* Dairy consumption weakens due to economic downturn
* Supplies begin to contract to match softer demand
By Nigel Hunt
LONDON, March 19 (Reuters) - Dairy prices have been cut by more than half during the last few months to a five-year low and may have struck a trough but any significant rebound is unlikely until global economies start to revive.
"I think there do seem to be some signals that we have reached the bottom but I wouldn't go as far as to say we are going back on an upward trend," Rabobank dairy analyst Mark Voorbergen said.
"The only thing that will really change prices is when demand picks up and that will be strongly linked to the overall economic trend," he added.
A dairy price index published by the United Nations Food and Agriculture Organization (FAO) fell to 114.3 last month, less than half its late 2007 peak of 268.6 and the lowest level since February 2004.
For a graphic on the price decline, click on:
https://customers.reuters.com/d/graphics/CMD_FDIND0309.gif
"The dairy market went through an unprecedented price spike (in late 2007) but has been in freefall since last summer," FAO senior commodities economist Merritt Cluff said.
"I don't think it will go much lower than this but there is scope for it to go lower," he said, adding prices remained far above a trough in 2002 when the index tumbled to 71.7.
Analysts said the sharp rise in prices in 2007 prompted some dairy farmers, particularly in the United States, to boost production. Demand has been weakened by the economic downturn with key importers such as Russia cutting purchases.
Russia emerged as a major importer of products such as cheese in the 1990s as livestock numbers fell in the aftermath of the break-up of the Soviet Union.
Rabobank's Voorbergen said stocks of cheese had built up in Europe with export demand curtailed by the economic downturn.
He noted consumption was also hurt by high retail prices.
RECAPTURED MARGINS
"Retail prices in dairy are still relatively high although at the wholesale level prices are coming down quite rapidly," Voorbergen said, adding processors were trying to recapture margins which were squeezed during the 2007 price spike.
Analysts said dairy farmers, particularly in the United States, had responded to the drop in prices by culling more cows.
"Supply is gradually contracting in line with demand," Voorbergen said.
The drop in prices has prompted widespread protests from dairy farmers across the European Union and led to the reintroduction of support measures such as export refunds early this year to boost domestic prices.
"The EU since the beginning of the year has been selling product at subsidised rates on world markets and that has helped to drive (international) prices down," FAO's Cluff said.
The European Commission, in a report this week, said in the short term the dairy sector should continue to be dominated by the consequences of the economic crisis.
"The pronounced decline in the prices of dairy products during the most recent months is expected to induce a substantial fall in the producer price of milk in 2009," the report said.
"This should lead to a slight contraction in EU milk production over the short term."
EU Agriculture Commissioner Mariann Fischer Boel said last week all available steps would be taken "to keep the boat floating in the dairy sector".
"I'm always cautious to predict anything but I do think there's a light at the end of the tunnel," she said. "And it's not a train coming." (Graphic by Catherine Trevethan; additional reporting by Jeremy Smith in Brussels; Editing by Sue Thomas)