Analysts predict return to high dairy prices
Global dairy product prices have risen sharply since August and the sharpness of the increase has caught most observers off-guard.
According to the analysis the massive surge to record dairy prices witnessed in 2007 and 2008 may be about to return.
Global dairy analysts warn the sustained rise in the cost of dairy produce that began again in August 2009 could herald a new era of expensive dairy food products, that will put pressure on inflation in the year ahead.
The price hikes will be good for farmers whose incomes have been badly hit since the global slowdown, but will hurt consumers if the trend is sustained.
The Food and Agriculture Organisation (FAO) of the United Nations say its figures show a worrying trend in prices from a consumer perspective over several months.
Its dairy price index of international dairy product prices reached 209 in November, an increase of 114% from February 2009. The index rose by 32% in November alone.
Although still off its high (just north of 250) of August 2008, the index is well ahead of its historical level which, prior to 2007, was never higher than 150, Davy Research points out in a new analysis.
Butter prices moved upwards earlier than other dairy commodities and have doubled since February.
Whole milk and skim powder prices have jumped by 90% while Fonterra’s whole milk auction price has doubled since August.
Fonterra is the world’s largest exporter of dairy produce and is regarded as a very reliable barometer of world dairy prices.
What has troubled analysts is that these increases have occurred at a time when the EU and the US have been stockpiling products.
It was expected that the release of these stocks would undermine the upward price trend, but that has not happened.
However, softer milk output growth in Oceania, which includes Australia and New Zealand, has been less robust than previouslyassumed with production there now past its peak, which will add further to price pressures in the year ahead. There has also been an rise in demand in Asia and in oil-exporting countries. That has been publicly noted by Fonterra, the world’s largest milk processor and dairy exporter.
This configuration of growth and demand has made the stock overhang of much less concern than it was earlier in the year, but it has not disappeared. It is for this reason that FAO notes that the “sustainability of the rise in prices is uncertain”. The FAO noted the hikes cover its composite food commodity basket which have risen uninterruptedly since August.
In November, the index was at its highest since September 2008, although it was still 21% below its peak of June 2008.
Concern is growing that the recent price developments are, in reality, signalling a return to the price surge witnessed in 2007 and 2008 when demand for dairy produce from rapidly growing economies such as China and other emerging Asian economies resulted in a bonanza for dairy farmers.
“The food and food price crises of that period may turn out not to have been historic after all,” the Davy analysis said.
Looking ahead the broker said in the first full week of January, the focus will be on Christmas trading performance for the retail sector with all the major retailers are likely to report trading updates.
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