The UK dairy industry is experiencing declining milk production, rising farmgate prices and mixed retail demand, while global milk surpluses continue to limit commodity price recovery.
Falling UK Milk Deliveries Contrast With Global Dairy Production Growth
The Great Britain (GB) dairy market faced further supply contraction during the third quarter of 2026, as persistent summer heat, rising production costs and animal disease risks affected milk output. According to the Agriculture and Horticulture Development Board (AHDB), milk deliveries declined year-on-year in July, August and September, despite some easing of heat-related pressures towards the end of the period.
Milk production fell by 3.1% in July, 4.4% in August and 2.3% in September compared with the corresponding months of 2025. As a result, calendar-year milk production was 0.5% lower, while production for the current milk year declined by 2.5%.
AHDB forecasts that GB milk production will reach approximately 12.73 billion litres in the 2026/27 season, representing a 2.2% decline from the previous milk year.
Rising Costs and Herd Reductions Pressure Milk Supply
Several factors are contributing to the contraction in British dairy production. The national milking herd totalled approximately 1.57 million head in July 2026, down 2.2% from the previous year and the lowest level recorded in the cited analysis.
Higher fuel, fertiliser, forage, straw and labour costs are putting additional pressure on farm margins. Low forage stocks following dry weather have also affected some regions, although September rainfall and improved grass growth provided partial relief.
Animal health is another concern, with bluetongue virus presenting an additional risk to dairy production. Meanwhile, the number of dairy females under two years old declined by 2.2%, potentially limiting the availability of replacement heifers in the coming years.
These developments could restrict production capacity even if weather conditions improve, as rebuilding dairy herds requires time and investment.
Global Milk Production Continues to Expand
While UK milk supplies are contracting, production across several major dairy regions continues to increase. Global milk production across the selected regions averaged 793.7 million litres per day in July 2026, up 2.3% year-on-year.
New Zealand recorded growth of 7.4%, while Australia increased production by 6.6%. US output rose by 1.7%, and Argentina recorded growth of 3.2%. European Union milk deliveries also increased by 2.6%, with Germany contributing significantly to the expansion.
However, Rabobank forecasts that milk production growth among the seven major dairy-exporting regions will slow to 0.5% in the second half of 2026, compared with 3.1% in 2025. Drought, weaker feed quality, higher feed costs and herd reductions are expected to constrain future growth, particularly in Europe.
Dairy Commodity Prices Show Diverging Trends
Wholesale dairy markets strengthened during the third quarter as heat-related production declines tightened UK milk supplies. September saw cream prices rise by £101 per tonne, while butter increased by £90 to £3,540 per tonne. Mild cheddar prices gained £270 to reach £3,330 per tonne, and skimmed milk powder rose £260 to average £2,730 per tonne.
However, global market conditions remain uneven. Recent Global Dairy Trade auction results showed butter prices declining by 0.3% and anhydrous milk fat falling by 1.1%, while skimmed milk powder increased by 4.3%.
This divergence highlights stronger performance in dairy protein compared with milk fat products.
Farmgate Milk Prices Rise Despite Uncertain Outlook
The latest published GB farmgate milk price for August 2026 reached 36.89 pence per litre, up 4% from July. Several processors also announced further price increases for October, including suppliers operating under liquid, cheese and manufacturing contracts.
Nevertheless, rising farmgate prices may not fully offset higher production costs. Continued global milk surpluses and uncertain demand could restrict further increases, leaving farmers exposed to changing market conditions.
Retail Demand and Exports Shape Industry Prospects
UK household dairy spending increased during the 12 weeks ending 5 September 2026, supported by higher average prices and growth in cheese and yoghurt. Yoghurt volumes rose 6.8%, while cheese volumes increased 2.2%. In contrast, butter volumes declined 2.4%, and liquid milk volumes fell 0.3%.
Cheese exports also remained a relative strength, reaching a record volume in the second quarter of 2026, although export value declined by 4% because of lower global commodity prices.
The outlook for the UK dairy industry will depend on production costs, herd recovery, consumer demand and international market conditions. For farmers and processors, balancing reliable milk supplies with sustainable margins remains a central challenge heading into 2027.
