THE recent surge in the value of dairy products has led some in the industry to question whether this increase is sustainable or simply a short-term blip.

My answer to this question is that it is sustainable for the medium term. Of course, like any marketplace, there may be small price increases and decreases from time to time, but the basic market fundamentals are strong and are set to remain so. There are a number of reasons why I say this.

Firstly, global economic growth has been strong for the past five years and continues to grow. This is particularly pronounced in China and the Middle East where their increased affluence has led to sharp increases in the demand for dairy products. As these countries become richer, this trend is likely to continue.

Secondly, world demand continues to outstrip available supply. Only approximately 10% of milk enters world trade and over the years, the key exporters have been the EU, USA, Australia and New Zealand. In the last five years the EU has operated a quota system, which has seen milk supplies fall slightly and Australia has been hit by droughts wiping about 15% off national output.

New Zealand has expanded supplies to compensate for the Australian cuts and any extra USA milk has largely been absorbed by their domestic market.

Thirdly, market conditions are unlikely to change in the near future. Consumers might be put off by the high prices, but if there is no stock prices are unlikely to fall. There are now no intervention stocks of butter or powder in the EU, no subsidies for the domestic market and no export refunds.

This is a profound change for the dairy industry.

In response to these market conditions Milk Link has been determined to maximise the returns it pays its members.

Since April 1 its producer price has increased by seven pence a litre to 24ppl for a standard litre.

In addition, we have reaffirmed our commitment to members that the money they have invested in Milk Link to build the processing business will yield a return of at least 10% in the current financial year. The improved returns to the sector have enabled Milk Link to continue its programme of reinvestment in its manufacturing sites. We remain certain that farmers will only be able to maximise their long term returns by owning efficient added value processing.

Of course, had milk prices not increased there would have been many more dairy farmers leave the industry. For too long dairy farmers have made little or no profit and over the last few months there have been big increases in on farm costs such as feed. That said, the recent price rises should return the dairy industry to somewhere near viability and enable farmers to reinvest and plan their businesses for the long term.