Dairy prices, already at the their highest in 19 months, are to "continue to trend" upwards as importers' appetites increase at a time of notable decline in output from the top exporting country, New Zealand.

Dairy commodities have already shown a sharp recovery from a 2011-12 slump, boosted by a decline in output in many producing countries at a time of improving demand.

Price at GlobalDairyTrade auction, the benchmark physical product sale run by New Zealand's Fonterra, have recovered 36% from a low in May last year, reaching last week their highest level since July 2011.

And dairy prices are to continue increasing, driven by the "better balance" in market dynamics from the oversupply which weighed on values during the downturn.

'Taking its toll'

A "trend higher" in prices will "continue in the approaching months, with milk production to remain under pressure in most key exporting regions".

Indeed, New Zealand output, which has surprised many observers early in 2012-13 by running 5% above last season's bumper levels, is to start showing year on year declines – something not seen since 2010.

"Dry weather is taking its toll in New Zealand's North Island, with production now falling significantly," Rabobank said.

And the performance by other southern hemisphere exporters are also ending what should be the high points of their production seasons on a weak note, with Argentine output down 7.7% in December, and Australia's falling 1.3% year on year.

Australia's milk flows "are likely to come in below expectations over the final months of 2012-13," the bank said, warning that the January floods were "having a small by nevertheless negative" impact on east coast output, while South Australia is struggling with the aftermath of a heatwave.

'Preventing a surge'

In the northern hemisphere, European Union milk output fell 1.0% in November, the latest month available, as producers struggled with high feed costs, although in the US, output rose by 1.6% in December.

"US production in the fourth quarter of 2012 was stronger than previously anticipated," analysts at New Zealand-based consultancy Agrifax said, if cautioning over the potential for a slowdown ahead.

US farm officials on Friday forecast domestic milk output rising by 0.3% year on year in 2013.

Dairy prices might be rising faster were it not for sizable inventories in importing countries, Rabobank added.

"Key import regions will continue working through any accumulated inventories in the early months of 2013, preventing a surge in prices," the bank said.

However, "buyers will eventually need to re-enter the market",