"Panic buying" appears to have broken out in the global dairy trade as supply constraints ratchet prices up into uncharted territory, according to agricultural forecaster Agrifax.
The latest data from the NZX-owned rural information provider show prices for milk powders jumped 4 per cent, and butter leapt 10 per cent, in the past fortnight in US dollar terms. Some prices for skim milk powder hit almost US$5000 ($6628) a tonne - more than 2 1/2 times last decade's average of US$1900.
"There are signs of panic buying and a wide range of prices are quoted by various sources," Agrifax said. "This is totally uncharted territory."
But Fonterra chief executive Andrew Ferrier denied those giddy prices would burn off demand for dairy, insisting a small number of trades at those levels is nothing new. However he told the Business Herald the full impact on consumers would not be clear until the end of the year.
"We want to ensure that dairy prices are at a level that is not going to have a material impact on demand - we just don't know what that price level is yet."
News of the surge follows the European Union's decision last week to scrap its dairy export subsidies in a move expected to cut dwindling European dairy production further.
Demand for dairy plummeted following spikes in commodity prices in 2000 and 2001, resulting in a dramatic slump in dairy prices and reduced payout to Fonterra shareholders for the 2002 season.
But Ferrier, who heads the world's largest exporter of dairy products, says that was a result of "very different dynamics" - an oversupply of product as opposed to today's shortage.
"We think it's very different than previous cycles because global demand has been so strong, global stocks are at an all-time low and we think there is just not enough [in the way of] pricing dynamics out there to drive a substantial fall."
However he acknowledged that high prices increase supply and tend to reduce demand, so care was needed.
While Ferrier did not predict a "precipitous fall" after the boom, he expected that "over time dairy prices will soften from the current peak and settle at a more palatable level".
However in the next six to nine months he did not see much changing the current supply-demand dynamics behind the dairy boom.
The drought in Australia, increasing use of land to grow corn for biofuels in the US, and Westernised diets in rapidly developing regions such as Asia and the Middle East are driving a surge in dairy prices, and supply can't keep up with demand.
"They just need product," Agrifax founder and market analyst David Meares said. "And it's not there."
He expected the price rises would have some impact upon consumption, especially in less affluent countries.
However, he did not think there would be much impact on developed economies such as the EU and the US.
Although demand in the short term was "very inflexible", the longer-term outlook was less certain. "The consumer hasn't been tested yet," he said.
He said that since no one had predicted the meteoric rise in dairy commodity prices, forecasting when they would come down would be difficult.
If current prices hold, Fonterra's payout for the 2007/08 season could be $6 per kg of milk solids at the current rate of US75c to the kiwi dollar, and go even higher depending on Fonterra's hedging policy, Meares said. "At a US71c conversion, a payout of about $6.40 is possible."