Tough times ahead for global dairy markets: Rabobank

The near-term outlook for global dairy markets continues to underwhelm, says a report just released by Rabobank.

But intervention buying by governments in the northern hemisphere had sustained global dairy prices at current levels.

The Rabobank Dairy Quarterly says a reduction in global dairy supply had been insufficient to offset the weak conditions for dairy, with US dollar dairy commodity prices making little headway in international trade in recent months.

Speaking at the South Island Dairy Event this week, Rabobank senior analyst Hayley Moynihan said there was still hope that fundamentals would begin to turn in favour of dairy sellers late in 2009.

"Demand will benefit from improving availability of credit, rising incomes and lower pricing in some key markets and supply reductions are also likely to accelerate," she said.

While any recovery was likely to be slow, the longer-term demand fundamentals for dairy products remained sound.

Ms Moynihan said milk production growth had ground to a halt in most key export regions, as farmers responded to the combination of poor milk prices and still-high input costs.

But supply reductions were minimal in key northern hemisphere regions and were partly offset by a solid recovery in New Zealand milk production from the drought-impacted levels of a year ago.

The Rabobank report said that, in the absence of a broad-based improvement in dairy demand, intervention buying by governments in the northern hemisphere - together with strong import buying from China - played a crucial role in sustaining price levels through much of this quarter.

In total, China and intervention authorities in the United States and the European Union (EU) bought just under 200,000 tonnes of milk powder in the first quarter of this year - around 25 per cent of normal international trade volumes in those products over the period, Ms Moynihan said.

"In addition to supporting prices, the redirection of product to government warehouses in the US and EU opened a window for exporters in Oceania to substantially increase shipments through the first quarter of 2009."

The improved season and movement of stocks held over from the last quarter of 2008 saw exports rise 10 per cent (53,000 tonnes) in the first quarter of this year, with volumes of skim milk powder and butter particularly strong.

In the shorter term, prices for next quarter looked likely to be heavily influenced by the relative strength of intervention buying in the northern hemisphere, and export subsidisation from the same region.

That subsidisation risked undermining the market floor in international pricing apparent through recent months.

Rabobank said its primary expectation was that export subsidisation would remain limited by the underlying shift in political appetite for such policies in the EU and the US, keeping pricing in touch with current levels through the third quarter of 2009.

But short-term downside risks had increased in recent months.

- NZPA