Price of milk looks buoyant - analyst

Global dairy prices are set to ease from current highs as world supply builds and demand growth begins to slow but will not drop sharply until later in the year, says a bank analyst.

Rabobank senior analyst Hayley Moynihan said New Zealand's dairy industry looked well positioned, with increased year-on-year milk production - buoyed by higher milk prices - likely for the latter part of 2010.

She told the South Island Dairy Event (SIDE) that the second half of 2010 could even see world dairy supplies rise as milk production increased, the EU began selling its intervention stockpiles and the US found export markets attractive again.

Global demand was expected to continue to expand over the same period, though at lower rates than had occurred in recent months.

"Pricing is likely to face downward pressure as supply builds - particularly from the southern hemisphere - and demand growth slows through the second half of 2010," Ms Moynihan said.

These drops were more likely early in the fourth financial quarter – with the new milking season well under way – rather than in the third quarter.

"A strong price fall looks unlikely at this stage," she said.

There had been relatively little conversion of drystock farms to dairying recently, but the benefits from new farms maturing, incremental herd expansion and the alleviation of pressure on fertiliser and feed expenditure should see a strong start to the season - weather permitting.

Dairy products were now at exceptional highs: in US dollar terms, prices of all key commodities, except whey, increased by up to 17 percent by mid-June, compared to levels at the start of the year, she said.

This had happened despite the US dollar exchange rate also rising by about 4 percent over the same period, something which would normally put similar downward pressure on prices in US dollars.

Strong pockets of demand and a sustained drop-off of milk production in dairy export regions, meant there had been "near indifference" in the way recent prices barely reacted to the EU sovereign debt crisis, Chinese attempts to rein in growth and financial market jitters.

Dairy demand remains weak in developed countries, and in particular lost momentum in the US but the developing world continued to provide a strong engine for demand growth, with traditional importers increasingly active and non-traditional buyers such as China and India also competing.

But Ms Moynihan said the rate of growth in developing nations may yet slow in the face of headwinds from reduced economic growth, rising retail prices and substitution pressure.