Global dairy markets are entering a turning point as rising input costs and geopolitical uncertainty begin to squeeze margins and slow production growth across key exporting regions. After peaking in late 2025, milk supply growth is easing and is expected to flatten in the third quarter of 2026 before contracting later in the year. Food price inflation, including for dairy, is likely to rise in the coming months, adding pressure to farmer margins. According to a new RaboResearch report, the key forward-looking risk lies in escalating input costs, driven by geopolitical tensions, which could further accelerate supply contraction and heighten market volatility.
Milk supply growth loses momentum after record expansion
Global milk production surged through 2025, with year-on-year growth peaking at 5.2% in the fourth quarter, one of the strongest increases on record. However, this expansion is now firmly in retreat. RaboResearch estimates growth of 1.5% in the second quarter of 2026, followed by stagnation and an expected contraction of 1.6% in the fourth quarter. If materialized, this would mark the first quarterly decline since mid-2024 and signal a rebalancing after a prolonged period of excess supply.
Price dynamics have been uneven across the dairy complex, says Lucas Fuess, Senior Dairy Analyst at RaboResearch. “Skim milk powder has been driving the recent price recovery, while cheese and butter markets remain under pressure due to ample supply. Regional differences also stand out. US nonfat dry milk prices have hit record highs, while European milk prices have fallen sharply, putting pressure on farm margins.”
Input costs and geopolitics reshape profitability outlook
The emerging constraint on dairy supply is not demand but rising costs. Energy, fertilizer, and financing costs are increasing across most producing regions, driven in part by continued instability in the Middle East. The unresolved disruption around the Strait of Hormuz is raising uncertainty in global oil markets, with cascading effects on agricultural inputs and feed costs.
Higher costs are already eroding profitability, particularly in Europe where milk prices have fallen significantly over the past year. While some regions, including the US and New Zealand, are seeing relatively stable or supportive milk price outlooks, the broader trend points toward margin compression. This dynamic is expected to play a central role in limiting future production growth.
Demand resilience faces inflation and consumer pressure
On the demand side, dairy consumption remains supported by structural trends, including sustained interest in protein-rich products. However, rising food price inflation and weaker consumer purchasing power are beginning to shift buying behavior. A widening gap between higher- and lower-income consumers is likely to influence demand patterns across both retail and foodservice channels.
At the same time, macroeconomic uncertainty and geopolitical disruptions are adding volatility to global trade flows. Global dairy trade faces rising uncertainty, as Middle East disruptions and shifting consumer demand patterns increase risks for the remainder of the year. As Fuess notes, “a sensitive margin balance emerges, with all eyes on input cost pressures.”
Outlook: Supply contraction likely amid mounting headwinds
In the coming months and into 2027, RaboResearch expects global milk production growth to slow significantly, with the potential for outright contraction in key regions. This outlook is contingent on continued pressure from input costs, alongside uncertain developments in energy markets and geopolitical conditions.
“Weather risks are becoming more important, especially with a strong El Niño event increasingly likely. That could disrupt supply further, particularly in the Southern Hemisphere,” Fuess explains. “At the same time, shifts in consumer demand, driven by inflation and health trends, will play a key role in where prices go next.”
“The market is moving toward a more balanced supply and demand situation, but uncertainty is still high. Ultimately, it will come down to how cost pressures, geopolitics, and consumer behavior interact going forward.”
