New era awaits global dairy market

Posted by Daniel Palmer on 6th November 2008

Milk splash

Short-term challenges including a recent moderation in dairy commodity prices await the global dairy industry but the medium to long-term outlook remains robust, reveals a new Rabobank report.

To maximise their full participation in this new era, global dairy players should be willing to shift policy and strategy, the report advised – urging supply chain players, including farmers, dairy processors, traders and end users, to reconsider their current strategies.

Bearish mood
Report co-author Tim Hunt said the market was expected to enter the closing months of 2008 in a bearish mood taking a cue on the skyrocketing prices in 2007.

“Fundamentals on all sides have appeared to be weakening, with retail dairy inflation still building, United States milk supply growth only slowing modestly, financial market turmoil and a damaging milk contamination scandal in the Chinese market,” said report co-author Tim Hunt.

Global dairy producers should expect significantly higher production costs over the next few years, the report warns. Demand on the other hand, is also falling due to high retail prices, forcing ingredient users to switch to cheaper substitutes.

But prices could recover as demand for dairy products increase worldwide.

Expected turnaround
Although the global dairy demand is likely to remain below trend level through the first half of 2009 in the face of anticipated weak economic conditions, a turnaround could be on the cards.

Expected to take place sometime next year, the turnaround will be influenced by a number of factors including an ultimate improvement in the global economy, increased consumer demand due to more competitive pricing and the continuance of demographic and cultural trends favourable to dairy consumption.

“In the medium term, we feel demand growth will be strong enough for the market to turn to higher cost producers at some point to be able to keep up with consumption,” Hunt said. “Encouraging additional supply from these producers will require a return to higher price levels.”