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World dairy prices looking near the top

World prices for some dairy products are likely to stay firm over the next six months, but may struggle to push much higher, the world's biggest dairy exporter said.

New Zealand's Fonterra Cooperative Group, which controls around a third of the world's dairy exports, said the rise of more than 50% in the price of whole milk powder, a lead indicator for the sector, seen over the past two months may be difficult to sustain.

“We've got prices now that, apart from the unprecedented peak in commodity prices in 2007, we haven't gone past these sort of prices before,” Kelvin Wickham, Fonterra Global Trade managing director, told Reuters.

“If it dropped 10% or went up 10% it wouldn't surprise me, it's so lumpy at the moment that sort of range is within bounds in the next three months.”

Last week Fonterra reported a 24.2% lift in the average selling price for whole milk powder in an Internet auction to $2,858 a metric tone. That followed a 26% rise in August.

Wickham said the recent lift has come with low inventories and improved demand for value added consumer dairy products.

Dairy products account for around a quarter of New Zealand's export earnings, which touched NZ$42.8 billion ($30.1 billion) in the year to July 31.

Wickham said subsidies for dairy farmers in the United States and European Union were not currently affecting whole milk prices to any extent, but needed to be reduced or removed to avoid market distortions in the future and underpin prices.

“If the European Union were to reduce their subsidies even by a nominal amount, that would definitely underpin the firming in price,” he said.

The sharp improvement in prices had yet to be seen in those for skim milk powder, cheese and butter, all of which still had significant stored volumes overhanging the world market and needing to be disposed of.

However, the strength of the NZ dollar is crimping returns to New Zealand's near 11,000 dairy farmers, who are facing a 12.5% fall in the forecast payout for the 2009/10 season, despite the improvement in prices.

Fonterra, a farmer-owned co-operative, generates more than 7% of New Zealand's gross domestic product and has annual sales of around NZ$17 billion. (Reuters)