The global dairy market is entering a period of slower milk production growth and increasing supply uncertainty, potentially providing stronger support for international dairy commodity prices, according to Rabobank’s latest research.
In its Q3 Global Dairy Quarterly, Rabobank said milk production across major exporting regions continued to expand through the third quarter of 2026. However, growth has slowed considerably, with production estimated to have increased by 1.4% year on year, marking the weakest quarterly growth since early 2025.
The bank expects this slowdown to become more pronounced during the second half of 2026. Milk production across the Big 7 dairy-exporting regions—the US, Argentina, Brazil, Uruguay, the European Union, New Zealand and Australia—is forecast to grow by only 0.5% year on year in the second half of the year.
Rabobank expects production to contract by 0.2% in the fourth quarter of 2026 before remaining broadly flat through the first half of 2027.
Supply Growth Faces Increasing Constraints
Several factors are contributing to the expected moderation in milk production. While milk supplies remain elevated in the US, New Zealand and the EU at headline level, weather conditions are affecting production in parts of Europe.
North-western Europe has experienced heat-related impacts, while production growth in Brazil and Argentina is moderating because of difficult year-earlier comparisons and heavy rainfall.
The combination of slower production growth, tighter producer margins and structural supply constraints in Europe could reduce the availability of milk for global dairy markets.
Global Dairy Demand Remains Resilient
Despite abundant milk supplies and continued economic uncertainty, global dairy demand has remained stronger than expected.
Asia continues to provide an important foundation for international dairy trade, with China showing signs of stabilisation and demand remaining robust across Southeast Asia.
Rabobank highlighted growing demand for protein-rich dairy products, supported by increased consumer attention toward health and nutrition. Emerging dietary trends associated with GLP-1 medications are also contributing to changing consumption patterns.
The bank said strong demand for milk powders, protein ingredients and cheese is helping absorb increased milk production and supporting global trade flows.
Milk Powder Markets Strengthen
Milk powder markets have emerged as a major source of strength during the third quarter, particularly for New Zealand, where milk powder accounts for more than half of total dairy exports.
The latest Global Dairy Trade auctions delivered significant gains. Skim milk powder prices increased by more than 10% across the two auctions, while whole milk powder prices rose by almost 3%, despite large volumes being offered.
Demand from Indonesia, Malaysia, the Philippines and Thailand has also remained strong during 2026, helping New Zealand farmgate milk prices perform relatively well compared with markets in the Northern Hemisphere.
New Zealand Milk Price Could Approach $10
Rabobank believes there is upside potential for New Zealand’s 2026/27 farmgate milk price.
Fonterra initially set its opening midpoint forecast at NZ$9.75/kgMS, before reducing it by 50 cents to NZ$9.25/kgMS in July.
However, Rabobank expects the reduction could prove temporary and forecasts that the final 2026/27 milk price could reach around NZ$10.00/kgMS.
New Zealand’s 2025/26 season ended with record production of 2.027 billion kgMS, becoming the first season to exceed the 2 billion kgMS threshold. June and July 2026 also established new monthly production records.
Rabobank currently forecasts approximately 1% production growth in New Zealand during 2026/27, although the outlook could change as the effects of El Niño become clearer.
Producer Margins Under Pressure
Despite positive milk price expectations, rising costs are creating challenges for farmers.
Increasing on-farm expenses and higher interest rates are narrowing the margin between milk prices and production costs. While producer returns remain positive across most regions, profitability is becoming less secure.
This could make farmers more cautious about expanding production, potentially reinforcing the supply constraints expected in the global market.
Key Risks for Global Dairy Markets
Rabobank identified several factors that could influence dairy markets through 2027.
| Market Factor | Potential Impact |
|---|---|
| Slower global milk production | Supports dairy commodity prices |
| European supply constraints | Limits exportable milk availability |
| Chinese demand stabilisation | Provides support to global trade |
| Strong Southeast Asian demand | Supports New Zealand exports |
| Higher energy costs | Raises production and logistics costs |
| Strait of Hormuz disruption | Could increase freight and fuel costs |
| El Niño | Creates uncertainty for New Zealand production |
| Consumer spending | Could influence dairy demand |
The prolonged disruption to oil flows through the Strait of Hormuz remains another important risk. Rabobank expects fuel inventories, diesel margins, refining constraints, freight expenses and fertiliser costs to remain elevated into 2027.
Consumer resilience will also be closely watched. Although dairy demand across many importing markets has remained stronger than expected, persistent increases in living costs could eventually influence purchasing behaviour.
Overall, Rabobank’s outlook points toward a global dairy market shifting from a period dominated by production growth toward one increasingly shaped by supply uncertainty, tighter margins and resilient demand. If production growth continues to slow while Asian demand remains firm, global dairy commodity prices could receive greater support, with New Zealand farmers potentially benefiting from stronger farmgate milk price prospects.