June 26, 2010

Global dairy prices face downward pressure

The slowdown of the world economic recovery is to place downward pressure on dairy prices, which will become increasingly evident as the year progresses, Rabobank said.

While growth in demand for dairy products in developing nations, including Brazil and China, looks set to remain strong in the second half of the year, consumption in Western states would be dented by the impact of waning economic stimuli.

According to Rabobank, the notable catch for dairy is the lack of job growth in advanced economies, with consumer spending thus lagging economic recovery. Dairy demand had already stagnated in the key European and US markets.

The bank also said that consumption growth in the US appears to have stalled in the first quarter, triggering a sharp reduction in purchases of cheese and casein from the world market.

The softer market conditions looked likely to become more pertinent in the last quarter of the year, when southern hemisphere producers will enjoy their spring boost in production, than the July-to-September period, the bank said, noting that a strong price fall is unlikely at this stage.

Butterfat prices looked especially vulnerable, being particularly expensive by almost any measure, with record prices, unusually high levels relative to dairy protein, and record premiums above competing vegetable oils.

"While near-term supply is limited, the potential for downward price adjustment later in the year is particularly prominent," the bank said.

The comments follow a doubling in prices of many dairy prices over the last year, driven by demand, which has beaten most expectations. This year enjoyed the strongest first quarter for dairy trade since at least 2004, with volumes up 12% year on year.

Meanwhile, supplies have been constrained by a squeeze on production thanks to herd cutbacks prompted by the economic crisis, and in Argentina and Australia by droughts.

Milk production in main exporters is likely to have returned to growth last month, Rabobank said, with dairy supplies also being boosted by the release by the EU for sale of some of its butter and skimmed milk powder stockpiles.