|Global Market Analysis|
MILK AND MILK PRODUCTS
The FAO Dairy Price index of international dairy product prices has been rising rapidly in recent months, and in November reached 209, an increase of 82 percent from its low of 114 in February 2009. The Index rose by a full 32 percent in November alone, sparking speculation about a repeat of the large price spike that took markets by surprise three years earlier. All dairy products are showing signs of strong recovery to levels not seen since August 2008. The largest increase has been displayed by butter, the price of which has doubled since February to USD 3 688/tonne. However, prices for both skim milk and whole milk powder have also increased by over 90 percent to USD 3 375 and USD 3 525/tonne respectively. The causes of this rapid price rise are not fully clear at the writing of this Outlook, particularly in view of the large public stocks for both butter and skim milk powder available in the European Union. However, stock retention combined with reduced milk output in the European Union and the United States, and lower growth than expected in Oceania's milk output may be contributing factors to tight export supplies. The economic recovery underway in large Asian countries and in certain oil exporting countries may also be an important factor in renewed import demand. The sustainability of the rise in prices is uncertain, though contingent on the responses of the European Union and other exporting countries which hold dairy product stocks.
World milk production in 2009 should reach 701 million tonnes, or an increase of just over one percent, with production growing faster in developing countries than in developed countries. The gap between these differing patterns of growth is expected to widen in 2010, with high growth in the developing world at 4 percent and a virtual stagnation of output in the developed countries. Milk production in 2010 should grow by close to 2 percent, to a total of 714 million tonnes.
Milk production in Asia is set to grow by 3 percent in 2009 to 255 million tonnes. Production in India, the world's largest producer, should reach 112 million tonnes. This represents moderate growth, 3 percent, as pasture growth was affected by a poor monsoon season. In China, consumer confidence has recovered from the melamine crisis and output is expected to grow by 5 percent, to 43.6 million tonnes. In Pakistan, where normal weather conditions prevail, output is anticipated to remain unchanged at 33.2 million tonnes. In 2010 Asia is anticipated to expand milk production by 4 percent, reaching almost 265 million tonnes. India is forecast to grow moderately, some 4 percent, due to the below average rains from the likely occurrence of "El Niño". Output in China is anticipated to return to higher growth, at 9 percent, a figure still below its track record of recent years. This conservative estimate is based on the persistence of low farm-gate prices and tighter feed and water availability.
In Europe, output in the European Union for 2009 will likely remain relatively unchanged despite market intervention and the expansion of production quotas, at 154 million tonnes. Demand for dairy products stagnated in 2009 and farm gate prices decreased substantially with the fall in international prices, eroding profitability and deteriorating farm liquidity. Domestic prices fell to such an extent that traders were selling butter and skim milk powder (SMP) to intervention, and using export subsidies. However, by September, market prices were again above intervention levels. and purchases stopped. Milk production in the Russian Federation, at 32.8 million tonnes, represents an increase of a mere one percent over 2008, on account of low fodder reserves that were prepared for winter and a slight reduction of the national dairy herd. Production in Europe in 2010 is anticipated to remain stagnant reflecting the low price incentives of the past year and continued higher feed prices. Summer droughts in parts of the Russian Federation have constrained once again the building of fodder reserves for winter and therefore production may remain relatively unchanged.
In North America, milk production for 2009 in the United States is estimated to decrease by one percent on account of low farm gate prices and the deterioration of the milk/feed price ratio. Output may fall to 85.5 million tonnes. Cooperatives Working Together retired a quarter of a million cows, which also contributed to the slight reduction of output. In Canada, where production is governed by quotas, milk output is anticipated to remain relatively unchanged at 8.3 million tonnes. The trend of declining output in the United States is expected to continue in 2010 with a further one percent fall in production, although the price ratio of milk to concentrate price improved consistently through the second half of 2009, and should this trend continue into 2010, production estimates may be revised upwards.
