A slowing in global milk production – following an intense period of growth – is set to see global dairy markets headed back towards supply and demand ‘balance’, Rabobank says in its newly-released Q2 Global Dairy Quarterly.
The report, by the international agribusiness bank’s RaboResearch division, says the rate of global milk production growth finally began to slow in quarter two this year.
This was after four consecutive quarters of expanding global milk production, where growth tracked above two per cent in each quarter, with annual milk production growth peaking at a “whopping” 5.2 per cent at the end of 2025 – one of the steepest milk production increases on record.
Looking ahead, Rabobank estimates global milk production will finish quarter two this year 1.5 per cent higher than last year, before flattening in quarter three and moving into decline by quarter four this year (estimated down by 1.6 per cent year-on-year).
Overall, the report says, “higher input costs, the subsequent margin contraction on-farm and the tenuous milk price situation” will be key levers to watch in the coming quarters for the global dairy sector.
“Demand shifts could be the ultimate driver of overall prices, with Middle East tensions and consumer health trends the keys to global trade moves,” it says. “Additionally, weather is emerging as a critical watch factor as well, with concerns for a strong El Nino and its impacts that could especially be noted on milk supply across most parts of South America and both Australia and New Zealand.
“While global milk production has moved on from the intense supply growth story of recent quarters, the global dairy market will continue to navigate this series of potentially-significant headwinds as it seeks balance.”
Global production decline
Report co-author, RaboResearch senior dairy analyst Michael Harvey says the forecast global milk production contraction in Q4 this year would represent the first quarter where production had declined since Q2 2024. “And this helps build the case for a rebalancing of global milk supplies following the intense output growth that has been the story for some time now,” he said.
“Largely, it is our view that milk production growth will cease and that will bring a return of some semblance of balance within dairy product availability on the supply side,” he said.
On a calendar year basis, the bank says 2026 milk production is expected to be up one per cent – following a gain of 3.1 per cent in 2025, while its initial expectations for 2027 are for a 0.2 per cent drop. This would be the first calendar year contraction since 2022, Mr Harvey said.
He said this expected reduction in supply was down to several factors, including the normal sector cycle, with boom in supply leading to lower price signals, but also notably the accelerated cost of inputs, driven by this year’s Middle East crisis, and weather challenges in some key production regions.
Global prices
Mr Harvey said although “increasingly in the rear-view mirror”, the recent significant milk supply growth had caused generally weaker prices across the ‘dairy complex’ into 2026, although the situation varies widely by individual product.
While nine of the 11 Global Dairy Trade (GDT) auctions so far in 2026 had seen the price index increase, Mr Harvey said this was more a reflection of a rebound following the intense supply-driven price selloffs through the second half of 2025.
“Notably, GDT price index growth has largely been led by skim milk powder, followed by whole milk powder,” he said. “Cheese and butter prices at the GDT auctions have shown some volatility, but on average are generally lower versus 2025 levels, driven by adequate supply.”
Inputs squeezing margins
Overall, the report says, all eyes are focused on dairy farmer margins across the globe, with a general sense of margin contraction emerging as a key theme.
“Most concerning across nearly every region is the increase we’ve seen in input costs – including for oil, energy and farm fertiliser as well as interest rates – that could pressure margins further in the second half of this year and potentially into 2027,” Mr Harvey said.
He said dairy producers would be closely watching the outcome of the announced US/Iran peace agreement planned to be signed later this week and the impacts on the opening of the Strait of Hormuz.
Mr Harvey said, “while futures markets for dairy commodities in some regions look steady now, when coupled with sensitive and ever-volatile milk prices globally, the scene could be set for margin and profitability challenges for many of the world’s dairy farmers. And this has contributed to our expectations of milk production contraction to emerge in future quarters.”
Consumer demand – “protein’s positive halo”
The report notes food price inflation – including for dairy products – is likely to emerge in coming months, off the back of higher input prices. This is expected to shift patterns in consumer-purchasing habits, Mr Harvey said, as out-of-home food prices continue to trend higher and in-store products ‘fight for margin’ (with discounting and promotional activity) as consumers become more resistant to price increases.”
One upside, he says, is “protein’s positive halo”, which has become a significant health trend in many regions. “And this is an area where dairy, especially whey proteins, can prove a winner,” he said.
Australia
For Australia, the report says, while milk production has momentum as the sector moves into the new season, tighter farm margins and the risk of low rainfall in the weather outlook could lead to constrained supply growth.
Mr Harvey said milk production trends had varied by state in the 2025/26 season, with New South Wales and Queensland the strongest performers, while Tasmania had also recorded solid growth. Overall, 2025/26 milk production is expected to be slightly below prior year levels.
For the new 2026/27 season, RaboResearch is forecasting a 0.3 per cent decline in milk production.
Mr Harvey said improved rainfall had recently alleviated soil moisture deficiencies that had impacted some regions, although the outlook was for below-average rain in southern and eastern Australia in coming months and the risk of a shift to El Nino conditions, associated with lower rainfall, later in the year. “This increases the risk of tighter feed availability,” he said.
New season milk prices have been announced. Across southern Australia, the range was AUD8.80/kgMS-9.50kgMS. This is slightly below Rabobank’s expectations, Mr Harvey said.
Overall, these factors suggest Australian dairy farmers are commencing the 2026/27 season under increasing margin pressure, he said. “With cost pressures expected to remain elevated for the foreseeable future and milk prices only close to break even, farm profitability is likely to stay constrained in 2026/27,” he said.
The report says at retail level, dairy price inflation is once again emerging in the local market, with major Australian retailers raising the shelf-price of private-label milk in response to increasing supply chain costs. “Further price increases across the dairy aisle are likely in the coming months,” Mr Harvey said.
Australian dairy export volumes for July 2025-March 2026 were broadly stable year-on-year, the report said. Product-level performance was mixed, with strong growth in milk exports for the period (up 17.9 per cent), supported by improved trade to South-east Asian markets, but sharp declines in butter (down 49.5 per cent), butter oil (down 38.2 per cent) and cheddar (down 18.2 per cent) exports.
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Rabobank Australia & New Zealand Group is a part of the international Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has more than 125 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 35 countries, servicing the needs of more than nine million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group is one of Australasia’s leading agricultural lenders and a significant provider of business and corporate banking and financial services to the region’s food and agribusiness sector. The bank has 87 branches throughout Australia and New Zealand.
