Speaking at the Dairy Event at EuroTier in Germany, dairy economist, Mary Ledman from the Daily Dairy Report said that since 2007 global milk production has risen by 22.5 million tonnes.

And although production is forecast to rise sharply in 2012, the gain is exceptional because it is more than half the gain achieved between 2007 and 2011.

She said the question is whether this rate of growth can be sustained into 2013 or whether it will be greater than this year's growth.

Lower milk production growth will lead to less skimmed milk powder and butterfat production rather than a reduction in production of products such as cheese.

However, she said that less supply will buoy the global dairy product markets and milk prices.

If, though, milk production decreases more than anticipated then Ms Ledman said dairy markets are likely to reach new highs in 2013.

Despite the forecast higher prices, production costs are also expected to rise next year and this will produce tight profit margins.

The margins are going to be affected by feed costs and lower milk prices in New Zealand are expected to reduce supplementary feed supply to increase milk production.

European milk production is also expected to slow down as the quota year comes to an end and farmers try to avoid penalties.

Any recovery is not expected until the second half of 2013 or even into 2014, but this will depend on good weather in producing regions, favourable grain harvests both in the northern and southern hemisphere and a small growth in global dairy product consumption.

Ms Ledman said that both domestic and global dairy markets are expected to remain quite volatile, because of low stock levels. This is partly down governments and commercial operators pulling back from storage programmes taking away the potential for a soft fall when times are hard.

She said that for some futures markets might be able to ease the shock of steep rises and falls in price and bring a little certainty to the markets.

The main country to watch in the global dairy market is India, where the herd has now reached 45 million cows, growing by nearly 7 million between 2007 and 2011.

India's milk production has increased by 9.6 million tonnes in the same period and accounted for 43 per cent of the global rise in milk production.

However at the same time milk production in both China and Russia has fallen and now there are more exports to these two emerging nations.

More than 40 per cent of the total world production of SMP and whole milk powder (WMP) is exported, but only 10 per cent of the world production of butter and cheese is exported.

The FAO estimates that about seven per cent of the total milk production is traded.

In New Zealand, where virtually all the country's production of WMP products is exported milk production this year is expected to be 25 per below 2007 levels.

On the global market the forecast is for New Zealand, the USA and EU to see a fall in their market share of milk production with Argentina and Australia seeing rises. This is expected to lead to a rise in global prices WMP production is expected to rise while SMP production will fall from 2012 to 2013.

Generally, the global milk products market is expected to see prices go up from 2012 to 2013.