero-Covid policy. There's a rising concern about the Covid situation in China since there has been little to no sign of any immediate relaxation. Analysts expect that price risks will veer on the upside if conditions change.

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Many second and third-tier buyers have stepped into the market within the last month of the fourth quarter and are needed to pick up the slack in early 2023. As a result, China's first quarter for 2023 dairy imports could fall short of last year's levels, but a renewed buying interest is developing for its second quarter.

The market will continue to test consumers.

Across the globe, consumer prices for dairy products have increased worldwide. Dairy demand is multifaceted with household size and income as affecting factors. Consumer confidence will continue to be tested, especially when disposable incomes take a hit from the economic pressures.

The U.S. consumer price index increased by 16% year over year in the third quarter. However, domestic demand for milk solids only rose to 1% within the same period, while exports soared to 6.2%, a 2% gain from the last quarter.

In the U.S., demand has been moderately less due to high retail prices. For example, the USDA milk report revealed that consumers bought less butter around the early holiday season than they usually would because butter is expensive. But, globally, with cost-of-living challenges, U.S. consumers have been more defiant than European consumers, who feel a pinch at the retail level. There's also been resilience in the Southeast Asia market yet, consumers are purchasing smaller volumes like the U.S. consumer.

As holiday buy-ins wane, the cheese and butter markets will find a new balance with 2023 prices. In the U.S., cheese and butter stocks are not burdensome. End users are being encouraged by analysts to jump into the market to scoop up a bargain, as market opportunities can be elusive in these competitive global dairy markets.

Cheese still reigns.

Exports of cheese in the first quarter of the year were up 17% year-over-year. But, rising prices curbed export growth within the third quarter to almost 4.2% year-over-year. The U.S. trade with Mexico, one of its largest dairy trading partners, was 17% higher along with South Korea, with a 10% year-over-year increase in third-quarter imports.

In November, the National Milk Producer Federation announced that several member cooperatives secured 50 contracts. These contracts add 6.2 million pounds of American-type cheeses, 348,000 pounds of whole milk powder, and 1.2 million pounds of cream cheese to CWT-assisted sales at the end of this year. These stocks will go to customers in Asia, Central America, the Caribbean, Middle East-North Africa, Oceania, and South America and will be shipped from November through May 2023.

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Exports of nonfat dry milk and skim milk powder totaled about 620,380 tons, down 9% yearly. However, on a positive note, third quarter exports to Mexico at 90,583 metric tons bested those in 2021 by 1.8%, representing the first quarter in 2022 with higher year-on-year sales to Mexico.

Dry whey exports averaged about 163,280 metric tons through the third quarter into the fourth, which was down by 6% from 2021. Experts say that the cause is primarily due to a 30% decline in sales to China, which accounts for about 45% of the U.S. dry exports.

More purchases for U.S. food aid.

The USDA could be preparing to use about 1 billion dollars to purchase food for food banks, with another $500,000 to expand local sourcing or buying programs and an additional $500,000 to purchase food for educational institutions' breakfast and meal programs. In addition, experts are still determining how much more dairy the government plans to buy in 2023. It is known that this will result in more government purchases and not less, which will support the fluid milk, cheese, and butter markets.

Class IV milk prices will remain high into the new year for producers.

In the U.S., Class IV milk prices are forecasted to maintain a slight premium above Class III prices through 2023 due to high butter prices. Ample cheese and dry whey stocks will cap the class three milk price. Experts forecast that Class III will see a bump of 23 cents this month compared to November and is predicted to fall to the mid-20s- by January and will trade lower in February.

Class III is at 20.30 cents per hundredweight, which averages about 2.5 cents more than $17.60, the rolling five-year average. With Class IV, it was at $23.35 but is expected to drop by only $2.75, resulting in $20.60 in February of 2023. Experts also forecast that the 12-month Class IV future price is expected to be about 20.95 cents per hundredweight which is 4.32 cents per hundredweight, more than $16.63, the rolling five-year average.

To read Rabobank's full report, click here.