The dairy price rollercoaster is poised for a "substantial" upturn, giving a "rude awakening" to buyers, as the setbacks of poor weather and high grain prices turn the taps off on milk production growth.

Dairy prices, as measured by whole milk powder for export from Australasia, are in the first half of next year to hit the "higher end" of a forecast range of $3,200-3,800 a tonne, with even higher values "entirely plausible", Rabobank said.

The forecast, which suggests a rise of roughly 20% from current levels, reflects the a slowdown "to a trickle" in milk production growth in major exporting countries "as farmers respond to low milk prices, high feed costs and pockets of unfavourable weather".

Already European Union and US production is on the decline, with anecdotal evidence pointing to a drop in Argentine output too, in contrast with the strong start to 2012 for output which all top exporters enjoyed.

Chinese orders soar

Meanwhile, demand, while remaining sluggish in Western countries, is holding up "well" in emerging markets, and indeed had drained dairy product inventories built up earlier in the year.

"The bright light for dairy producers, and a fulcrum for recent price recovery on world markets, has been the ongoing strength of import demand," Rabobank said.

"Trade emanating from the Big Seven export regions rose by 18% in the three months to July."

While this included an element of opportunistic buying, to exploit low prices, major purchasing regions such as China and the Middle East "face ongoing local production constraints, and high local milk costs continue to favour supplying additional demand with imported product".

Customs data show China's imports of whole milk powder topping 43,000 tonnes in August, a five-month high, and in a period when imports are usually slowing before a build-up late in the year heading into spring.

'False sense of security'

The result of the supply squeeze was that prices are poised "to rise substantially in the international market in order to bring about the demand rationing needed to balance the market".

"The global dairy market appears headed for a period of renewed supply scarcity in the coming 12 months.

"We fear that much of the market has been lulled into a false sense of security by the phenomenal [production] growth seasons we saw in late 2011 and early 2012 – with the next 12 months most likely providing a rude awakening."

Volatile prices

The comments follow a rebound of more than one-quarter already in dairy prices, as measured by a GlobalDairyTrade auction index, from a mid-May low, when values fell to their lowest in nearly three years.

Indeed, the global dairy market, having seen relatively stable price growth up to 2007, has been rocked since by two cycles of soaring and slumping values.

Whole milk powder sold at an average of $3,036 a tonne at the latest GlobalDairyTrade auction, last week, nearly $500 a tonne above its May low.