There is a danger lurking behind the high prices being achieved for our dairy products.
They are driving some buyers to replace milk-based fats with alternatives derived from oilseed plants.
The danger in this, according to Dairy Australia, is the long-term damage to world demand by encouraging buyers to explore alternatives.
The pressures on buyers are likely to remain after they suffered under a 42% rise in prices recorded in the NZ-based GlobalDairy Trade auctions during 2013.
"Ongoing strength in dairy commodity prices means substitution of dairy remains a concern."
"The risk of longer term demand reduction grows over time as commodity prices remain too high and thus unaffordable for large populations in developing markets," Dairy Australia said in February update on the dairy situation and outlook.
The increased use claim is borne out by AAK, the Swedish based producer of vegetable-based fats, which recently announced record profits for the final quarter of 2013.
Profits were up by 12% after sales of its dairy replacement products increased significantly, according to CEO Arne Frank.
"As many as 1m to2m dairy cows are believed to have been culled in China in the past year," according to Dairy Australia.
China’s policy of encouraging larger enterprises, at the expense of smaller operators, large numbers of which had left dairy often in favour of the increasingly profitable beef industry, was seeing dairy undermined.
“As long as China remains short of dairy product, either via demand growth or struggling local milk production dairy commodity prices should remain elevated.”
Milk output in China is reportedly tracking as much as 20% below recent years.
New Zealand had captured a significant proportion of the increased demand (a 30% increase in the first nine months of 2013 compared to the previous year) for produce as a result of its free trade agreement with China.
Ongoing dairy demand was now translating into improved returns to farmers with export-focused New Zealand farmers benefiting to more than 40%.
Production here was forecast to finish the current season up 6% at 2 billion litres. EU-28 milk production is expected to lift 1% to 147 billion litres.
The total value in trade last year increased 15%. Whole milk powder and skim milk powder were down 18% and 1% respectively but total values were up 17% and 37% respectively.
Dairy Australia said when considering “where to from here”, as long as China remained short of dairy product (either via demand growth or struggling local production) commodity prices should remain elevated.
Debt loadings and challenging conditions were expected to constrain dairy production growth from the US, parts of Europe would prosper while others would continue to struggle.
Despite strong production growth from New Zealand, world demand was unlikely to be met.
Concerns over China’s financial stability were heightening.
"However, some measure of caution still needs to be applied given a fragile economic recovery and that no one really knows the extent of possible shadow-banking issues in China.”