Adverse Weather Meets Supply Growth As Dairy Stabilises

Insight Focus

Supply Growth Meets Emerging Weather Risks

The global dairy market entered mid-2026 with a contrasting mix of abundant milk supply and growing weather-related risks. New Zealand remains the key focus for global traders. USDA forecasts New Zealand milk production to reach a record 22.1 million tonnes in 2026, supported by strong farmgate milk prices, productivity gains and continued investment in supplementary feed.

Processors and industry participants report exceptionally strong early-season milk availability, with milk even being transported from the South Island to the North Island for processing, highlighting the scale of supply currently available.

Source: USDA

At the same time, weather forecasts are increasingly focused on the risk of El Niño developing later in 2026. NIWA estimates a 95% probability of El Niño conditions emerging during July–September, while Fonterra has identified El Niño as the principal supply-side uncertainty for the coming season. However, high milk prices and strong feed inventories mean any impact on New Zealand milk output may take longer to emerge than in previous drought cycles.

The New Zealand dollar has also remained relatively weak against the US dollar, helping underpin farmgate returns and export competitiveness despite softer commodity prices.

European Heatwave Supports Prices

While Oceania is entering a potentially strong production season, Europe is confronting the opposite problem. Record-breaking heatwaves across Western and Central Europe during June and July have placed dairy cows under significant heat stress, reducing milk yields and disrupting seasonal production patterns.

Copernicus reported that June 2026 was the hottest June ever recorded in Western Europe, while USDA Dairy Market News warned that prolonged hot and dry weather was creating uncertainty around milk availability through the summer.

AHDB estimates that heatwaves have already reduced UK milk production by approximately 18.5 million litres, shifting the market from oversupply into short-term undersupply. Similar concerns have been reported across mainland Europe, with lower yields, deteriorating pasture conditions and rising feeding costs.

These developments have helped halt an extended decline in European dairy commodity prices. Cream, butter and skim milk powder markets have begun to firm as buyers reassess available summer supplies.

Source: European Commission

Nevertheless, upside potential may be limited. If elevated prices persist through the third quarter, increasing volumes of competitively priced New Zealand product could ultimately find their way into Europe, particularly as expanding dairy quotas under recent free trade agreements improve market access.

Protein Markets Remain Exceptionally Tight

Perhaps the most notable development in dairy ingredients has been continuing tightness in protein markets. Market participants report increasing scarcity of milk protein concentrate (MPC70), with some New Zealand processors reducing production in favour of higher-return product streams.

At the same time, demand for whey proteins remains exceptionally strong. The rapid growth of high-protein nutrition products, sports nutrition and demand linked to GLP-1 weight-loss treatments continues to support whey protein concentrate (WPC) and whey protein isolate (WPI) values. This is increasing competition for liquid whey streams and reducing the availability of downgraded products traditionally used in calf milk replacer and piglet milk replacer markets.

As processors maximise returns by directing more whey toward food-grade ingredients, animal nutrition manufacturers are increasingly seeking alternative protein sources. There is growing concern that feed-grade buyers may eventually have to compete directly with much higher-priced human nutrition markets for protein availability.

This trend is also supporting lactose and whey complex values. Although Global Dairy Trade prices have softened recently, lactose prices remain significantly above year-earlier levels.

China Remains a Key Variable

China’s livestock sector continues to be watched closely because of its influence on whey demand. Chinese pig prices remained under pressure through much of the first half of 2026 as domestic pork supplies expanded faster than demand. AHDB reports that average pig prices were around 27% below year-earlier levels through mid-June, reflecting persistent oversupply.

Source: Pig333

Although prices have shown some recovery in early July following government intervention and herd management measures, Beijing is actively encouraging reductions in breeding sow numbers to rebalance the market.

For dairy markets, this creates an important secondary effect. Sweet whey powder and whey permeate are major components of pig feed formulations. A sustained reduction in China’s pig herd could modestly suppress feed-whey demand, partially offsetting some of the upward pressure currently coming from food-grade whey protein markets. However, the effect is likely to be limited given continued growth in human nutrition demand.

Dairy Prices Under Pressure Despite Firm Fundamentals

Despite regional supply concerns, global commodity markets softened during June and July. The Global Dairy Trade index fell 4.9% at its July 7 event, marking a third consecutive decline as auction volumes increased sharply and buyers responded to expectations of stronger milk production from major exporters. Whole milk powder fell 4.4% and skim milk powder fell 7%.

Reflecting these developments, Fonterra reduced its opening 2026/27 milk price forecast from NZD 9.75/kgMS to NZD 9.25/kgMS, citing softer-than-expected demand and strong global supply growth.

Nevertheless, the cooperative continues to expect a strong start to the New Zealand season, reinforcing the view that weather developments rather than supply availability may become the dominant market driver during the second half of 2026.