Global dairy prices had entered a new era and while easing in the short term, would remain higher than their long-term average and resume increasing again in 12 to 18 months, according to a new report by specialist rural banker Rabobank.
Dairy prices have eased for most of this year, and while the bank expected prices to recover in the medium term, it warned prices would be volatile due to production constraints limiting the ability to keep pace with demand.
The meltdown of global financial markets in the past month took the edge off dairy prices, which had doubled in the 12 months to late 2007 when they peaked, but Rabobank believed economic growth and cultural changes to more western diets had "increased the price the market will pay for milk".
It has picked global dairy consumption to be 1.7% this financial year but growing to 2.5% from 2010 to 2012.
But some of that higher price would be because new milk would be produced from higher cost production regions.
"Constraints on growth in traditional low cost regions mean that, for additional export supply, the market must now turn to regions with higher costs of primary production, less efficient supply chains or greater structural impediments. Extreme volatility is likely to remain."
While most dairy farmers would see higher prices, Rabobank said margins would be squeezed by higher costs.
"Farmers in export regions must be prepared for volatility on all sides of their business."
For United States processors, the report said they would need to adjust their strategies to deal with a major increase in volume to extract more value, and in the case of Australia, New Zealand and Europe, to deal with slower growth.
New Zealand production was picked to increase substantially this season as the country recovered from drought and from 300 new dairy farms.
That would continue in 2009-10 as more farms were converted, and recently converted farms built up production.
New Zealand's milk supply growth would in 2010 return to what could be achieved from productivity improvements, the report said.
Brazil would be the other country to substantially increase production in the immediate future but it would not be enough to satisfy market needs.
The key for New Zealand and Australia was to maximise value from existing supply.
"This will entail balancing current returns to commodity products against the long-term imperative to value-add and hence stay out of the road of lower cost producers as they push further into the international market."
The factors that underpinned those rapid increases in dairy prices remained relevant.
While fuel prices had eased, the report believed they would remain higher than their historic average.
Fertiliser prices were also expected to remain higher than their long term average kept high by demand from agricultural producers, delayed production response due to those record prices and high extraction costs.
Prices could ease once construction of several large fertiliser plants was completed in 2010.
While demand for dairy products has eased this year, Rabobank said the price correction had "overshot" what was required to balance the market.
Rabobank picked that in 12 to 18 months' time, global dairy consumption would grow again due to population growth, urbanisation and westernisation, availability of cheaper dairy commodities following recent falls, some retail devaluation and more competitive dairy pricing against substitutes.