Droughts in big milk-producing countries including Australia have also contributed to higher prices. Australia is in the grips of its worst dry spell on record, which is hurting agricultural output. The rising cost of goods used to make dairy products is cutting into bottom-line profits, said Amr Farghal, the general manager for Fonterra Middle East. "We're buying full cream milk powder, skim milk powder, milk protein concentrate, bulk cheese, and on all these items the prices have increased dramatically," he said. "It is putting a lot of pressure on our overall financial performance." World food commodity prices rose to record highs last year, driven in part by rising demand and surging oil prices. Those costs began to fall from their peaks as the global economic downturn took hold. However, dairy prices have rallied again this year, surging 70 per cent between January and November, the Food and Agriculture Organisation price index showed. The steepest rise came in the fourth quarter between September and November according to the index, which is based on a basket of globally traded dairy products. Still, prices may have risen too far too quickly, the Dutch financial services firm Rabobank said in its Dairy Quarterly report. "The market is now faced with the possibility that pricing may have overshot levels that will prove sustainable through 2010, as supply and demand start to respond to extreme price levels," Rabobank said. "However, inherent lags, particularly on the supply side, reduce the prospects of a meaningful correction until beyond the first quarter." While many regional producers have in-house farms to produce fresh milk, others must import dairy products such as milk powder and whey to make foods including cheese and yogurt. The rising cost of raw materials puts pressure on dairy producers to raise retail prices to recoup their costs, said David Edwards, the managing director of the market research firm IMES Consulting Group. Steep gains in the price of staple foods such as milk in the Emirates are monitored by the Ministry of Economy, Mr Edwards said. The ministry signed agreements with retailers such as Lulu and Carrefour last year to keep the prices of key foodstuffs at 2007 levels. This causes producers to get caught between market forces and government regulation, Mr Edwards said. Hussam Abdul Qader, the general manager of marketing for the Almarai dairy company, based in Riyadh, said it had felt the pinch of rising commodity prices this year but had not raised retail prices. "We are not panicking yet," he said. "We will see where this trend is going and are not passing the cost to the consumer until we know." @Email:aligaya@thenational.ae