Surging grain prices have presented a second blow to dairy farmers who were already looking at bleaker prospects for milk prices thanks to a "significant shift in market sentiment", Rabobank has warned.

The firmer grain market, coupled with dairy prices which at Fonterra auctions have fallen by nearly one-quarter since April, "will place pressure" on farmers' profits, the bank said in a report.

It had been a "bad couple of months" for dairy farmers, the briefing added.

"Not only have dairy export prices significantly fallen, but global wheat prices have rallied almost 50% in US dollar terms, eroding expected margins for grain feeding in the 2010-11 season."

Quality losses 

Prices of other livestock feeds have also increased, with UK hay, for example, 40% more expensive than last year after dry weather cut yields.

In parts of eastern Europe, wet weather prevented farmers making early cuts, and even in the US - the one major exporter enjoying bumper wheat yields - forage growers have lost out to rains.

"Some farmers got their hay mowed, but then they lost yield and quality when it rained," Keith Johnson, a forage expert at Purdue University, said.

"Others did not get it cut in timely fashion, so the quality of their hay went down."

'Sentiment shift' 

Rabobank analysts attributed the fall in dairy prices to an increasing reluctance by buyers to pay up as hopes for global milk production increased.

"Supply is now in recovery mode in most key regions," the bank said.

"All major exporters posted year-on-year milk production growth in May, with early indications suggesting further growth in June."

Consumers had been especially cheered by a government forecast of 14% output growth in New Zealand, the world's biggest dairy exporter, where Fonterra, the globe's top dairy group, is based.

"With supply on the rise and prices slipping, buyers are reported to be holding off purchases where possible - despite little evidence of any significant change in end-use demand."

The fall in prices "would appear to reflect a significant shift in market sentiment from mid-year".