World dairy prices predicted to fall as supply builds

Global dairy prices will ease from current highs, as world supply builds and demand growth slows but the drop won't be rapid or immediate, according to a recently released industry report.

Rabobank's dairy quarterly report shows New Zealand's dairy industry is well positioned with increased year-on-year milk production, buoyed by higher milk prices projected for the remainder of the year.

Report co-author Rabobank senior analyst Hayley Moynihan said world pricing was likely to face downward pressure as supply built - particularly from the southern hemisphere - and demand growth slowed.

However the shifts were unlikely to occur rapidly and may be more pertinent in the early quarter four than in the quarter three forecast period, Moynihan said.

"A strong fall in price looks unlikely," she said.

After taking a heavy knock during the global financial crisis, international dairy commodity prices experienced a sharp recovery late last year.

While the first quarter of 2010 saw "some steam blown off the international dairy market, the pot began to boil vigorously again in quarter two," she said.

Dairy prices have once again gained ground, with near-term prices now at exceptional levels, she said.

The developing world continued to provide a strong "engine" for demand growth, despite recovery in US consumption losing momentum, the report said.

Robust and often double-digit volume growth was reported for quarter one by processors in South East Asia.

"Demand is expected to continue to expand through the second half of 2010, however the rate of growth "may well slow in the face of headwinds from reduced economic growth, rising retail prices and substitution pressure," the report says.

Meanwhile April marked the tenth consecutive month of year-on-year decline in milk supply due to low milk pricing through 2009 and adverse weather in Europe and New Zealand.

However supply was set to build, Moynihan said.

- NZ HERALD