October 24, 2006

Australian drought could impact dairy prices

Australia's worst drought in a century, which has already caused wheat prices to rise 34 percent in the past month, may cause a rise in the prices of Australian dairy products, thus affecting the global market.

Australia exports almost half of its dairy output and holds a 13 percent share of the global market. When Australia's dairy supplies are more restricted, global dairy prices stand to gain, analysts said.

Other major export markets include countries in Latin America and New Zealand.

With tighter supplies, processors would be looking at their product mix and make adjustments accordingly, causing supply changes within the range of dairy products.

In some areas of Australia hit hard by drought, farmers have started off-loading stock before the hot, dry summer, when more feed and water would be necessary.

Such news has raised alarms in importing countries. Japan, Australia's biggest dairy export market, is concerned about Australia's ability to ensure long-term supply because of the drought.

Other major customers of Australian dairies include south-east Asia, North America and the Middle East.

However, dairy production so far has met expectations and did not seem to be in any danger, local news media indicated.

Still, the industry may do well to prepare for a few surprises. A drought in 2002-03 caused the industry to lose 7 percent of its total production, while farm exports were down by 27 percent, according to Chris Phillips, general manager for trade and strategy at industry association Dairy Australia