Dairy is the commodity in main focus in the latest Commodities Wrap from NAB Agribusiness, released today.

The report provides an overview of key commodity prices and macroeconomic drivers, such as interest and exchange rates.

NAB’s rural commodity index declined by 4pc in February 2009, as weaker global demand placed downward pressure on global grain and dairy prices.

The index in $A terms is forecast to fall by 3pc in 2008-09 and a further 9pc in 2009-10, as the weaker global economic outlook constrains the recovery in demand for rural commodities.

NAB’s head of agribusiness for Southern and Western Australia, Neil Findlay, says that, for dairy, there’s a very real possibility that prices could return to pre-2006 levels.

“International dairy prices have fallen significantly over the past 18 months, down nearly 60pc from their peaks of November 2007 in US dollar terms,” Mr Findlay says.

“Domestically, farmgate milk prices are expected to fall by 19pc in the 2008-09 year on year.

“While the global financial crisis has had an impact by cutting world demand for dairy products, it is the European Union’s actions that are really bad news.

“By re-instating export subsidies, dairy products that might otherwise have been destined for the internal European market will instead head to export markets.

"It will also distort price signals reaching European processors, and keep less efficient producers in business.”

Mr Findlay says domestic production is expected to grow at a rate of 1-2pc a year, although this remains highly reliant on seasonal conditions, certainty of water access and stable feed costs.

“And consumption of dairy products in developing countries is expected to increase in line with rising incomes," he says.

"For example, per person fluid milk consumption in China has increased by 17pc a year over the past 10 years.”