Firm demand puts global dairy sector in good position

Strong demand from developing nations, along with tight supplies, have left the dairy sector in a "real sweet spot" which will keep prices high, according to the head of the world's biggest milk exporter.

 

Population growth, coupled with stronger consumer desires for both healthier foods and milk products, will raise world dairy consumption by 2% this year, Sir Henry van der Heyden, the chairman of New Zealand's Fonterra, said.

 

The sector has "huge and growing opportunities across Asia, China, Middle East and Latin America", he said.

 

Meanwhile, supplies are being held back by a hangover from herd reductions in 2008 and 2009 prompted by weaker prices, as well as drought in Argentina and Australia.

 

"With global supply tight, strong demand means prices should remain well ahead of long-run averages," Sir Henry said, adding that the market was in a "real sweet spot".

 

However, he warned of greater volatility in prices, in part because Europe and the US had reduced programmes of stockpiling dairy products, leaving the market more vulnerable to supply hiccups.

 

While milk powder prices typically varied month by month by US$50 a tonne four years ago, now that movement can top US$500 a tonne. "Volatility is a fact of life, a constant - we better get used to, work with it - and change how we run our farming businesses," he said. "Those who don't might find it tough going in this new world."

 

The comments came shortly after Fonterra's latest monthly internet dairy auction showed a fall of US$37 a tonne to US$3,932 a tonne in the average price of whole milk powder.

 

The fall was the first in four months, but left prices around their highest levels since the summer of 2008.

 

However, breaking the trend of recent auctions, the furthest away contract, for delivery between November and January, performed best, closing its discount to the near-term July contract.

 

Paul Grave, the auction's manager, said the result reflected both strong demand and constrained supply in the short term, adding that the outlook for prices was positive.