Dairy Prices Tipped to Stay on High

Dairy prices have been high for an extended period but there is nothing to suggest a looming drop, says the ANZ bank’s latest market focus.

The bank said prices for dairy products had settled near a nine- year high courtesy of a tight demand-supply balance.

“This situation has been reinforced in recent weeks by hot and dry conditions in Europe, which will limit the extent of production surpluses in the EU in 2005.

“While there is little in terms of fundamental supply-demand influences to precipitate a correction at this point, prices nonetheless look extended from a cyclical perspective.”

ANZ said the average peak-to-peak price cycle for dairying was about four years.

“We are currently four years into the present cycle.

“Looking at directional gauges, the relationship between dairy prices and leading indicators of global growth highlight that at this stage in the dairy price cycle the risks are to the downside.”

However, the report said the continuing theme in dairy markets in this part of the world was a tight demand-supply balance favouring exporters. “It may be that international markets will get a clearer directional gauge later in the year as the 2005-06 production season gets under way in Oceania.

“It may take a good start to the season towards peak production in mid-October to take significant heat out of international dairy prices.”

As with foreign exchange markets, ANZ said, any turning point could be “sharp”.

Meanwhile, the report said, a tight supply situation from New Zealand was helping keep New Zealand lamb prices at record levels.

“Supply and demand are forecast to remain steady.”

While beef prices peaked late last year, ANZ said they remained strong due to tight supplies and BSE-related restrictions out of Canada and the US.

In summary, the bank said prices for dairy, beef and lamb looked close to their peak but the supply-demand fundamentals could see them remain at “extended levels” until late this year. But it added commodity prices would turn, implying the New Zealand dollar should head lower.