Tighter margins, slower production growth and a cautious price recovery: Rabobank Q1 summary

• Global dairy markets entered 2026 in a position of ample supply, driven by strong milk production growth across most major exporting regions. Lower feed costs have supported expansion, keeping global output elevated despite falling dairy prices
• Since late 2025, dairy commodity prices have come under significant pressure. Fat markets have been most affected, with butter prices falling by over 40% between September and February, while whole milk powder (WMP) declined by around 30%
• Protein products, including cheese and whey, have proven more resilient, declining by approximately 15%. However, trends have diverged within the protein complex, with skimmed milk powder (SMP) prices rising since January and whey prices continuing to strengthen, supported by demand for high-value protein products
• Recent Global Dairy Trade (GDT) auctions indicate early signs of price recovery. However, Rabobank notes that current supply levels do not yet support a sustained rebound
• Milk production growth among the 'Big 7' exporters is forecast to slow to 0.2% in 2026, down from 2.6% in 2025, with a slight contraction expected in early 2027

EU milk production increased strongly in late 2025 and early 2026, driven by previously high margins, lower feed costs and improved productivity. Output rose 6% in December, marking the fourth consecutive month of growth.

However, falling milk prices and rising regulatory costs are now squeezing margins.

Environmental policies, such as nitrogen limits in the Netherlands, and weaker returns are expected to drive a reversal in production growth later in 2026. Rabobank forecasts a 0.9% contraction in the second half of the year.

High milk supply has led processors to prioritise butter and SMP production, resulting in elevated stocks. A sustained price recovery will depend on these inventories being reduced, although global stocks of SMP are reportedly smaller than initially thought.

Export competitiveness is also under pressure, particularly with China imposing tariffs on cream and cheese from the EU. However, butter is currently at a substantial discount to Oceania, which may help.

US milk production continues to expand, with strong year on year growth driven by a larger herd, higher yields per cow and increased milk components (fat and protein).

Herd numbers are at their highest level since the 1990s, supporting continued output growth through 2026.

Lower milk prices are partly offset by reduced feed costs and strong calf prices linked to the beef sector, helping maintain farm profitability.

Dairy output remains strong, particularly for cheese, with December up 6.7% year-on-year (YoY), while milk production increased by 4.2%, supported by expanding processing capacity.

Whey markets are also benefiting from strong demand for high protein products. Rabobank forecasts milk production to grow by around 2% in 2026.

US exports performed strongly in 2025, with record shipments of cheese and butter, driven by competitive pricing. However, export growth is expected to moderate in 2026 as global prices converge.

Milk production remains robust, supported by favourable pasture conditions, good feed availability and strong farm confidence. Output is expected to increase further through 2026/27.

Export performance has improved through a shift towards higher-value products such as butter, cheese and casein, lifting returns despite relatively flat volumes.

Farm profitability remains solid, with current milk price forecasts at profitable levels. Rabobank bank expects milk collections to lift by more than 2% across the current 25/26 season with more momentum potentially into 26/27.  

The planned Fonterra divestment payment in late 2026 is expected to inject additional liquidity into the sector, supporting on-farm investment and land activity.

As of January 2026, milk production continues to decline, falling 1.2% season to date due to dry conditions, water constraints and elevated culling rates.

Rabobank expects Australian production season to finish around 1% lower at the end of June 2026.

Seasonal conditions remain a key risk, with soil moisture deficits and uncertain rainfall constraining recovery.

Lower feed costs are providing some support to margins, but reduced milk supply is limiting export availability.

Australia’s export sector has delivered mixed results, with export volumes declining 0.7% between July and the end of December.

However, overall export values were 5.6% higher, due to improved returns in some product categories.

Domestic demand for high-protein products has driven a sharp rise in whey imports, increasing by 76%.

Milk production grew strongly in 2025, with Brazil and Argentina increasing output by 7% and 9.7%, respectively. However, falling milk prices have reduced profitability, leading to slower growth in 2026.

In Brazil, lower farmgate prices and increased imports are adding pressure to the domestic market. While consumption is expected to improve gradually in the first half of 2026, competitive imports are likely to delay a stronger price recovery.

Rabobank expects milk production to grow by 1% in 2026.

In Argentina, margins have turned negative due to declining real milk prices, despite favourable weather conditions supporting feed availability. Domestic demand remains subdued, increasing reliance on export markets.

Rabobank expects Argentina’s milk production to grow by around 2% in 2026.

Milk production growth across the region is expected to slow considerably in 2026, reflecting weaker margins and softer demand conditions.

China’s dairy sector is characterised by stable milk production but weak demand. Output is expected to remain broadly unchanged in 2026 as improvements in productivity offset reductions in herd size.

China’s dairy herd had declined 4.5% YOY to around 5.91 million head by December 2025.

Despite a smaller herd, data shows that milk production increased slightly by 0.3% in 2025 YoY. Rabobank expects the dairy herd to decline by a further 2% YoY to 5.8 million head in 2026.

Ongoing yield gains should help counter herd declines, maintaining relatively stable milk output.

Consumer demand remains subdued, with overall dairy consumption expected to decline by 0.5%. While foodservice demand is providing some support, this is not sufficient to offset weaker retail consumption.

Import demand is expected to remain flat, as domestic production increasingly substitutes imports. However, demand for higher-value dairy products, particularly protein-rich categories, continues to grow.

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