In South America, where low prices and drought affected the dominant pasture-based production systems, output for 2009 is anticipated to stagnate at some 57.7 million tonnes. Production in Brazil may remain unchanged at some 28 million tonnes. Following from exceptional growth of deliveries in the past two years, these came to a halt because of drought that affected mostly the southern states, and forced farmers to feed expensive concentrates. Deliveries were down 8 percent in the first quarter of 2009, and although weather conditions improved for the rest of the year, the recovery is unlikely to compensate for the earlier production deficit. In Argentina, output is anticipated to increase by a mere one percent, reaching 10.4 million tonnes. Drought affected crops during late 2008 and early 2009, and winter provisions of hay and silage were poor. However, output increased towards the end of the year with improved weather conditions and a ARS 20 ct/litre (some 5 USD cts) compensation provided by the Government in July. In Uruguay, production growth resumed in 2009 at the rate of 2 percent, as farms recovered from drought. Output is estimated at 1.6 million tonnes. In Chile, producer prices in 2009 fell 25 percent and production is set to decrease by 5 percent. In light of the above, and provided normal weather conditions prevail, aggregate production in South America for 2010 should reach 59.1 million tonnes, or an expansion of 2.5 percent.
In Oceania, dairy production in marketing year 2008/09 reached 26 million tonnes, or an expansion of 6 percent. Output in New Zealand is estimated at 16.6 million tonnes, growing by 8 percent, as the country recovered from a prolonged drought. In Australia, and despite favourable weather conditions, milk output increased by a mere 2 percent to 9.4 million tonnes. Farmers, faced with low farm-gate prices, fed less feed concentrate, a key input in production. Relatively good weather and climbing world prices towards the end of 2009 present a more encouraging production environment in Oceania its 2009/10 marketing year. However, only a moderate 2 percent growth is expected in New Zealand under prospects of dry weather conditions from the occurrence of "El Niño", and recent cash flow difficulties of farmers. Output in Australia is set to fall 2 percent as a result of low profitability, a deterioration of the short-term debt situation that constrains the purchase of feed concentrate and the likely recurrence of dry weather conditions.
Aggregate 2009 milk production in Africa is expected to grow just over one percent, reaching 36.6 million tonnes. In North Africa, favourable weather conditions fostered pasture growth, and production should expand by some 5 percent in Egypt (4.9 million tonnes), and by a moderate 2 percent in Algeria (2.2 million tonnes). In West Africa rains also favoured pasture development, but poor rains and low pasture growth in Southern Sudan constrained milk production. Production in South Africa, has trended upward in recent years, but may reach 3.2 million tonnes, growing by a mere one percent, as drought affected most of the country. In Eastern Africa, several countries report livestock deaths due to drought. In Kenya, dry weather is constraining dairy production, and output is set to decrease by 5 percent to 4.2 million tonnes. For 2010, milk production in Africa is anticipated to grow 2 percent, reaching 37.4 million tonnes. In Eastern Africa, however, the tight supply situation has resulted in firm farm gate prices, and prospects of growth in domestic and regional (Common Market for Eastern and Southern Africa - COMESA) import demand in 2010 are encouraging commercial farmers to invest in pasture development. In addition, "El Niño" may bring above normal weather conditions, imperative for good for pasture growth. In Southern Africa, "El Niño" is likely to have the opposite effect of below-normal precipitation and milk output may increase only slightly.
Table 16. World dairy markets at a glance
* Jan-Nov 2009
Despite a rebound of exports from New Zealand and South America, global exports in 2009 of the most important milk products, in milk equivalent terms, are forecast to decline 5 percent, falling to 38.6 million tonnes. This fall is due mainly to an estimated reduction of 3 million tonnes in the exports from the European Union and the United States. In these countries, where the combined exports accounted for 14 million tonnes in 2008, or one-third of world trade, traders were not attracted by world markets during the first half of the year, and preferred instead to stock or sell milk products in domestic markets. On the import side, the world market had been characterized by weak demand and prices, with a notable contraction in imports by some countries. For example, Venezuela's imports are estimated to fall from 2.5 to 1.7 million tonnes. However, with shrinking export supplies, the end of 2009 is characterized by firmer prices, and the outlook for 2010 is for a return to the trade levels of 2008, or an increase of 5 percent. Higher prices, and the recovery of the world economy is creating a renewed interest of traders on export markets, particularly in Asia. The outlook for 2010 depends to a large extent, however, on the reaction of United States traders, and on whether the European Union will liquidate its high dairy product stocks under more favourable price conditions, where they are not required to provide export subsidies.
