Milk production and consumption have so far been concentrated in the developed regions - mainly Europe, the USSR, North America and Australasia - though more recently Japan has also become an important milk consuming and producing country. In contrast, the developing countries, with about three quarters of world population, account for just one quarter of world milk output and, as net imports have risen, for slightly over a quarter of global consumption of milk and milk products. However, since the 1970s, when their share was only one-fifth, milk production in the developing countries has grown faster than in the developed regions.
This difference in production and consumption trends between the two categories of countries is likely to accentuate in the medium term. As indicated in Table 1, the developing countries' share of global milk production could reach nearly a third by the end of the century. Yet, as their population is projected to increase to 4.8 billion, or four-fifths of the world total, while their net imports of dairy products will probably decrease, average availability, at just over 40 kg of milk equivalent, will not be significantly higher than at present and will be still merely one-seventh of the average level for the developed regions. Moreover, this relatively low statistical average will conceal wide differences between individual countries and, within countries, among income groups. Perhaps even more than in the past, consumption of milk and milk products in the developing regions will be concentrated among middle and high-income groups in urban areas. However, dairy development could increasingly support efforts to improve rural incomes and living standards in developing countries with a reasonable potential for milk production.
The difference in likely future rates of growth in milk production between developing and developed countries reflects not only trends in demand but also recent changes in production policies. In the developed market economies, with the major exception of Japan, per caput demand for milk and milk products overall seems to have reached saturation point, while population growth is slow. In some Eastern European countries and the USSR there would appear to be scope for rises in demand for the long run, but the medium-term outlook is for stagnating or even falling consumption owing to the effects on consumer prices and incomes of structural adjustment programmes. Moreover, with non-food use, particularly feed use, decreasing average availability per head of population in the developed countries as a whole is expected to fall by the end of the century.
Large-scale, heavily subsidized use of milk and milk products in livestock feeding was one of the main features of surplus disposal in the developed market economies over the past quarter century when milk output increasingly exceeded effective demand. On average during the 1980s, governments of West European and North American countries subsidized the feed use of some 20 million tons of milk equivalent per year, most of it in the form of skim milk and skim milk powder but occasionally also butter, with the EEC accounting for the bulk of this. At the same time, West Europe and North America exported large quantities of milk products, at reduced prices, or as food aid. Thus, by the first half of the 1980s, almost 20 million tons of milk equivalent annually or three-quarters of world exports of dairy products were heavily subsidized. Confronted by this situation, low-cost producers of traditional exporting countries in Australasia were hardly able to maintain the volume of their sales abroad, despite a growing international market, while most suppliers among developing countries had to withdraw from export marketing. At the same time, net imports of the developing countries, of which nearly 20 percent was food aid, reached about one-eighth of their total consumption as can be seen from the table.
|Milk production||Net imports 1||Availability1 2|
1 Milk and milk products in milk equivalent.
2 Including non-food use and waste.
Ample availabilities of relatively cheap, or entirely free, milk products in international markets supported policies aimed at low consumer prices in many developing countries which in turn discouraged the development of local milk production. As a matter of fact, in a situation of almost chronically depressed prices in international trade, the comparative advantage of milk production in developing countries was generally considered to be low. This was true not only of the lending policies of national and multilateral development banks but also of the investment policies of transnational companies. Although such companies made considerable investments in milk processing and distribution throughout the developing regions, their interest in the development of local milk production lessened in view of the cheap raw material supplies in international markets that could be drawn upon for recombining. Among the few developing countries which, notwithstanding this discouraging background, launched policies of strong support to domestic dairying as early as in the 1960s and 1970s were India, the Republic of Korea, China, Cuba and, to a certain extent, Venezuela. As in India, dairy development programmes in Cuba and China have benefited substantially from food aid in the form of milk powder and butter oil which after recombining have been sold in the urban markets at prices equivalent to those obtained by domestic producers. While adding to local milk supplies, the main purpose of such commodity aid has been to generate funds for investment into the development of local milk production and marketing.
WORLD STOCKS AND EEC SURPLUSES
However, during the second half of the 1980s, the international dairy situation changed significantly. The EEC, faced with ever rising costs of its farm support policy, introduced quotas on the marketing of cow's milk in 1984/85 and has since then reduced output by about 10 million tons, or one tenth. Other West European countries and Canada have operated similar supply management schemes. The United States has repeatedly cut the milk support price, accompanied by direct measures to reduce the dairy cattle population. In addition, dairying in New Zealand was affected by adverse weather. Helped by huge sales of butter at cut-rate prices mainly to the USSR, world stocks of dairy products were reduced to rather low levels by 1989, while prices in international trade in dairy products rose sharply. On the basis of c.i.f. prices of skim milk powder and butter oil prevailing during the first half of 1989, the cost of raw material for the recombining of 1 tonne of milk with 3 percent fat was about US$260, almost three times as much as during the mid-1980s. At this level of international prices the competitive advantage of imports over local dairy products had practically disappeared in countries with a reasonable potential for dairying. As discussed in a second paper submitted by FAO's Commodities and Trade Division to this seminar, prices in international dairy products trade have decreased again in 1989/90 though they remain well above the levels registered in the middle of the 1980s.
