September 16, 2010

US poses risks to firm world milk prices

The US poses a "disconcerting downside risk" to prospects for firm global dairy prices-both through an economic downturn sapping demand and a rise in production spurred by a return by farmers to profit.

Rabobank said that its central forecast was for dairy prices to "hold their ground in coming months", helped by the firm Chinese and Russian demand which earlier in September pulled prices out of a four-month decline.

However, this scenario could be tested by the realisation of fears of renewed recession in the US, the world's largest economy.

America's farmers have been ramping up production, with year-on-year growth in milk output accelerating to 2.9% last month, and the national herd seven months into an expansion phase.

Higher milk prices had more than offset increased feed costs, "keeping most farmers above the breakeven point", Rabobank said.

However, a return to recession in the US would choke off domestic demand growth at a time when local supply momentum is strong and cheese inventories are heavy, Rabobank warned, noting that liquid milk sales were already on the slide.

Shipments had already reached record levels in the April-to-June quarter, beating levels of a year before, net of imports, by "a massive" 900 million litres in milk equivalents.

Other risks to prices included the threat of the EU selling down aggressively its stocks of skimmed milk powder, an outcome which appears unlikely, and of a stronger-than-expected rebound in production in New Zealand, the world's top dairy exporter.

However, assuming the world avoids economic upsets, the bank said it expected import demand, led by vigorous buying from China and Russia, to soak up rises in output.