Stockpile may hurt milk powder prices

Small mountains of stockpiled butter and milk powder in the United States and Europe could dampen but were not expected to curb growing global demand, according to a report by Rabobank.

The bank's senior analyst, Hayley Moynihan, said buyers would be aware that 300,000 tonnes to 400,000 tonnes of skim milk powder and butter were in storage, but the real impact on price would be decided by how those products were released on to the market.

That latest stockpile was about 40% of that built up earlier in the decade, she said.

Mrs Moynihan remained optimistic that the dairy sector's fundamentals remained strong, despite what she described as "the completion of a phenomenal boom-bust cycle in the global dairy market".

The US and European Governments have said they would divert some of the stockpiled product, acquired to underpin domestic prices, to domestic food aid programmes, which she said was better than releasing it on to the international market.

The European Union has said it could start selling its stockpile in the middle of next year, but Mrs Moynihan said it was also keen to let milk prices strengthen and recover before it acted.

But its presence would still be felt.

"From that point of view, it is likely to cap price levels until the product is worked through."

The recovery was illustrated in particular by a sharp improvement in whole milk powder prices, helped in part by the US and European governments supporting skim milk powder prices in difficult times.

Mrs Moynihan said that safety net encouraged manufacturers to focus production on skim milk powder.

Whole milk powder prices on Fonterra's globalDairyTrade auction this month reached a 16-month high, with prices nearly double those of July.

Mrs Moynihan said the dairy industry had emerged from the recession "shaken, but not stirred", with the medium term looking positive.

The recession had, however, cost the industry a year of demand growth and consumption, a legacy that could remain until 2011 or 2013.

The good news was that demographic and cultural trends supporting dairy consumption growth had emerged "largely unscathed".

"As per capita income once more begins to increase in the coming years, global dairy demand is expected to rise steadily."

Milk growth was expected to remain constrained in low-cost producing areas of the southern hemisphere, meaning increased milk production from higher-cost supply regions, such as the US and Europe.

She said that created an expectation that after 2010 the market would return to solid rates of demand growth, driven by rising per capita incomes, population growth, urbanisation, westernisation and government promotion.