Volatility is the key word in the dairy market right now. After crashing to record lows last summer, prices shot up at the tail end of the year before falling again at the beginning of 2010.
In its quarterly report on the dairy market, Rabobank said key commodities in USD prices fell 10 to 15 per cent in the first two months of the year before stabilising in the first half of March.
The bank said this movement has left prices at a level that buyers can live with and that will soon stabilise milk production, but not encourage too much of it.
“The recent market correction has brought pricing back into a more comfortable range,” stated the report.
Looking forward, the expectation is that dairy commodity prices will “generally remain in touch” with current levels through the second quarter of 2010. Butterfat is the only exception to that forecast as prices are expected to dip further due to pressure from cheaper substitutes.
Despite the prediction of general stability there remains a risk that prices could spike or slump again.
Rabobank said most of the risk is pointing downwards but the balance is less heavily weighted in that direction than it was three months ago.
Much of the potential downside risk comes from Europe. There is the potential for a strong increase in production called a “spring flush” as cattle head back into pastures.
With subdued European demand, international markets could end up being hit with a wave of surplus EU dairy supplies. Added to which, there is the risk of a weakening Euro, which would make EU dairy exports more competitive.
“A combination of two or more of these would exert considerable downward pressure on pricing in the international market,” said the report.