The nascent recovery of global dairy commodity prices evident in late Q2 continued through Q3.
Price tension was a function of a substantial slowdown in milk production growth in export regions and strong buying from import region.
Falling milk production in both the US and EU drove local wholesale prices up rapidly in Q3.
The recovery in world market prices was more tepid (4% to 15%), reflecting better supply conditions in Oceania.
Milk production growth in key export regions will slow to a trickle over the next 12 months, as farmers respond to low milk prices, high feed costs and pockets of unfavourable weather.
Even factoring in only fractional consumption growth in the US and EU, this will reduce the volume of surplus product available for international sale from key export regions.
Assuming a steady rise in demand for imported product, prices will thus need to rise substantially to achieve the required demand rationing to balance the international market.
This will likely send prices towards the higher end of our target medium term trading range (referenced on USD 3,300-3,800/tonne for WMP) in fob Oceania trade in 1H 2013.
Having hotted up earlier, wholesale pricing in the US and EU will see less upside in coming months, until international prices move into alignment as 1H 2013 progresses.