February 10, 2014

Global dairy prices surge on high demand

Buoyed by growing demand from China, North Africa and Russia, global dairy prices have jumped by almost a third in the past year amid limited supplies.

The UN Food and Agricultural Organisation's (FAO) dairy price index, which tracks butter, skimmed milk powder and whole milk powder prices, jumped 28% in January from a year before.

Michael Griffin, the FAO's dairy and livestock market expert, said prices rose as supplies struggled to keep up with demand because there were only a handful of countries exporting dairy products.

Dairy exporters are limited to the EU, New Zealand, Australia and the US, as well as some countries in South America, and increasing production was difficult, said Griffin.

Due to the decline in milk production in China and Russia, jump in demand came, underpinning a surge in dairy imports. Chinese demand was exceptionally buoyant, said analysts.

The country's demand has spurred active deal making in the industry, especially in Asia and Australasia.

Firm dairy prices came amid falling markets for most of the other food categories that make up the FAO's food index. The overall index fell 4.4%, the first drop in three months, with cereals dropping 23% thanks to bumper crops.

The FAO said lower prices for food commodities were expected to stimulate demand, and forecast world cereal usage in 2013-14 to rise by 92 million tonnes, or 4%, to 2.4 billion tonnes.

In the dairy market, Chinese buying in the export markets is expected to remain strong, rising 15-20% in the first half amid static domestic production, according to Rabobank. Supply is expected to increase by about 3% and could ease prices.

The upside risk for the market this year is the relatively low level of stocks after active buying by importers in 2013.