July 29, 2010

Australian dairy producers receive warning of lower prices

The correction in dairy markets may have further to run, National Australia Bank has warned, echoing the conclusions of US officials-but for quite different reasons.

The Australian bank said it saw a double whammy of economy fears and a seasonal uptick in northern hemisphere demand as likely to depress prices further below their spring highs.

"Early indications in July have shown dairy prices falling as fears of a global shortfall in supply have subsided somewhat," the bank said. The comments follow the steepest decline in at least two years in whole milk powder prices at the monthly auctions run by Fonterra, the world's biggest dairy group.

And the market faced downside risk, with renewed concerns about the global economy coming into play, and European and US farmers raising production to exploit the recovery in prices late last year.

The bank's finding echoed that of the USDA last week in a report which highlighted signs that global dairy prices are set to ease in the coming months, and noted falls in European Union skimmed milk and whey markets, besides the Fonterra auction result.

Meanwhile, key economic indicators, particularly for the Asian countries such as China which are big dairy importers, remain positive. Instead, it was likely that the correction in prices is more of a reflection of anticipated increase in supplies as the new Oceania season approaches, the USDA said.

Production in New Zealand, the world's biggest dairy exporter, surges during the southern hemisphere spring when its cows are turned back out to pasture. In addition, with payouts high last year, and speculation that they will be even bigger next season, milk output has the potential to expand by 2-3%, which could translate up to an additional 500,000 tonnes of milk, the USDA said.

This would approach New Zealand's historic rate of growth in milk output, following a slowdown earlier this year caused by drought.

However, Australia looked less likely to revive its production, with drought becoming more the norm and rain the exception, the department added.

Drought was largely to blame for a decline in Australian milk production which had averaged 2.4% a year since 2005, with the number of cows down by 20% to 1.6 million heads during the period.