At times this fall, wholesale natural gas prices in Europe have spiked nearly 3,000% higher than they were in the fall of 2020. In early September, Goldman Sachs estimated that the surge in energy costs is nearly equivalent to 15% of Europe’s gross domestic product (GDP). It isn’t hyperbole to say that the impact to their economy, and the structural changes that we will see follow, will rival the impacts of the oil crises in the 1970s. While there are dozens, and maybe even hundreds, of different potential impacts on the dairy markets, let me walk through the big ones.

The consumer price pinch

When I was in Germany for a dairy conference in May, most of the discussion was around tightening environmental regulation that could restrain milk production growth for the foreseeable future. Generally speaking, this situation is supportive for dairy prices.

However, at the StoneX conference in Dublin during mid-September, the mood was more depressed. The spike in energy costs, combined with inflation for other goods and services, could crush household budgets this winter and lead to much weaker dairy demand.

To counteract the situation, European governments are sending out one-time checks to consumers, capping energy prices, and trying to change the structure of their energy markets to bring down the average cost of electricity. Each country has a different level of exposure to natural gas prices, and each is responding with different levels of support for consumers. This makes estimating the final impact on consumers and dairy demand very difficult. But even with optimistic assumptions, consumers are going to feel some financial pain, and dairy demand will likely take a hit.

Processing prices escalate

At our Dublin conference there was also a lot of discussion about what the high energy costs mean for dairy processing. Running a milk drying tower is now significantly more expensive than it was just two years ago. I’ve tried to put together estimates for what drying costs look like in both the U.S. and the EU given the higher energy costs. In the second half of 2022, I think U.S. drying costs are up about 12% compared to the second half of 2020. Meanwhile, the EU costs are up about 31%, as shown in the figure.

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(c) Hoard's Dairyman Intel 2022
September 26, 2022
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