The recovery in global dairy prices looks set to run out of steam, thanks to the size of inventories in America and Europe, Rabobank has said, in comments echoed by milk giant Fonterra.

The Dutch bank said that the "sustainability" of a rally in whole milk powder prices - which have rocketed by more than 50% in two months - "will remain at risk" until global stocks of dairy products weaken.

Northern hemisphere inventories had continued to rise, albeit at a slower pace, as America and Europe maintained rises in production, while Australian and New Zealand output fell.

'Disconcerting signs'

"Some regions are yet to reduce milk supply at all - the US has not reported one month of supply below previous year levels since the market crashed," Rabobank said in a monthly agriculture report.

Indeed, the rise in prices was reaching a level where exporting was "again attractive" to European and US processors.

"[This] will limit further upside in the near term," the report said.

Subsidy issue 

The analysis was echoed by comments from Kelvin Wickham, the managing director of Fonterra's global trading arm, who urged America and the EU to at least cut dairy subsidies.

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

He concurred that the rally may be difficult to sustain given that, while prices were well at roughly half those hit in late 2007, they had recovered near to longer-term levels.