Jamie Gray: Dairy boom over? Don't count on it

The GlobalDairyTrade Price Index dropped 8.9pc to the lowest level since December 2012 in the latest auction, the 10th decline in past 11 sales. Photo / Christine Cornege.

Global dairy prices fell 8.9 per cent this morning to the lowest level since December 2012. Agriculture reporter Jamie Gray looks at reasons why it's not yet doom and gloom for the sector.

• Much of the recent price action in dairy can be explained by the fact that 2013/14 was an extraordinarily strong year. New Zealand is the world's biggest dairy exporter, so when the drought hit in 2013, supply was affected, which drove international prices sky high. Supply was also tight for many of world's other producers, which put added pressure on markets.

• International prices are now back to where they were before the effects of the drought started to make their presence felt. Conditions have since returned to more "normal" levels although production around the world has increased and is likely to increase further.

• Likewise, increased demand for protein, particularly from the developing countries of China and India, is also expected to remain a key factor in the market for years to come.

• Fonterra's current forecast for 2014/15 is at $7.00 a kg, which would still be the fourth highest on record if it came to pass, but well short of the previous year's record high of $8.40 a kg.

• The current year's forecast is under the spotlight, and some economists expect the forecast to drop to the low $6s. If that proved the case, farm income would be down by about $3 billion, but only against last year's extraordinary performance.

• The season is still young - it is nowhere near its peak around October/November - and lot can happen between now and then. Milk production around the world has responded to high farmgate milk prices, leaving the global commodity market with plenty of product to go around.

• Inventories in China remain high, which is keeping some large importers out of the market temporarily to work through accumulated stock. Experts say it will take until the end of this year before the market churns its way through the excess volume and the market finds its feet again.