Dairy outlook remains strong in medium term

A return to subsidies in the EU is having a short-term impact on dairy prices slowing their recovery but the medium term outlook for the industry is strong, according to a report by the National Australia Bank (NAB).

The index in Australian dollar terms is forecast to fall by 3 percent in 2008-09 and a further 9 percent in 2009-10, as the weaker global economic outlook constrains the recovery in demand for agricultural products.

Dairy prices could return to pre-2006 levels, according to NAB's head of agribusiness for Southern and Western Australia, Neil Findlay.

International dairy prices have dropped sharply in the past 18 months, down nearly 60 percent from their peaks in November 2007 in US dollar terms, Findlay said.

Domestic farmgate milk prices are seen to fall by to 19 percent in the 2008-09 year-on-year.

As the EU has reinstated its export subsidies, shipments of dairy products will increase, distorting price signals reaching European processors and keeping less efficient producers in business, Findlay said.

Domestic production is expected to grow at a rate of 1-2 percent a year, but this remains highly dependent on seasonal conditions, water access and feed costs, Findlay said.

Consumption of dairy products in developing countries is expected to increase in line with rising incomes, Findlay said, citing that per capita milk consumption in China has increased 17 percent a year for the past 10 years.