November 17, 2004

 

 

International Dairy Market Remains Buoyant

 

Prices for dairy products are still buoyant as the international dairy market remains tight.

 

Improved economic conditions throughout Asia have boosted dairy exports to the region since January.

 

Australia's dairy supplies are still behind previous levels as it recovers from the drought that has affected the country during the past two years.

 

Although the outlook for the upcoming milk production season is showing some encouraging signs, it will be some time before stocks of dairy commodities can be rebuilt to their preferred levels.

 

Likewise, New Zealand is carrying smaller quantities of product into the latter half of 2004. Therefore, New Zealand has reportedly sold forward the majority of its current season's production, which will help stabilise international prices over the next six months.

 

World dairy prices are being supported by a firm internal European Union (EU) dairy market.

 

Given that supply from other key global suppliers is tight, as is the case in Australia and New Zealand, higher export prices out of Europe are underpinning world prices.

 

The appreciation of the Euro against the United States (US) dollar has put upward pressure on export offers from Europe in US dollar terms.

 

Accompanied by significant cuts to export subsidies for most dairy products, this has been the backdrop for higher export price offers out of the EU and, therefore, a stronger tone to international dairy prices. This is likely to be the case in the coming months.

 

Having now moved past its seasonal peak, some of the bigger dairy producers in the EU have had less milk available for the manufacture of dairy commodities.

 

This has contributed to a tight balance in the domestic EU market and firm wholesale dairy prices. However, there is a chance that domestic wholesale prices will be pushed lower by sales of butter and skim milk powder (SMP) from government intervention in the coming months.

 

Any price falls should be kept to a minimum given that commercial and government stocks of dairy commodities in Europe, particularly butter and SMP, are lower than normal.

 

Moreover, heavy EU export activity, which has been stronger than normal, due to reduced competition, should continue until Australia and New Zealand have begun to rebuild their dairy supplies.

 

On the whole, this will contribute to a better-balanced EU domestic market.

 

With the international dairy market tightly balanced for the first time in years, prices should remain strong for the rest of 2004 and early 2005.

 

Although there is an expectation that international dairy prices could ease, as buyers resist the current high prices, the shortage of dairy products out of Australia and New Zealand should stabilise prices in the next six months.

 

Economic growth throughout Asia, largely led by improved conditions in China and Japan, should continue in the coming months. This will ensure that dairy exports to the region remain strong.

 

The only downside to this could be a slowdown in the US economic recovery, which would then have a flow-on effect to the Asian region.

 

While the internal EU dairy market stays tight, and export subsidies remain at record lows, international dairy prices should be able to consolidate on the recent strong gains.

 

Ongoing pressure on the EU to reduce its financial support for the agricultural sector could see further cuts to export subsidies.

 

As we move towards 2005, Australian exporters will be gearing up to take advantage of greater access for Australian dairy products into Thailand and the US under the new Free Trade Agreements with both countries.