New era dawns for global dairy market report by etssetcf


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									                                                                   Media Release
                                                                  November 5, 2008

             New era dawns for global dairy market: report
The global dairy market has entered a new era with growing world consumption of dairy
products, combined with reducing growth in supply, expected to underpin sustained
higher, though volatile, prices into the future, according to a recently-released industry

The Global Dairy Industry – Reshaping in a New Market Era, a report by leading
agribusiness lender Rabobank, says despite current short-term challenges facing the
sector – including a recent moderation in dairy commodity prices – the medium to long-
term outlook is robust, with the market for dairy moving into a fundamentally changed

“In this new era, global demand for milk at any price point has shifted upwards, based on
income growth in many parts of the world, and favourable demographic and cultural
trends that have increased the number of people that are aware of dairy, have access to
dairy, want to consume it and can afford to do so,” the report says.

“Rabobank remains convinced that the medium-term equilibrium price for dairy products
has shifted upwards from its long-term average. Economic growth and cultural changes
have substantially increased the price the market will pay for milk.”

The increased world demand for dairy products – along with constraints on long-term
global supply growth – is expected to see prices recover and to continue trading in a
higher price band in the future.

Short-term challenges

Prevailing negative forces have been at play in late 2008 weighing on the previously
buoyant dairy industry, says report co-author, Rabobank senior analyst Tim Hunt,

“The global dairy market has entered the closing months of 2008 in a bearish mood.
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,” he says.

After an extraordinary boom in global dairy prices in the past two years which culminated
in a phenomenal peak in late 2007, international dairy prices have fallen during most of

“Record farm gate prices and a better run of seasons brought additional supply to the
market,” the report explains, “while demand growth was dampened by the combined
forces of severe inflation in retail and wholesale markets and weaker economic

                                                                     Media Release
                                                                    November 5, 2008

Expected turnaround

Global dairy demand is likely to remain below trend level through the first half of 2009
assuming continued weak economic conditions. However, Rabobank expects to see a
turnaround later in the year on the back of factors including an eventual 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.

Rabobank also expects a moderation of recent supply growth as farmers in many key
export regions rein back investment in response to lower milk prices and a step change
in the cost of production ushered in by higher input prices.

Increased production costs

Dairy producers across the world face significantly higher production costs than in recent
history, the report warns.

“The cost of producing milk has significantly increased for all farmers due to the
structural increase in the prices of feed grain, fertiliser and fuel,” Mr Hunt says.

In addition, he says, there are constraints on growth in traditional low-cost dairy regions,
such as Oceania, due to limited land or natural resource (water) availability.

“This means that for additional export supply, the market will eventually need to turn to
regions with higher costs of primary production, less efficient supply chains or greater
structural impediments – such as Latin America and the US,” he says. “Extreme
volatility in the dairy market is likely to remain.”


Even with a recovery in prices, the industry must expect significant prices swings, the
report warns.

“Within this higher trading band, price volatility will be high,” the report says. “Global
dairy stock levels are low and, in the medium-term, we expect to see more frequent
shocks to the demand and supply side of the market.

“These are expected to unleash the latent volatility inherent in dairy product markets due
to the short-term unresponsiveness of demand and supply to price.”

New strategies for key players

The new dairy market era is expected to significantly reshape the sector in the years to
come and heralds the need for all players involved in the industry to reconsider their
strategies, the Rabobank report finds.

                                                                    Media Release
                                                                   November 5, 2008

“As the global dairy industry contemplates life in this new market era, players all along
the supply chain will need to re-evaluate their strategies,” it says.

“Those who adjust best will be well placed to reap the benefits that market change will

Even with higher dairy commodity prices, farmers in most regions will not necessarily
see margin improvements due to the increased cost of production, while those in export
regions must be prepared to manage volatility on all sides of their business.

Domestically-oriented dairy processors also face a battle to restore margins in very
difficult conditions (with the focus on areas such as input sourcing, product range and
brand) while export dairy processors will need to adjust their strategies and develop
competencies to suit changed conditions, such as huge increases in export volumes.

Traders, meanwhile, face the prospect of limited volume growth from the traditional
heartland of the EU, but will need to be ready to diversify their sourcing base as other
regions develop increasing milk surpluses.

Dairy ingredient users also need to reconsider the manner in which they will be able to
secure supply and manage the volatility in price, while balancing the costs of
reformulation and recipe flexibility with savings from substitution.

And all players, the report says, will need to consider the implication of increased credit
risk and capital shortages in the current financial environment.


Media contact:
Denise Shaw                                           Elise MacDonald
Public Relations Manager                              Public Relations Consultant
Rabobank Australia & New Zealand                      Rabobank Australia & New Zealand
Phone: +61 2 8115-2744 or +61 439 603 525             +61 2 8115-4861


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