February 11, 2010

Global dairy prices to benefit from China milk scandal

China's latest tainted milk scandal may reduce the risk of a decline in global dairy prices by driving up demand for imports at a time when other buyers are backing off.

The future of China's demand for imported milk, whose rise last year fuelled a jump in world prices, is the biggest uncertainty to markets holding on to gains.

China's imports of whole milk powder, which tripled in 2009 in the wake of the initial melamine scandal, have been expected by the USDA to drop by 25% this year as consumer faith in the domestic brands recovers. But the latest discoveries of melamine-tainted milk could undo the rebuilding efforts of the Chinese dairy industry, and support more imports.

China on Wednesday (Feb 11) launched a national food safety campaign, while buyers in many other countries have been trimming their milk orders due to the near-doubling in prices over the last five months of 2009.

With retail dairy prices now on the rise again, the end consumption growth is slowing rather than accelerating in some markets. Wholesale buying are also showing signs of slowing down, as buyers consider full inventories, high pricing and the forthcoming Northern Hemisphere spring flush, according to Rabobank.

Dairy-producing countries have reduced their milk production over the past three months. Australian output dropped 7.7%; Argentina by 3.7%; the US by 1%; and the EU by 0.7%. New Zealand is also estimated to have reduced output by 0.4% over the past eight months.

With production waning in many exporting countries and no sign of the EU releasing its huge stocks of skimmed milk powder and butter built up by intervention buying when prices were low, a sharp correction is unlikely.

While fundamentals don't support record prices, they are not bad and are getting better, Rabobank concluded.