Dairy prices seen weakening, futures needed

Global dairy markets may fall further in the next few months as prices backtrack from last year's steep advance, sparking interest in a European futures contract for the once stable sector. "Prices are off substantially already but we could certainly see further falls of at least 10 to 15 percent," said Rabobank's Australia-based analyst Tim Hunt.
"We see the next six to nine months offering little hope of a turnaround in prices. The economic slowdown has a long way to run yet. Supply growth is slowing down but it will take a while," he added. Dairy prices surged in 2007, boosted partly by accelerating demand growth in countries such as China and supply problems in key exporter Australia.
"Volatility is an increasing feature of the global dairy market. In the face of buoyant demand growth, stocks of dairy commodities have dwindled over the past year because of supply problems, particularly in Australia and New Zealand," said Jim Begg, Director General of trade group Dairy UK.
"This has amplified natural price variations and led at one point last year to panic buying of dairy commodities," he said. A tainted baby milk formula scandal in China has contributed to the turnaround, sparking a significant decline in demand. "We are still quite positive on the long-term demand growth potential in China but there is now a short-term issue which will probably cause demand to go down quite significantly over the next 12 to 18 months," Dutch-based Rabobank analyst Mark Voorbergen said.
"It (the scandal) will definitely impact global demand growth as well over the next couple of years." The price swings have shaken a once stable market and led to interest in a European futures contract. The Chicago Mercantile Exchange (CME) already operates a US dairy futures market. "We have been talking to dairy market participants as part of research into new products we might offer," said James Barr, spokesman for Euronext.liffe.
Rabobank's Voorbergen said one option would be a cash settled liquid milk contract based on a European liquid milk index. It might use prices in France, Germany, Denmark, Holland and Belgium. "We are looking to aid the development of a futures market aimed at hedging European price risk. It is an important sourcing area for players like Nestle," Voorbergen said. Voorbergen said he believed a physical delivery skimmed milk power contract could also be launched. "It would be wise to have a couple of contracts. This would be the preferred option," he said.