According to Xcheque dairy industry analysts, Dr Jon Hauser and Neil Lane, dairy commodity inventories around the world remain at historically low levels and demand is still strong, particularly in Asia and the Middle East.

But the one word of caution from the analysts is that the market has definitely peaked, and production from the dairy "power houses" – the European Union and United States – is increasing to meet this demand.

The US dairy industry is on target to produce 4-5 billion litres more in 2008 than it did in 2006, which has already had a significant impact on skim milk powder (SMP) prices and is also affecting cheese and butter prices.

"Aside from the fall in SMP price, we have an unusual situation at the moment where the US market for dairy commodities is trading at a 10-25pc discount to European and Oceanic prices," Dr Hauser said.

"It appears that the maintenance of traditional trading relationships and concerns over the security of supply are holding prices up.

"This is likely to continue until there are clear signs of a lift in production from Oceania and the EU and there is more supply competition in the market."

Dr Hauser said the current uncertainty was good news for the 2008-09 milk price.

Xcheque's forecast models are showing pricing for the major dairy processors in the range of $5.80-$6.40 a kilogram milksolids (MS) (43-47 cents/litre for 4.1pc butterfat and 3.2pc protein) for the whole year.

"The low end will be a consequence of a decline in commodity prices to the current level in the US, and the high end will be achieved if current commodity prices hold," Dr Hauser said.

* Extract from a full report in Stock & Land, Vic, July 17 issue.