FAO/GIEWS - Food Outlook No.5 - November 1999 p. 11

MILK AND MILK PRODUCTS

• Price trends
• Small rise in milk production expected
• Trade in dairy products little changed in 1999
• EC Stocks Could Fall
• Price Outlook
• Internet Conference : INTERNATIONAL PROSPECTS FOR DAIRYING IN THE NEXT WTO NEGOTIATING ROUND

Price trends

From the beginning of 1998 to mid-1999, international prices for dairy products, overall, showed a steady decline. An important factor behind this was ample supplies in the main exporting countries, coupled with reduced purchasing power as a result of currency devaluation in some important dairy importing countries, for example the Russian Federation, some countries in South East Asia, and Brazil. Prices stabilized, at low levels, during the middle of 1999 but latest indications are that some strengthening in export prices may be seen during the remainder of the year (see Price Outlook section).

INDICATIVE DAIRY EXPORT PRICES 1/

Small rise in milk production expected

A small increase in global milk output is expected for 1999, with production increasing in most major milk producing countries. In Oceania, favourable weather conditions led to a strong start to the 1999-2000 production year. In Australia, milk output in the 1999-2000 season could exceed last season's record levels. In New Zealand, milk production to date is running 7 percent above the same period last season, when output was affected by dry conditions. In some parts of the country, the spring production flush has been so strong that the processing industry had problems keeping up. As a result of higher returns from dairying relative to other pasture-based livestock activities, such as beef or sheep farming, the dairy industries in both of the above countries are firmly set on a cycle of expansion.

MILK PRODUCTION

Somewhat exceptionally, and reflecting the industry's heavy dependence on pasture, the expansion of milk production in Oceania is based on herd expansion, rather than increased yields. Elsewhere, such as in eastern Europe, milk production is expanding largely as a consequence of improved yields: this is the case, for example, in Poland, the region's largest milk producer, Hungary and Bulgaria. In the United States, milk production is anticipated to rise 3 percent for 1999 as a whole, as a result of low feed costs and ample forage supplies producing a favourable feed/milk price ratio. A rise in yield per cow is the main mechanism behind the rise in US output; however, an additional factor has been a lower than average rate of reduction in the size of the national dairy herd during 1999 as farmers seek to maximise their returns under the current favourable conditions. Production in a number of other developed countries (the EC, Canada, Japan, Norway, Switzerland) is subject to policies which restrict output and, consequently, changes little from year to year. In the Russian Federation, milk production in 1999 is projected to be lower than in the previous year. The drop in milk output is largely associated with higher than usual slaughter rates for dairy cattle, linked to a rise in prices for meat following the devaluation of the Rouble. This has led to large numbers of dairy cattle being slaughtered for meat. On the other hand, as the least productive cows tend to be slaughtered, average productivity per cow in the Federation is expected to rise.

In developing countries, growth in milk output is expected to continue in Asia and Latin America. Assuming normal weather conditions, India's milk output in the 1999/2000 (April/March) marketing year could rise to 76 million tonnes, confirming India's position as the world's largest milk producing country. In China, moderate growth in total milk output is expected. Unlike in the previous decade, milk production growth in China during the 1990's has focused on improved yields, rather than expansion of the dairy herd. In Latin America, the upheaval in the Brazilian economy at the end of 1998 had a number of effects. Firstly, the devaluation of the Real resulted in a rise in the border prices of imported dairy products, making domestically produced ones more attractive. This, on the one hand, encouraged domestic production and, on the other, created certain difficulties for fellow Mercosur members, like Argentina and Uruguay, where Brazil is the most important export market. However, despite uncertainty regarding both domestic demand and the future level of imports by Brazil, and low prices elsewhere in the international market, milk production in the Mercosur block is expected to increase during 1999, due to momentum in the herd expansion cycle. One outcome of this has been that, outside Brazil, producer prices in most countries in the group have been depressed. Regarding other countries in Latin America, in Peru, profitability of milk production, relative to most other forms of agricultural production, has led to sustained expansion in recent years. There, production is forecast to reach a record 1 million tonnes in 1999. In Mexico, milk production is also expected to rise during 1999; the introduction of improved technology and animal genetics have been important factors behind this. This process reflects a movement towards larger-scale, more capital intensive milk production in Mexico.

Trade in dairy products little changed in 1999

Production of milk in excess of domestic requirements in the major exporting countries is expected to grow at the same rate as that of international demand during the remainder of 1999 and consequently supplies of dairy products to the world market are anticipated to be adequate. Purchases by most countries in South East Asia are expected to be at least maintained, and may possibly grow during the remainder of the year, as economic growth in this region should sustain import demand. Elsewhere, Brazilian imports are expected to be maintained, as lower international prices for dairy products have to an extent counterbalanced the fall in value of the Real. Import demand by the Russian Federation, which is the main importer of butter and an important importer of cheese, has been depressed so far this year. However, during September, increased trade enquiries from Russian importers were reported.

PUBLIC STOCKS OF BUTTER AND SKIMMED MILK POWDER IN THE EC AND USA

EC Stocks Could Fall

Stocks of the two dairy intervention products in the EC - butter and skimmed milk powder - were moderately higher at the end of September, than at the same time in recent years. However, from September onwards, market conditions within the EC for these products have been generally good and it is expected that sales will be made from intervention over coming months. Thus, year-end stocks are likely to be below current levels.

Price Outlook

Important factors with a bearing on the price outlook for the rest of 1999 and for the first half of 2000 include the level of import demand by the Russian Federation and the degree of milk production growth in the main dairy exporting countries in the southern hemisphere (New Zealand, Australia, Argentina and Uruguay). Additionally, for the oil producing countries in the Middle East and North Africa, increased revenue, stemming from higher oil prices, could lead to some growth in import demand. Assuming normal weather conditions in the southern hemisphere, the international dairy market is expected to remain reasonably well-balanced for the remainder of 1999 and into the first part of 2000. As intervention stocks in the EC are expected to decline, and Oceania began the current season with virtually no stocks, it is possible that international prices could rise from the trough experienced in mid-1999 and begin to move upwards.