European Union milk output will contract next year even faster than officials believe, a US briefing said, even as market talk of some improvement in supplies continues to overshadow dairy prices.

EU cows’ milk production in 2023 will fall by 0.6% to 143.0m tonnes, a five-year low, the US Department of Agriculture’s Brussels bureau said in its first forecasts for next year.

A fall at that rate would match the shrinkage the bureau expects for 2022, and would represent a third successive year of decline, the first such run since the early 1990s.

The drop would also exceed the 0.2% fall in collections forecast earlier this month by the European Commission, which pegged at 0.5% the shrinkage expected for 2022.

‘Milk production is improving’

However, there is market chatter that milk collections, after contracting by 0.6% in the January-to-August period, are showing signs of improvement, encouraged by historically high prices.

“It looks like headline production for September might be slightly positive,” said Nate Donnay, director dairy market insight at StoneX.

“The bigger story is that milk production is improving from 1%+ declines in the first half of 2022 to running roughly flat against last year in recent months and potentially headed for some mild growth in the fourth quarter and into 2023.”

While elevated feed and fuel prices are lifting dairy farmers’ costs, such gains are being offset by “record high milk prices”, Mr Donnay said.

“Anecdotally, we’re also getting a boost in production from mild fall weather in the first half of October that is keeping pastures green and growing.”

Such talk was viewed as fuelled a decline in prices at last week’s GlobalDairyTrade auction, as well in futures on Europe’s EEX exchange, where November butter futures, for instance, are down by 8.6% this month.

‘Will push more farmers out of dairying’

The USDA bureau said that its forecast reflected expectations that the European dairy herd – which peaked at 43.5m heard in 1968 – would shrink by some 260,000 head next year to fall below 20m head, in part thanks to higher costs.

“While September rains may allow grass growth to recover to some extent, the resulting fodder shortage and the high feed prices will drive farmers to reduce their dairy herds in the coming winter,” it said in a report.

“Many farmers are already feeding their cows with fodder reserves for the winter,” after drought which sapped pasture condition – and indeed diminished hay production.

However, the bureau also flagged a dent to EU milk producer profitability from tightening environmental and animal welfare constraints.

Next year’s EU Farm to Fork plan, and the revised Common Agricultural Policy, “will push more farmers out of dairying in the next few years.

“Small and less efficient farmers may choose not to make the necessary investments to upgrade their barns and production equipment to meet” the enhanced restrictions.

Cheese vs butter

The milk supply squeeze will be felt in particular in butter, with the bureau forecasting 2023 output easing to a six-year low of 2.04m tonnes.

Production of skim milk, from which the fat is taken to make butter, will fall to a 10-year low of 1.38m tonnes.

Instead, supplies will be reserved for making cheese, output of which will rise by 15,000 tonnes to 1.36m tonnes.

“Cheese production remains the preferred EU milk factory use, and this trend is expected to continue as several new cheese plants were built in recent years, mainly to produce industrial mozzarella for the food processing industry.”

EU whole milk powder output will in 2023 hold flat at 600,000 tonnes, matching the lowest on data going back 40 years.