Global dairy prices have been on an impressive and somewhat unexpected run since mid-December.
The Global Dairy Trade (GDT) Price Index is up 19.3% despite the global supply and demand picture not really improving over that time.
Buyers might have been pushed into action after spending months waiting patiently for prices to bottom out. Geopolitical tensions and an infant formula recall affecting a few major suppliers may also be contributing factors, as well as a seasonal decline in New Zealand milk production.
There may also have been a spillover from price volatility in other commodities.
The most correct answer may well be the simplest: prices fell too far in late 2025, and now they are back on the right track. Despite this surge over the past four auctions, the GDT Price Index remains 10.5% below the peak in May 2025.
Skim milk powder (SMP) was completely indifferent to the bull market in 2024/25, but so far in 2026 is a key contributor. Perhaps the infant formula recall led to a surge in demand in order to restock shelves.
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Looking ahead, the global supply and demand situation looks likely to push prices lower over the next several months. But some important context: demand remains steady, and dairying remains a profitable business everywhere in the world thanks to reasonably strong milk prices and very low input costs.
At present, there is no indication that dairy farmers overseas are looking to reduce production in the first half of 2026. Feed costs are still under control, and the recent lift in dairy prices should take pressure off profit margins. Still, some dairy farmers are lobbying the European Commission to fund a voluntary production reduction scheme similar to one implemented in 2016.
They're unlikely to succeed, but it illustrates that some pressures are mounting. The next key opportunity for destocking in the North Hemisphere would be in August/September after the spring flush.
NZ Production
New Zealand milksolid production rose 2.9% y/y in January and is up 3.1% season-to-date.
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Pasture conditions have been very good, and the wet weather in January sets up the tail end of the season nicely. |
Pasture conditions have been very good, and the wet weather in January sets up the tail end of the season nicely. There is also plenty of supplementary feed available, and the recovering farmgate price outlook adds an incentive to milk as long as possible. We now forecast milk production to hit 2 billion kgMS, a milestone that would have seemed implausible just two years ago. This would be an increase of 3.2% y/y, up from the previous forecast of 2.3%.
The outlook for next season is positive as well.
Previously we had warned that lower prices would increase cow culling rates heading into New Zealand's winter and reset the national herd's age structure, but with prices rebounding so strongly over the past two months this is now less of a factor.
There are also around 30 dairy conversions planned or underway in South Canterbury. Some of them will be ready to hit the ground running in 2026/27, further boosting the milk production forecast. Feed supplies are likely to be good heading into winter, and the gains seen in recent years in mating and genetics are sustainable. Despite all that, our forecast for next season is 'just' 1.2% higher than this year. The sector is capable of higher growth, but it might be too much to expect great dairy weather for a third year in a row.
