The escalation of tensions in the Middle East has triggered renewed volatility across global dairy markets, raising concerns about supply disruptions and trade flows through critical maritime routes. However, despite the sharp initial reaction in commodity prices, the structural backdrop of the dairy market is significantly more resilient than during previous geopolitical shocks. Strong milk production growth, improved inventories of storable commodities and limited direct exposure to the most affected Gulf markets suggest that the current crisis is more likely to generate short-term volatility rather than a structural supply shock.
Iran’s expanding presence in regional dairy trade
Iran has become an increasingly relevant supplier within the regional dairy market in recent years. Government efforts to diversify exports away from hydrocarbons have supported the expansion of the country’s dairy processing sector.
Exports of skimmed milk powder (SMP) and butter have grown steadily since 2021, positioning Iran as the fourth-largest SMP exporter globally, behind the European Union, the United States and New Zealand.
Iranian dairy exports remain highly regionalised. Competitive pricing, lower freight costs and shorter delivery times have made neighbouring markets the primary destinations. Afghanistan and Pakistan have been the main growth drivers for Iranian SMP shipments, while Russia has emerged as an increasingly important outlet for butter exports.
This regional concentration means that while Iran plays an important role within Middle Eastern dairy trade flows, the broader global market exposure remains limited.
Stock building reduced immediate market vulnerability
Another factor moderating the current market reaction is the degree to which buyers had already prepared for potential disruptions.
Throughout the second half of last year, geopolitical tensions in the region prompted several importers to increase precautionary inventories. This was particularly evident in the EU EBP SMP market, where prices rose more than 31.9% during the last three months as buyers secured volumes while prices remained near five-year lows at the end of 2025.
As a result, many importers entered 2026 with stronger inventory positions, reducing the likelihood of immediate supply shortages.
Supply growth shifts the market backdrop
The global dairy supply environment today is fundamentally different from the conditions that prevailed during earlier geopolitical disruptions.
After three years of limited expansion, milk production across the main exporting regions resumed growth in 2025. All major exporters recorded higher output, with the exception of Australia. Early data for 2026 suggests that this expansion has continued.
Within the European Union, milk collection also increased across several key producing regions. Higher milk availability translated into stronger production across most dairy categories, particularly butter and skimmed milk powder.
Delayed calving altered last year’s production profile
Milk supply dynamics during 2025 were strongly influenced by animal health developments, particularly the spread of bluetongue disease.
Delayed calving shifted part of the milk output later into the year. While production followed relatively normal seasonal patterns until mid-summer, output accelerated significantly from August onwards. The late-season milk surge encouraged processors to channel volumes into storable commodities such as butter and SMP.
Herd management decisions will shape the 2026 outlook
Looking ahead, herd dynamics will play a central role in determining milk supply during 2026.
Lower farmgate milk prices initially led analysts to anticipate higher levels of cow slaughter. However, this adjustment has so far been slower than expected, with many farmers delaying culling decisions as the spring milk flush approaches.
At the same time, herd sizes remain elevated in parts of Europe due to older animals retained during last year’s disease-related disruptions.
Weather conditions may therefore become a decisive factor in the months ahead. If favourable conditions persist, farmers may accelerate culling to improve herd efficiency and take advantage of currently strong beef prices. In that scenario, milk production could decline more rapidly than current projections suggest.
Input costs remain another potential source of uncertainty. Rising energy and fertiliser prices could weigh on farm profitability, although many producers have already secured fertiliser purchases for the second quarter, limiting the immediate impact.
Limited exposure to potential Hormuz disruption
The most widely discussed risk for dairy markets relates to the potential closure of the Strait of Hormuz, which would disrupt maritime access to several Gulf economies including Iraq, Kuwait, Bahrain, Qatar, Iran and the United Arab Emirates.
However, analysis of European export flows indicates that the direct exposure to these markets is relatively modest.
While the broader Middle East accounts for approximately 20% of EU dairy exports, the group of Gulf markets most exposed to a Hormuz disruption represents only between 4% and 5% of EU export value.
Cheese accounts for roughly one-third of these shipments, while butter and milk powders together represent more than half. Condensed cream also plays a notable role in regional demand due to its use in tea consumption and traditional desserts.
Logistics adjustments reduce disruption risks
Concerns have also been raised regarding potential disruption to global shipping routes through the Suez Canal or the Bab el-Mandeb Strait.
However, many shipping companies had already adjusted logistics following earlier attacks on commercial vessels in the Red Sea. Several operators rerouted shipments around the Cape of Good Hope, effectively bypassing the Suez Canal.
As a result, additional disruptions are more likely to translate into longer transit times rather than a structural interruption to trade flows. For example, shipments from Europe to Southeast Asia that typically require nine to ten weeks may now take up to twelve weeks.
Sentiment versus fundamentals
In the near term, dairy markets will remain sensitive to geopolitical developments and headline risk.
Nevertheless, the structural supply environment remains supportive. Strong milk production, improved inventories of storable dairy commodities and relatively limited direct trade exposure to the most affected markets suggest that the sector is better positioned than during previous geopolitical crises.
As the market adjusts to the evolving geopolitical landscape, short-term sentiment may continue to drive price volatility. Over time, however, underlying supply and demand fundamentals are likely to reassert themselves as the primary drivers of dairy market direction.
Potential timeline of market impacts
The potential impact of the conflict on dairy markets is also likely to evolve over several phases. In the immediate term, during the first one to two months, the main effects are expected to come from logistics disruptions and shipping rerouting. This could temporarily favour exporters from New Zealand and the United States, while imports into Gulf countries such as Qatar, Bahrain, the UAE, Iraq and Kuwait may face short-term disruptions.
Over the following months, as the Northern Hemisphere milk flush progresses, processors may increase exports to prevent stock accumulation. This could lead to a redistribution of trade flows, with additional volumes redirected towards alternative destinations such as Africa or South America, increasing competition in global dairy commodity markets.
Further ahead, between five and nine months, the focus may shift towards supply-side adjustments. Higher energy, fertiliser and feed costs could place pressure on farm profitability, potentially accelerating cow culling and contributing to a decline in milk output. At that stage, market dynamics could move from short-term volatility driven by sentiment and logistics towards tighter supply conditions.
This crisis therefore appears more likely to reshape trade flows and logistics patterns in the short term rather than trigger a structural supply shock in global dairy markets.
Written by Jose Saiz
