Flatlining supply and rising demand should offer a boost to dairy prices

ALTHOUGH the world price of milk may continue to fluctuate wildly in the coming year, John Allen of Kite Consulting told milk producers at a meeting in Glasgow yesterday that he had a fairly positive view of the future for the UK milk market.

There were a number of reasons for his optimism, but the biggest one was the shrinking stocks of milk products on the world. With demand continuing to rise and supplies flatlining, there was only one conclusion, he said, and that was there would be a tighter market by the end of 2010 than is currently the case.

The increase in demand in the world is largely centred on the Chinese market which has, over the past year, imported more milk products than ever before.

Allen said that milk products are very non-elastic in the supply and demand equation: "Shifts of half a percentage point can do major damage or provide big pluses to the bottom line."

After a long lean period, UK milk producers may want to see an immediate increase in the price they receive for their milk, but Allen warned there would be no sudden upward surge in value. A great deal depended on the timing and release of the dried milk stocks held by the EU.

Unlike the situation 30 years ago when EU intervention stores were full of butter, there is very little butter now held in reserve. Allen pointed out that, because Europe holds most of the milk produce stock in the world, this helps create a relative stability within its borders.

Even if the short term may not bring any significant change in milk fortunes, Allen said he thought there could be a "rocket" in prices by the end of the year. He said: "I expect prices to flatline over the next six to nine months, but after that we should be on an upward curve."

He added a little long-term joy by stating that he saw "good prospects for the next decade provided dairy farmers continued to produce milk competitively".

Outwith Europe, Allen predicted that milk prices would continue to fluctuate wildly with prices as low as 12p per litre and as high as 30p being possible.

However, the stabilising influence of the EU would limit these swings within its boundaries and, within the UK, there were further stabilising influences to further reduce volatility.

Allen also said that the political attitude to a free market economy was now far less enthusiastic than it has been for the past two decades.

There are, he said, now serious doubts that the World Trade Organisation talks in Doha would come forward with targets of further reducing trade tariffs.

He believed that politicians did not like volatile food prices, but because they did not have the tools to take over and regulate the market, he believed the future would continue to be based largely on free trading.

Any major reversal of overall policy would not be for the good of the industry, he said, warning producers that moving back into a position where politicians helped control prices was not ideal, as history showed they were often unable to sort out problems.