Global dairy prices are off 20 to 30 percent from their spring 2011 peaks, as swelling milk production worldwide has turned supply deficits into surpluses. As a result, rising inventories are expected to keep downward pressure on international dairy markets in the second half of 2012, according to presenters at the U.S. Dairy Export Council’s (USDEC) spring Board of Directors and Membership Meeting last week.

The meeting attracted a record turnout – a reflection of the broad understanding of the need to operate more effectively in international markets.

Current soft conditions are “a painful re-affirmation that market cycles will continue, even as demand, over time, outstrips supply,” said USDEC president Tom Suber. “In fact, it’s this period of temporary retrenchment that many of our work programs are intended to address.” USDEC marketing, technical and research activities are supported by U.S. dairy producers through their checkoff program.

Suber urged U.S. suppliers to protect volume and market share gains accrued in 2010-11. “We can’t take the hit and balance the world market through our own inventories every time supply and demand run into an imbalance,” he said.

Pricing soft for now

Near-term market conditions are challenging. Spurred by near-perfect weather and strong farmgate prices, milk production from the five major exporters (the European Union, United States, New Zealand, Australia and Argentina) is up more than 3 percent in the current production season (beginning June 2011), USDEC says.

“International demand has proved insufficient to soak up all the increased surplus generated in export regions,” added Rabobank analyst Tim Hunt. “More milk is being channeled into storable commodities as a result, and there are some early signs of stock accumulation as the spring flush builds in the EU and United States.”

On the plus side, however, import demand has held up well and the import market “has shown exceptional depth,” Hunt said. Last year, when the world’s largest dairy buyers Algeria, China and Russia collectively pulled back in the second half, Southeast Asia, the Middle East, North Africa and others more than made up for their absence.

Hunt expects market conditions to improve in late 2012 or early 2013 as the supply balance improves. “Structural growth trends remain intact,” he said.