Exports from Oceania, the world's largest supplying region for dairy products with a volume of 15 million tonnes in milk equivalent, is anticipated to expand 10 percent in calendar year 2009, with New Zealand, the world leading exporter with 11.3 million tonnes, expanding by 9 percent. New Zealand's whole milk powder (WMP) export volumes are up 7 percent with high exports to Algeria, China and Indonesia, while SMP exports are up 24 percent with larger shipments to Southeast Asian countries. Exports of butter are higher by 10 percent, as larger exports to Egypt, Iran and the Russian Federation more than compensated for lower shipments to Europe. Conversely, cheese exports may fall 5 percent, as larger purchases from China and the United States may not offset the reduced sales to Japan. Exports by the third largest world exporter, Australia at 3.7 million tonnes, are anticipated to grow by 12 percent in milk equivalent terms. About one-third of Australian milk production is exported, and therefore as with New Zealand, the performance of export markets has a direct impact on the economy of the sector. As such, the financial problems that the dairy industry faces today were to a large extent due to low world dairy prices during its marketing year 2008-09 and the steady strengthening of the Australian Dollar. Export growth in 2010 from Oceania may be close to 10 percent, reaching 16.4 million tonnes in milk equivalent. New Zealand export growth is expected to rise 12 percent, as better world prices should encourage the sale of stocks, which some analysts believe were some 360 000 tonnes in early 2009. Australian dairy product exports are not expected to expand despite renewed interests from Southeast Asia, China, Japan and Saudi Arabia in late 2009, given its reduced level of milk production.
Exports in 2009 from the European Union, currently the second largest exporter after New Zealand, are anticipated to fall 12 percent to 8.4 million tonnes. The fall is due mainly to the retention of stocks and stagnant milk production. The pattern of falling world export shares is not new, and coincides with the implementation of domestic market reforms. Intervention prices have been substantively reduced since 2003, and producers have been compensated with, by and large, decoupled single farm payments. This policy responds to the European Union commitment to reduce market support and intervention in the domestic market in favour of the provision of safety nets in times of crisis. The Commission intervened during the recent episode of low world dairy prices through the purchase of milk powder, butter and export subsidies. By mid November, European Union stocks of SMP amounted to 268 000 tonnes, and public and private stocks of butter at around 150 000 tonnes. European Commission officials emphasized in September that public stocks would not be released in the short run, but when their sale is unlikely to upset the recovery of the market. Exports in 2010 are forecast to decline 4 percent, but much depends on the evolution of global prices.
In the United States, exports of milk products may fall by 2 million tonnes in milk equivalent terms in 2009, which would bring the total of United States exports to 2.3 million tonnes. The decline reflects the low interest by traders given relative domestic and international product prices. However, a weak United States Dollar and the recovery of world prices at the end of the year have brought about a renewed interest on export markets and USDA forecasts 2 percent growth in exports for 2010.
