Dairy price boom exceeds Goldman's expectations

Global dairy prices have exceeded Goldman Sachs' expectations. Photo / Christine Cornege

Dairy farmers feeling more confident about opening cheque books is good news for the economy, says Goldman Sachs economist Philip Borkin.

"We are already detecting improving sentiment emerging from the rural sector as farmers begin to feel more confident against a backdrop of modestly improved balance sheets and strong incomes," Borkin said.

"In our view, this was a missing ingredient in early 2010 when economic momentum appeared to be strong only to run out of steam quickly later in the year."

Goldman Sachs has boosted its previous expectations for global whole milk powder prices from US$3350 a tonne for 2011/12 to US$3700 and from US$3050 a tonne for 2012/13 up to US$3600 - compared with a historical average of about US$2100 a tonne.

Since an update in November global dairy prices had overshot Goldman Sachs' expectations.

"While demand growth from emerging markets was as strong as we expected, in our eyes it was a number of adverse shocks to global supply that was the major driver of the surge in global dairy prices, and agricultural commodity prices more generally."

With the demand and supply balance for many agricultural commodities tight it would not take much of a shock to see prices move sharply in either direction, Borkin said.

Dairy products had a relatively small international market and less government intervention than in the past, which had led to some significant price swings in the past five years.

As with households more generally, Goldman Sachs did not believe the process of deleveraging in the dairy sector had run its course.

"Instead, we feel the process will slow slightly, naturally resulting in better growth outcomes."

Its analysis overall was consistent with a more robust flavour to the recovery beginning to surface.