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Denver, CO—The cross-current of resilient domestic and global demand for dairy products with the slowing growth in milk supplies should give additional upward lift to milk prices in 2022, according to a year-ahead outlook report from coBank’s Knowledge Exchange.

Combined with softer feed costs following corn and soybean harvests, dairy producer margins will finally improve, the report said.

Milk supplies in the US and around the world will tighten in 2022 as dairy farmers reduce herd sizes in response to declining margins, the report noted. European and New Zealand milk production in particular will continue to face headwinds with stricter environmental regulations discouraging any growth in cow numbers.

With the global economy widely expected to continue its recovery from COVID-19 and global consumers adding more protein to their diets, demand for dairy products around the world will continue to grow, particularly in high-growth regions like Southeast Asia.

The US Phase One trade deal with China is set to expire at year end, and China could steer its purchases toward the main US export competitors: New Zealand and the EU, the report said. Ongoing port congestion and a continuation of the strengthening dollar would hinder US dairy exports in 2022.

Domestic consumption of dairy products will be more resilient as consumer demand increases both at and away from home, the report said. Consumers armed with ample savings accounts and improved job prospects from a growing US economy will drive further increases in dairy consumption in 2022.

High costs for labor, construction, and freight will limit upside margin potential and dampen milk production growth, according to the report. Faced with tightness in farm labor, dairy producers increasingly will be evaluating robotics and automation on the farm.

The potential for continuing drought in the Western US, made more likely by the current La Nina conditions, will tighten feed availability for producers in the West, an additional incentive for dairies in the region to relocate further inland, specifically to the Midwest and Plains states, the report said.

For dairy processors, increasing milk costs, inflation driving up operating costs, and labor availability will mean some processors get squeezed, particularly those manufacturing commodity dairy products. The significant expansion of capacity in cheese production in the last year, with more capacity coming online in 2022, will reduce milk supplies available for other categories, particularly for Class II and Class IV users.

Port congestion and a shortage of available outbound containers will remain as headwinds for US dairy exporters for much of 2022, the report said. Ongoing logistical snarls, resulting in higher detention and demurrage costs and declining market share in Asian markets, will pressure US dairy companies. International customers are already switching dairy purchases to EU and New Zealand origin, a trend that is likely to accelerate in 2022.

Overall, the US economy is poised to slow in 2022 relative to 2021, but economic growth will continue at a pace that is well above average, the report said. Consumers have powered the economic recovery since mid-2020 and that will continue in the coming year. Consumer spending is expected to rise another 4 percent to 5 percent in 2022 and GDP is expected to grow by roughly 4.5 percent.

“The COVID-19 Omicron variant is shaping up to be the wild card of early 2022 and it could delay the rebalancing of the US economy,” said Dan Kowalski, vice president of CoBank’s Knowledge Exchange. “If Omicron disrupts the services industry, the majority of consumer spending will again revert to goods, compounding supply chain and inflation problems.

However, at this early stage, we expect Omicron to have only a modest impact on the economy.’ The CoBank 2022 outlook report examines several key factors that will shape agriculture and market sectors that serve rural communities throughout the US. For example, if the global economy is to perform well in 2022, it will do so despite three significant headwinds: a persistent pandemic, monetary tightening in the US and slowing growth in China.

As far as the US economy is concerned, the pandemic has significantly altered how the economy functions, with the greatest impact coming from what is consumed. Through October, in 2021 Americans spent 18 percent more on goods and about 1 percent less on services than they did in 2019, the report noted.

Compounded by a labor shortage, it is easy to see why supply chains have become one of the biggest economic challenges of the pandemic—demand has significantly exceeded the capacity of the existing system, the report explained.

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