Continued strength in world demand for most dairy products is forecast to lead to slightly higher world prices for cheese and milk powders in 2005-06, according to figures from the Australian Bureau of Agricultural and Resource Economics published today (12 December). However, with milk production growing at a faster rate than consumption, overall world dairy product prices are expected to fall next year.

In its quarterly Australian Commodities outlook publication, ABARE said that with a forecast 1.5% rise in Australian milk production, relatively high world prices and an assumed slight depreciation of the Australian dollar, returns to producers are expected to increase further in 2005-06 on the higher returns of 2004-05.

World prices for dairy products rose strongly in 2004-05, as a result of rising demand and falling supplies of dairy products, ABARE said. The average butter price was up 36%, whole milk powder was up 21% and cheese and skim milk powder each rose 19% in 2004-05, compared with 2003-04.

However, ABARE said: "The gap between growth in world dairy product consumption and supply is expected to narrow considerably in 2005-06, with an assumed return to average seasonal weather conditions and increasing milk yields in Australia and New Zealand."

It added that global milk production in 2005 is estimated to be higher per cow, with US production up nearly 4% in the first eight months of 2005 and EU production up 2% in the first seven months of 2005.

With world milk production forecast to increase at a faster rate than consumption in 2006, world dairy product prices are forecast to fall in 2006, ABARE said. Butter prices are expected to be most affected, with production in New Zealand forecast to increase on the level achieved in 2004-05 and butter demand in the Russian Federation and the Middle East forecast to ease. Strong import demand in the Baltic states, the Middle East and north Africa has been driving the recent increase in butter prices.

World cheese and skim milk powder prices are expected to ease progressively over coming months as Australian and New Zealand exports increase further. However, full year world prices for cheese and skim milk powder are forecast to average slightly higher in 2005-06 than in 2004- 05, with average prices in the September and December quarters of 2005 well above those in the corresponding quarters of 2004.