Dairy prices finished 2012 on a, broadly, positive note at GlobalDairyTrade, amid expectations of values making a firm start to next year, and of a retreat in southern hemisphere production.

The last GlobalDairyTrade auction of the year ended with values up 1.1% from the last event, two weeks ago, with cheddar cheese prices leading the increase, with a rise of 6.9%.

Rennet casein, used as a thickener in products such as cheese and coffee creamers, appreciated by 4.9%, with smaller increases in values of skim milk powder and milk protein concentrates, a high-protein product used in the likes of processed cheese, crackers and energy bars.

The gains more than offset a 0.6% decline in the value of whole milk powder, which accounts for the bulk of volumes sold at the auctions.

Retreat and recovery

The result took values to within 2% of where they started 2012, although the flat finish defies sizeable volatility within the year.

Values had fallen more than 20% by May to their lowest in nearly three years, depressed by a strong finish to the southern hemisphere season, particularly in New Zealand, the top milk exporting country, where GlobalDairyTrade, run by dairy giant Fonterra, is based.

Prices staged a recovery as high feed prices, and poor weather, depressed output in major northern hemisphere producers, including the European Union and the US.

Among major products, prices of whole milk powder - of which New Zealand is an especially important producer, largely for the Chinese market – fell by 8.1% over the year, while values of cheddar, a largely northern hemisphere product, rose by 8.2%.

'Demand will be critical'

Rabobank said it forecast a further rise in values heading into 2013, when "tighter supply dynamics continue to favour an upward trend for dairy commodity prices.

"But the strength of demand will be critical to determining how strong the price movements will be.

"Purchasing from key importing regions continues to provide activity, but overall is best described as solid with not current level of urgency apparent.

"Buyers have had ample opportunity to fill inventory pipelines at reasonable prices over recent months."

Production outlook

However, the early signs for spring ramp-up in northern hemisphere production will also play a big role, as well as the strength in the remaining peak period of the Australian and New Zealand seasons.

While New Zealand's 2012-13 season got off to a strong start, many commentators believe it will see a softer close. New Zealand's Ministry of Primary Industries said that "assuming a return to average climatic conditions, milk production is expected to remain at 2011-12 levels in the current season,

"While this equates to zero growth relative to the previous season it nonetheless reflects high milk production relative to historic levels."

Agrifax analysts said: "With official data showing milk collection to be 8% ahead across the first four months of the season… the ministry must by factoring in a significant slowdown in milk output during the latter part of the milk production season."

'Dry conditions were threatening'

Data from industry group Dcanz this week actually showed New Zealand milk output up 6.5% for the June-to-October period, the first five months of 2012-13.

A strong start settled down to year-on-year growth of 3.4% in October itself, the peak production month, with some concerns over last month's result.

"Dry conditions were threatening in some parts through November," Rabobank said, if adding that "widespread rain through early December has alleviated concerns for now".

Australia's spring flush in output "passed with production growth coming below expectation", undermined by wet weather in Victoria, the bank said.

October production fell 1.4% year on year.