Flourishing economic growth in China will underpin the global dairy market – but the sector's upward path may not be smooth, National Australia Bank has said.

The Chinese economy will expand by 10.5% this year, "underpinning a strong demand outlook for the dairy industry", NAB commodities economist Ben Westmore said.

The country's dairy imports had already jumped by 45% in the year to April, spurred by growing affluence and rising urbanisation, which is associated with better-equipped supermarkets and a greater use of refrigerators.

"China continues to grow as an importer of whole milk powder, with increased urbanisation and rising protein consumption per capita," he said.

Demand for foreign milk in particular has been fuelled by a number of discoveries of contamination of domestic supplies by melamine, a chemical which, while toxic, boosts protein counts.

'Disparity and lumpiness'

However, the sector looked set to continue to be dogged by the swings which have seen prices double, halve and then double again within the last four years.

"The regional disparity and lumpiness in the patter of the global economic recovery is likely to continue to be reflected in some volatility in dairy prices over the period ahead," Mr Westmore said.

He attributed the market's price instability to the relatively small level of dairy output which was traded internationally, while saying current market strength was "consistent with tight conditions" fostered by Chinese demand at a time when EU and US farmers had cut back herds.

"Small changes in production or consumption of dairy products in the major dairying countries can lead to volatility in world dairy product prices."

Positive outlook 

China's dairy demand looked a fillip in particular for Australian and New Zealand milk industries, whose access to the market is supported by their relative geographic proximity.

Indeed, China has now overtaken the US as New Zealand's second most export market, behind Australia.

"The outlook for both the Australia and New Zealand dairy sectors is positive," Mr Westmore said.

New Zealand, the world's biggest dairy exporter, shipped more than NZ$1bn of dairy products to China last year.