World milk supply “will likely remain right”, as heat shrinks European supplies, US officials said, foreseeing the first decline in world output for 18 years, and a recovery in Chinese demand from lockdown lows.

The US Department of Agriculture cut by 3.38m tonnes to 442.7m tonnes its forecast for global mil production in 2022 – taking the estimate marginally below last year’s total to show the first year-on-year decline since 2004.

“Since the end of 2021, global milk supplies have tightened,” the USDA said, noting year-on-year dips in output in Australia, the European Union, New Zealand and the US in the January-to-May period.

Argentina, with a 1% rise, was the only one of the key exporters to show an increase in volumes, and even this was likely to reverse as elevated feed prices squeezed farmers’ margins.

‘Likely remain tight’

“Diminishing producer profitability in Argentina will likely cause production growth to moderate,” the USDA said.

And as in the EU hot and dry weather increases “cow discomfort” and depresses milk output per cow, “going forward, global supplies will likely remain tight”.

“Tightening supplies in the EU and Argentina are expected to more than offset improving production in New Zealand, where pasture conditions have improved considerably since the start of 2022 and the short-term climactic outlook is positive.”

The USDA tripped by 100,000 tonnes to 12.0m tonnes its forecast for Argentine cow’s milk output this year, while slashing by 4.45m tonnes to a five-year low of 142.3m tonnes expectations for EU production.

EU output will fall for a second successive year for the first time since at least the 1990s, with the USDA also flagging setbacks from rising feed costs, besides tighter environmental and animal welfare regulations in the bloc which “have tempered producer enthusiasm for expansion”.

‘Not much to get optimistic about’

The comments come even as dairy prices have fallen back from early-year highs, entering a bear market at GlobalDairyTrade auction, amid lingering worries over demand from China, the top importer of products such as milk powders and butter.

Chinese dairy imports tumbled by 24% year on year, in a decline viewed as fuelled by the dent to consumption from the country’s Covid restrictions and waning economic growth, with StoneX cautioning that “it looks very likely that July will be down by a similar amount.

“There still doesn’t seem to be much to get optimistic about,” said Nate Donnay, StoneX director of dairy market insight, noting that Chinese farmgate milk prices have yet to show their typical summer uptick, and that fresh Covid cases are maintaining concerns of fresh lockdowns.

“Covid cases have surged this week, primarily in mid-tier cities, but parts of Shanghai and Shenzhen are seeing new restrictions too.

“All of the indicators point to a continued [dairy] oversupply in the country.”

Recovery ahead?

However, the USDA forecast some revival in Chinese imports of major dairy products – albeit insufficient to prevent it cutting expectations for the country’s 2022 purchases of butter cheese and both skim and whole milk powders.

For whole milk powder, for instance, the USDA forecast that “as Covid-related lockdowns ease and logistics improve, it is expected that China demand will experience some recovery”.

For skim milk powder, “easing Covid-related lockdowns in China could support some improvement in shipments” from the EU, while “some recovery” was expected in the country’s cheese demand from Australia.

On futures markets, best traded September Chicago Class III milk futures stood 1.2% lower in late-morning deals at 19.93 per hundredweight, down 21% from their June high.

SGX NZX whole milk powder futures for September closed up 0.8% at $3,695 per tonne, extending a recovery from Wednesday’s 10-month low of $3,630 per tonne.