Dairy prices at a key wholesale auction recorded their third-highest price ever, amid concerns of a "supply crisis" in China, the top importer, overshadowing signs of recovering milk output in major exporting countries.
A dairy index calculated by GlobalDairyTrade auctions rose 2.4% to 1,460 points at Tuesday's even, a level beaten only twice, in April this year, when it hit a record 1,573.
The increase reflected gains in most products, the exceptions being milk protein and rennet casein, with skim milk powder faring particularly well, rising by 2.3%.
Whole milk powder, which accounts for most of the volumes sold, rose by 2.3%, also to a level exceeded only twice.
'Mopping up huge quantities'
The strength of the result was attributed in part to a squeeze in product on offer, with the volumes sold falling for a fourth successive event, to 45,423 tonnes.
Although New Zealand-based Fonterra, which runs GlobalDairyTrade, has twice in the last three weeks increased its 12-month forecast for volumes it will offer at the auction, following an uptick in domestic milk production, it is directing more product at higher-value markets.
However, strong Chinese demand has also been seen as propping up prices – a factor evident the "large" premium of whole milk powder prices, which the country prefers in imports, over skim milk powder values, and the strength of the market in New Zealand, China's preferred origin, Rabobank said.
"Faced with a local supply-side crisis, China is mopping up huge quantities from the internationally traded market – squeezing out many other buyers," Rabobank said in a report.
'Exceptionally high prices ahead'
China - whose domestic milk output is believed to be being constrained by high feed costs, weather setbacks and some prevalence of foot-and-mouth disease – imported 27% more dairy product in the April-to-June quarter than a year before.
"The biggest buy side story of the quarter comes from China," the bank said, terming "credible" ideas that China's own milk production fell 6% year on year in the first half of 2013.
And the bank forecast that, with China's "supply crisis unlikely to be resolved quickly", the country would remain a strong buyer through the rest of 2013, with Russian demand "to remain strong" too.
This will "ensure exceptionally high prices through the October-to-December quarter as the market works to ration supply", Rabobank said, forecasting that "price relief" would not kick until next year, "and even then only in the April-to-June quarter".
The forecasts include assumptions of a continued revival in production in the European Union, where output began growing again in July after 12 successive months of contraction, caused by poor weather and elevated feed costs.
With high milk prices encouraging output, and farmers helped by "exceptional" conditions which have allowed the production of healthy volumes of fodder, EU milk volumes will show a 3% rise, year on year, for the second half of 2013.
US output will rise 2%, "constrained by the quality and cost of forage in some regions", the bank said.
New Zealand recovery
Milk production in New Zealand, the top exporter, will rise 6% in its 2013-14 season, which ends in May, with volumes already running 4.5% ahead in the June-to-August period.
Fonterra foresees New Zealand output rising by about 5% over the season, while smaller rival Westland Milk Products earlier on Tuesday said that volumes were running "10% above budget" so far.
Even so, processors are being forced to pay up for milk, thanks to the strong demand, with Fonterra last week raising its estimate for 2013-14 payouts for the third time in two months, by NZ$0.50 to a record NZ$8.30 per kilogramme of milk solids
New Zealand output in 2012-13 fell 1.5%, thanks to a summer drought which scorched pasture and prompted many producers to take cows dry early, and to raise slaughter rates.