Dairy price rises forecast to moderate as demand eases

By Ahmed ElAmin

- Last updated on GMT

Related tags: Milk production, Milk

The international demand for dairy products has eased slightly and
prices for supplies are likely to moderate in the next several
months, according to a new report.

The predicted price drop will provide some relief to food processors using dairy ingredients. Growing international demand for dairy markets has been an ongoing trend over the past six years, leading to higher and higher prices for supplies.

Still, even with the easing in demand supplies will likely remain tight this year particularly since the anticipated jump in production in the Oceania region has foundered on adverse milk producing weather in New Zealand, the US government's Foreign Agriculture Service (FAS) unit stated.

Global dairy product prices during 2005 remained high, sustained by well balanced markets, a weak dollar trend, and world economic growth. For milk powder and cheese, export prices at the end of 2005 are virtually unchanged from the early part of the year. Prices for butter has been easing in the past few months, but nevertheless, remains historically strong, the FAS reported.

In the EU milk production for 2006 is set to increase marginally, but strong internal consumption for dairy products will absorb additional production and thus exportable supplies will probably be similar to 2005, the FAS believes.

By contrast, US milk production for 2006 is expected to expand at a more moderate pace to 2.6 per cent this year after an output surge of 3.5 per cent in 2005.

While this will ensure that there are ample exportable supplies of nonfat dry milk, global markets for other dairy products are unlikely to be affected significantly since US exports of cheese, butterfat, and whole milk powder are not as competitive, the FAS stated.

Currency value fluctuations between the US dollar and the euro could complicate the forecast. High world prices for dairy products coupled with a weak US dollar have helped increase the industry's competitiveness on world markets while at the same time diluting export returns to competing producers.

In recent months, the value of the US dollar relative to the euro has been strengthening, effectively exerting downward pressure on the bloc's dairy export prices. If the US dollar continues to strengthen against the Euro as expected this year, US products could become more expensive for EU importers, the report stated.

Following a drought in 2004, milk production in the EU's 25 member countries is expected to rebound by nearly one per cent in 2005, particularly in France and Germany, the FAS stated.

The increase led to the imposition of about €388 million in overproduction fines, during the marketing year from April 2004 to March 2005. About 80 per cent of the levy was applied to Germany and Italy for exceeding their production quotas.

For 2006, EU production is forecast to grow as the quota limits for some of the major producers are being raised by 0.5 per cent. In addition, some of the new member states, such as the Czech Republic and Poland, are benefiting from higher milk prices by expanding production.

In the US, record milk prices in 2004 led to a surge in milk output of about three per cent during 2005. US dairy producers were able to increase cow numbers and raise productivity through the use of bovine somatotropin hormones. The use of hormones boosted milk per cow output by about three per cent this year the FAS reported.

"Ultimately, however, this rapid rise in production was sufficient to surpass even the strong growth in dairy product demand, undermining product prices,"​ the FAS noted.

Despite a continuing moderation in milk prices, production is not anticipated to be affected significantly in 2006. The FAS estimates US milk production will grow by just under three per cent during the year.

Australian milk production for the July 2005 to June 2006 season is forecast to increase by about three per cent as a result of timely rainfall. This is still seven per cent below the record volumes produced in the 2001/02.

The additional milk production is expected to be channeled primarily into the production of cheese and whole milk powder, while the production of nonfat dry milk and butter is forecast to remain largely unchanged from last year.

In New Zealand, poor weather conditions adversely affected milk output in some key areas. Milk production has fallen two per cent relative to year-ago to-date flows. Milk production for 2005/06 is currently forecast to drop by about another two per cent in 2006, marking the second year in a row during which milk production contracted.

Related topics: Markets, Pricing Pressures

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