The mettle of the global dairy rally is about to be put to the test, as the northern hemisphere spring brings a jump in milk production, Rabobank has warned.

There is a "predominance of uncertainties" over whether the dairy market will be able to hold on to the price gains achieved in the second half of last year, when milk powder prices near-doubled at auctions runs by Fonterra, the world's biggest exporter.

Among concerns is whether there is sufficient demand to soak up extra production poised to hit the market when northern hemisphere dairy farms – notably in the European Union, the world's top-ranked milk producer – rebuild towards peak output.

'Holding their breath'

"It is pertinent to note that current pricing is probably being set on low trade volumes, as the market drifts through the lull between a weak southern hemisphere season and the forthcoming peak of the northern hemisphere spring," Rabobank said.

"Coming months will reveal whether global demand is strong enough to soak up the traditional surpluses generated in the EU spring without damaging product value in international trade.

"Buyers and sellers alike will be holding their breath."

Price fears 

The comments come a week after Fonterra warned of an "element of uncertainty" in dairy markets, after prices for far-ahead milk powder futures fell below those of near-term lots, an unusual price pattern for farm commodities.

The forecast implies that the average all-milk price will rise by some 25% this year, while remaining well below the $19.13 per hundredweight recorded for 2007.