In South America, exports of dairy products in 2009 may grow 15 percent, reaching 3.6 million tonnes, as a result of an expansion of exports from Argentina, Brazil and Uruguay, where production in the previous year was affected by drought. Exports from Argentina (1.4 million tonnes) are expected to grow by 10 percent thanks to larger shipments of milk powder to emerging economies, while a renewed interest in cheese is also noted by traders. Exports from Brazil are estimated to expand substantially, over 40 percent, and to surpass for the first time the benchmark of one million tonnes in milk equivalent terms. Brazil was importing one million tonnes of dairy products in 2002, and used to be a key export market for both Argentina and Uruguay. However, the steady expansion of milk production of recent years, at an average of 4 percent per annum since year 2000, has resulted in the progressive substitution of imports by domestic production, to the extent that Brazil is now a net exporter. The Government of Brazil, aiming to protect producers during the recent episode of low world prices, imposed import quota restrictions on SMP, a move also made by Chile and Colombia, which in 2009 applied temporary safeguards in the form of higher import duties. Exports from Uruguay should expand 10 percent, well above 600 000 tonnes in milk equivalent terms, with cheese to Mexico and Venezuela, and SMP to Cuba and Venezuela. Export growth in South America is forecast to slow down in 2010, to about 6 percent over 2009, as a result of slower export growth from Brazil.
Global trade in whole milk powder (WMP), which amounts to 1.9 million tonnes in product weight, is anticipated to decrease slightly in 2009, by about 2 percent. About half of the world's WMP production is traded in the world market and the largest outlets are developing countries. While imports by African, Asian, Central America and Caribbean countries are anticipated to grow, aggregate imports may fall in 2009 mostly because the world's largest importer, Venezuela with a share of 15 percent (in 2008), may buy 30 percent less WMP. In addition, Venezuela is now buying more WMP from South American countries, a move that affects New Zealand, its traditional provider. The recovery of Oceania WMP export prices in the second half of 2009 is in fact believed to be supported by higher demand from China. A rebound of imports is expected for 2010, with an 8 percent increase due to a large extent to higher imports from Venezuela.
The cheese trade, which amounts to 1.67 million tonnes and is the most important in value terms among the dairy products, was negatively affected in 2009, as exports are expected to fall by 7 percent. The fall is due to lower imports from Japan, the Russian Federation and the United States, which together account for more than 40 percent of the world market. Imports by Japan and the Russian Federation accelerated towards the end of the year, and should this trend continue into 2010, the outlook for next year is for a 2.4 percent growth in world cheese trade.
Global exports of butter in 2009 may amount to 770 000 tonnes in product weight, a fall of 3 percent compared with 2008. The 10 percent expansion of butter exports from New Zealand are being offset by lower exports by the European Union, India, Ukraine and the United States. More than 40 percent of the world butter trade is purchased by Asian countries, whose demand is anticipated to fall by 7 percent. Russian imports, with a 17 percent share of the world market, are anticipated to be stagnant. If butter stocks in the European Union are released in 2010, they would contribute to a 7 percent expansion of butter trade. Imports from Asia are forecast to grow by 5 percent while those of the Russian Federation may rise by less than 2 percent.
Global trade in SMP amounts to about one million tonnes in product weight and is anticipated to fall some 10 percent in 2009. Demand from Africa has fallen by 25 percent, but purchases from Southeast Asia have grown significantly, in particular due to the renewed interest by the Philippines (11 percent) and Malaysia (18 percent growth). Though impressive, these rates of growth only bring these countries to an import level similar to that of 2007. Imports of SMP by China may double in 2009. Markets purchased products mainly from Australia and New Zealand, who together sell more than 40 percent of the world's SMP. Purchases by Mexico (second largest importer) are anticipated to increase by 4 percent, but those from other Central American and Caribbean countries may fall. With these current trends in the world market, the outlook for 2010 is for a 3 percent increase, mainly due to larger purchases from Asian and Eastern European countries.
Table 17. Major exporters of dairy products
|2008||2009 Preliminary||2010 Forecast|
|WHOLE MILK POWDER|
|World||1 936||1 901||2 063|
|European Union *||484||386||350|
|SKIM MILK POWDER|
|World||1 198||1 072||1 104|
|European Union *||177||165||170|
|European Union *||150||140||150|
|World||1 794||1 670||1 746|
|European Union *||555||520||520|
|GIEWS||global information and early warning system on food and agriculture|