Strong milk production growth is putting pressure on dairy prices. Photo / John Doogan
Global dairy prices are expected to weaken after “stunning” global milk production growth in the second half of 2025, agribusiness banking specialist Rabobank says.
In a report for the fourth quarter, Rabobank said global milk production growth is estimated to have peaked in the third quarter of 2025, with fourth-quarter growth likely to be not far behind.
“The EU and UK posted their strongest growth since 2017 for the month of October, while surging US October milk flows posted their fifth consecutive month of growth rates over 3%,” report co-author RaboResearch senior agricultural analyst Emma Higgins said.
“Not to be outdone, New Zealand farmers have been setting new milksolid records each month from May to September 2025, with the peak month of October the third-highest output on record.”
South America was also shaping up to deliver a significant annual volume increase and output from the Big 7 producers (the EU, the US, New Zealand, Australia, Brazil, Argentina and Uruguay) is forecast to finish 2025 up 2.2% year-on-year.
Higgins said the wave of milk production had softened dairy markets through the third quarter, with sharp price falls recorded in the fourth.
“Too much milk for the market, combined with strong milk solids growth, has contributed to a sharp decline in commodity prices,” she said.
“Butter has led the decline, down 9% since the beginning of October and 24% below its peak earlier this year.”
Whole milk powder (WMP) and cheese have also followed suit, each 7% down on the beginning of the quarter. In contrast, skim milk powder (SMP) prices have held up better, declining 1% from already low prices felt earlier in the third quarter.
Looking forward to 2026, the report said, a period of weaker commodity prices was likely in the face of ample milk supplies and exportable surpluses.
“Demand remains fragile and in the absence of any supply shock to impede surplus milk, this raises the risk of prolonged weak pricing through mid-to-late 2026 as surplus milk enters the market,” Higgins said.
“However, supply growth is expected to slow to just 0.12% next year, and weaker prices should eventually support a gradual recovery in demand, with commodity prices expected to return to historical averages by year-end 2026,” she said.
The report says New Zealand dairy farmer revenues remain sound, despite lower milk commodity prices.
Fonterra has lowered its milk price forecast to $9.50/kgMS (kilo of milksolid) for the 2025/26 season last month, a 50-cent haircut from the previous forecast.
Still, it remains a profitable price and one of the highest season milk prices to date.
Dairy farmers will also be supported by a tax-free capital distribution to Fonterra shareholders next year, following the sale of Fonterra’s consumer business to French dairy giant Lactalis.
But Higgins said “there is elevated risk that the farmgate milk price moves lower across the course of the season”, which could mean that the final season payout lands around the $9.00/kgMS mark.
Dairy export volumes for the three months up to October 2025 bounced higher than the prior year, by 4% year-on-year, in line with more milk flowing from New Zealand farms.
“Shipments to China, New Zealand’s largest dairy export market, jumped by 17%, boosted by strong export volumes in September and October,” she said.
“Total export receipts for the same period were up 23% compared to 2024,” Higgins said, while a weaker New Zealand dollar, down 5% over the period against the US dollar, along with higher commodity prices, supported the increase.
DairyNZ’s latest “Econ Tracker” says most farms will still finish the season in a positive position, although the gap has narrowed compared with early season expectations.
The farmer-funded organisation said despite the Fonterra forecast farmgate milk price easing to a midpoint of $9.50/kgMS, the overall outlook remained positive with a forecast break-even milk price of $8.50/kgMS.
DairyNZ’s head of economics, Mark Storey, said the sector remained optimistic, but that farms should continue to monitor costs heading into the new year, as increased milk was putting downward pressure on prices.
“It’s not a case of being the Grinch who stole Christmas, but we do need to be sensible in terms of on-farm spending to maintain profitability over the remainder of the season,” Storey said.
“Demand is steady but not strong enough to absorb the additional milk at previous price levels.
“At the same time, we’re seeing a seasonal increase in farm working expenses,” Storey said – up 16c to $5.83/kgMS – which “consequently influences break-even costs and cash surplus”.
Storey said that even with a softer outlook, the sector remained in a strong position by historical standards.
DairyNZ chair Tracy Brown says that farmers are keeping a close eye on interest rates and any further reductions will be welcomed by the sector.
The Reserve Bank last week cut its Official Cash Rate to 2.25%.
DairyNZ said interest payments are expected to reduce to $1.11/kgMS for 2025-26, which is 35c lower than last season.
“Farms that reduce debt during high-payout years are better placed as margins tighten,” Brown said.