But strong global demand supports the dairy market.
International dairy commodity prices continued to trade at extremely high levels though the second quarter of 2011, Rabobank economists said in in the bank’s recent Trend and Outlook report for the international market.
But a modest increase in milk supply could temper high prices later this year.
Pricing was sustained early in the quarter by vigorous buying from China, Russia and Brazil, "which soaked up extremely strong supply growth in milk surplus regions," the report said.
As the quarter progressed, price support became more reliant on supply constraints as rising feed costs, dry conditions in the European Union and a seasonal decline in the Southern Hemisphere kept the market tight despite reduced import growth.
Import buying from China and Russia is likely to move closer in line with prior-year levels through the second half of 2011 – underpinning a stabilization of import demand, Rabobank said.
"On the demand side, recent months have brought a lull in dairy purchasing," as the global economy hit a softer patch, the report noted. Dairy demand is also being tempered by rising prices at retail and wholesale levels in many regions, particularly where it adds to pressure applied by rising fuel prices and food price inflation.
Looking ahead, however, the bank’s economists believe underlying global demand for dairy will improve.
But a "modest" increase in supply is likely for the second half of 2011. That could bring "the distinct possibility of some further softening of prices in international trade through the back half of the year," the report said.
"With exportable supply likely to expand modestly, Rabobank anticipates some downward pressure on pricing through the back half of 2011," the report said, although pressure may be delayed until early in the fourth quarter of 2012.
However, the extent of any downward price movement is likely to be limited since many buyers who have been squeezed out of the market by high pricing in recent months are likely to re-enter the market should dairy products become even modestly more available, Rabobank said.
An uptick in prices could be seen in India increases its purchases. On the supply side, a further spike in grain costs would lead to a faster-than-anticipated slowdown in supply growth, especially in the U.S, according to the report. In addition, a further decline in the value of the U.S. dollar would exert upward pressure on the prices of dairy commodities in U.S. dollar terms.