World dairy prices tipped to hold up

There is nothing to suggest an immediate drop in dairy prices, says the ANZ bank's latest market focus.

It said prices for dairy products had settled near a nine-year high, courtesy of a tight demand-supply balance.

"This situation has been reinforced in recent weeks by hot and dry conditions in Europe, which will limit the extent of production surpluses in the EU in 2005."

And the ASB Bank said in its weekly commodities report that while many had been expecting a weakening in world dairy prices following adjustments in European Government dairy policies, "the market seems to be going the other direction".

The strengthening of skim milkpowder prices spread to butter and whole milk powder last week, and prices for butter from Oceania - effectively New Zealand and Australia - were reported up almost 5 per cent from previous levels.

"With dairy supplies mostly fixed for the next several months, demand will be the key market driver," the ASB said.

The latest OECD long-term dairy projections to 2014 indicated that over the next decade, world demand for dairy products - butter, cheese and whole milk powder - would grow about 20 per cent, but demand for skim-milk powder would fall 4 per cent.

Product prices were expected to decline from their present levels but remain well above 1999- 2003 averages.

In 2014, butter prices would be about 40 per cent higher than the five-year average, with cheese, whole milk and skim-milk powder prices 20 per cent higher.

ANZ said the average peak-to-peak price cycle for dairying was about four years.

"We are currently four years into the present cycle.

"Looking at directional gauges, the relationship between dairy prices and leading indicators of global growth highlight that at this stage in the dairy price cycle the risks are to the downside."

But the report said the continuing theme in dairy markets in this part of the world was a tight demand-supply balance favouring exporters.

"It may take a good start to the season towards peak production in mid-October to take significant heat out of international dairy prices."

As with foreign exchange markets, ANZ said, any turning point could be "sharp".

Meanwhile, the report said, a tight supply situation from New Zealand was helping keep New Zealand lamb prices at record levels.

"Supply and demand are forecast to remain steady."

While beef prices peaked late last year, ANZ said they remained strong due to tight supplies and BSE-related restrictions out of Canada and the US.

- NZPA