Europe represents the biggest threat to a stable outlook for world dairy markets, given its potential for ramp up production, and its economic vulnerability which could dent internal demand.

The most likely prospect for the April-to-June quarter is for dairy prices to "remain in touch" with current levels, which are some 5-10% lower than at early-year peaks, Rabobank said.

However, the European Union "holds several downside risks for the market", the bank warned in a quarterly sector report.

A "strong spring flush", the seasonal production uptick when cattle head back into pastures, could skewer a regional slide in output running at a rate of 1.1% in January.

Meanwhile, dairy consumption among European consumers remained weak, as high unemployment and low consumer confidence undermined consumption "despite more benign retail pricing trends than in many regions".

'Prominent downside risk'

"The potential for a large EU surplus remains a prominent downside risk," the report said.

Combined with a fall back into recession, or a further decline in the euro which would boost Europe's export competitiveness, a production jump "would exert considerable downward pressure on pricing in the international market".

Europe had already enjoyed a 12% surge in exports in the last quarter of 2009, compared with the same period a year before, and has significant intervention stocks of butter and skimmed milk powder which are yet to be released.

However, the bank said its central forecast was for production to remain muted, thanks both to herd reductions and a late spring which had held back pastures.

Southern hemisphere 'sold out'

Soft output would help global prices stay at current levels, which "buyers could live with".

"Signs of price stabilisation in March appear surprisingly logical, given the recent track record of overshoots and undershoots in the global market," the bank said.

"While a price correction was warranted, there would appear to be enough support in the market to avoid a more substantial near-term price slump."

There were signs that India may need to increase imports to cover summer demand, while Argentina output looked likely to remain curtailed by "years of underinvestment".

Indeed, southern hemisphere producers were "almost sold out of milk for the current season", Rabobank said, thanks mainly to strong import demand from China, which discovered fresh traces of melamine in dairy products made from domestic supplies.

 

Agrimoney