New Zealand's dairy sector will face increased international competition as developing nations dominate production growth over the next decade, says a report by the OECD and the United Nations' Food and Agriculture Organisation.
The Agricultural Outlook 2009-2018 report said average dairy prices, in real terms, were likely to be slightly higher for the period relative to 1997-2006 - driven by rising energy and vegetable oil prices.
"Dairy products are expected to remain among the agricultural commodities for which consumption exhibits the highest growth rates," the report said.
It predicted a more competitive dairy sector, with non-OECD countries accounting for up to 81 per cent of the growth in milk production.
But New Zealand was expected to record the strongest milk production growth in the OECD in percentage terms.
Dairy products accounted for 27 per cent of all national exports from New Zealand in the year to May last year.
Westpac economist Doug Steel said the report was not too far away from the bank's view of the dairy sector.
"A slight [price] increase in real terms, ie, over and above inflation, it certainly means that dairy is expected to be coming out on the right side of the ledger."
Most dairy production growth globally would be in Latin America and eastern Europe, Steel said.
"There will be increasing competition ... but as long as consumption and demand is there the increased supply from those competitors shouldn't pull down prices and the OECD's suggesting that real prices will actually be increasing even with that increased production."
The report said the agricultural sector was showing more resilience to the global economic crisis than other industries.
Falls in agricultural prices and the production and consumption of farm goods were likely to be moderate provided the economic recovery started within two to three years, the report said.
During the next decade the prices for all farm commodities except beef and pigmeat, even when adjusted for inflation, were unlikely to fall back to the average levels before the 2007-08 peaks.
Read the full OECD report here
