Last updated: February 6, 2014 7:35 pm

Demand from China and Russia fuels dairy price surge

Global dairy prices have jumped by almost a third in the past year on the back of growing demand from China, north Africa and Russia amid limited supplies.

The UN Food and Agricultural Organisation’s dairy price index, which tracks butter, skimmed milk powder and whole milk powder prices, jumped 28 per cent in January from a year before.

Michael Griffin, the FAO’s dairy and livestock market expert, said prices rose as supplies struggled to keep up with demand because there were only a handful of countries exporting dairy products. “There is very wide demand, but largely four to five countries supply most of the world trade,” he said.

Dairy exporters are limited to the EU, New Zealand, Australia and the US, as well as some countries in South America, and increasing production was difficult, said Mr Griffin.

The jump in demand came as milk production in China and Russia has been declining, underpinning a surge in dairy imports. Chinese demand was exceptionally buoyant, said analysts.

“Increased buying from [China] is likely to have soaked up most, if not all, of the increase in exports arising from key surplus regions in the fourth quarter,” said Rabobank.

The country’s demand has spurred active dealmaking in the industry, especially in Asia and Australasia.

Firm dairy prices came amid falling markets for most of the other food categories that make up the FAO’s food index. The overall index fell 4.4 per cent, the first drop in three months, with cereals dropping 23 per cent thanks to bumper crops, sugar declining 17 per cent and vegetable oils falling 6 per cent.

The FAO said lower prices for food commodities were expected to stimulate demand, and forecast world cereal usage in 2013-14 to rise by 92m tonnes, or 4 per cent, to 2.4bn tonnes.

In the dairy market, Chinese buying in the export markets is expected to remain strong, rising 15 to 20 per cent in the first half amid static domestic production, according to Rabobank. Supply is expected to increase by about 3 per cent and could ease prices.

The upside risk for the market this year is the relatively low level of stocks after active buying by importers in 2013. “That leaves the market particularly exposed to adverse weather events that may crimp the second half of the southern hemisphere season in the first quarter or disrupt the northern hemisphere season in the second quarter,” said Rabobank.

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