Milk production in Western Europe and, to a lesser extent, North America still exceeds effective demand. Hence, access to their markets will remain restricted and some subsidization of their domestic consumption and exports is likely to continue. However, unless present production controls in these two regions are significantly relaxed surpluses should remain manageable and prices in international dairy trade would not return to the very depressed levels of the mid-1980s. 1
EFFECTS OF HIGHER INTERNATIONAL PRICES ON DEVELOPING COUNTRY IMPORTS
In the USSR, Eastern Europe and the developing countries which account for the bulk of world imports of dairy products, self-sufficiency ratios will probably increase in the medium term. Higher international prices and continued foreign exchange constraints seem to have discouraged imports by the USSR and some East European countries and encouraged exports by others. For similar reasons, many developing countries have reduced imports, while several low cost producing developing countries may expand or resume exports of dairy products.
In Argentina, Uruguay and southern Chile milk production costs, at about US$100 per tonne, are among the lowest in the world. Although shipments are small compared with those of the big suppliers in Europe, North America and Oceania, Uruguay has in recent years been the largest net exporter of dairy products among the developing countries. Given supportive government policy, Argentina could regain its position as the leading exporter of dairy products among developing countries. Once a significant supplier of butter, cheese and preserved milk products, Argentina's dairy industry has reduced its sales abroad over the past two decades, when the fall in export returns was compounded by taxes imposed by government on shipments to foreign markets. Elsewhere in Latin America, Costa Rica has recently begun to offer milk powder in external markets as rising prices have stimulated milk output and, reinforced by recession, curbed domestic demand for milk and milk products. In the longer run, Nicaragua might become an exporter of milk powder again, having been a net importer of dairy products throughout the 1980s.
In Africa, Zimbabwe and Kenya are re-emerging in their traditional role as net exporters, mainly of milk powder and butter to neighbouring countries in southern Africa and the Near East. In the markets of the Near East oil countries, Turkey also hopes to be able to sell rising quantities of cheese and other milk products, and there could be interest in certain milk specialities from South Asia. China and Mongolia might increase sales to the eastern parts of the USSR, a number of developing countries in East and South East Asia and perhaps to Japan.2
1 Assuming continued restrictive production policies in West Europe and North America, dairy farmers in Oceania will probably feel encouraged to raise production for export though this is not likely to offset the reduction in West European and North American supplies. Japan, the only OECD country whose imports of dairy products could grow over the medium term, might absorb part of higher Oceanian supplies.
In the short term the response of existing and potential suppliers to higher international prices, both in the developing regions and in Oceania and East Europe, could be through reducing domestic consumption rather than raising production. The long depression in international prices has discouraged investment into dairy farming in many low-cost producing countries, reinforced by general economic and financial difficulties including high interest rates and shortage of foreign exchange. Because of the large amounts of capital and time required to raise milk production and processing, future prospects for dairy products exports are apparently assessed with caution.
In fact, the largest part of the projected increase in milk production of the developing countries is likely to be for domestic consumption and, as a group, the developing countries will probably continue to have a sizeable net import, as indicated in the table. Imports will be increasingly concentrated in the petroleum exporting countries of Asia, North Africa and Latin America but, unless oil prices rise, even these countries may not maintain the volume of their imports at recent levels. Moreover, some of them, such as Saudi Arabia, have for some time promoted local milk production though in such areas dairying is costly, and a country's dependence on imported dairy products may just be replaced by dependence on feeds and other inputs. Dairying based on imported feeds will therefore be the exception rather than the rule in a situation where many developing countries are heavily indebted and short of foreign exchange.
DEMAND AND PRODUCTION IN ASIA
One country which has been able to afford a rapid expansion not only of its milk but also of its meat and egg production largely based on imported feeds is the Republic of Korea. In recent years this country has purchased between 7 and 8 million tons annually of feed grains and other concentrate feeds at a cost of roughly US$ one billion. In addition, the Republic of Korea where milk production was virtually unknown until the 1960s but reached 0.5 million tons in 1980 and over one million tons in 1985, based its dairy development programme essentially on imported dairy cattle. The Korea Rural Economic Institute projects milk production to rise to 1.5 million tons by the early 1990s and nearly 3 million tons by the beginning of the next century. While expensive in terms of foreign exchange and to final consumers, milk production has been profitable to farmers who have specialized in this activity or added dairying to their enterprise. The Republic of Korea, though not providing a model of dairy development which would be suitable for the majority of developing countries, illustrates the change in food consumption habits as a result of rapid economic growth and urbanization. Unlike most other developing regions, East Asia has no tradition of milk consumption. If the above projections materialize, per caput consumption of milk and milk products in the Republic of Korea which was virtually nil before 1970, would reach over 30 kg of milk equivalent in the early 1990s and over 50 kg by the turn of the century. However, notwithstanding its sizeable balance of trade surplus, the country is becoming preoccupied about its dependence on imported feed and is now paying greater attention to the development of domestic fodder resources.
2 In the longer term a general liberalisation of agricultural markets and trade as a result of the GATT's Uruguay Round would of course greatly improve the prospects for exports from low-cost producing countries such as Uruguay, Argentina, New Zealand or Australia. However, at this stage it would appear to be premature to talk about possible implications of any agreements reached under the Uruguay Round.
China is another example of rapidly rising demand for and production of milk as a result of social and economic change. Traditionally the majority of Chinese did not consume milk, but since the late 1970s demand for milk and milk products has experienced a fast rise in urban areas around which modern dairying based on high yielding Chinese Black and White cattle (largely Holstein-Friesian blood) and, to a lesser extent goats, is being promoted. By 1992 Chinese plans call for an increase in per caput consumption of milk from 3 to 5 kg. With most milk consumed by the urban fourth of the population, average intake in urban areas would thus reach some 20 kg at the beginning of the next decade. Milk production in China has risen at double-digit rates during the past decade but was still less than 4 million tons in the late 1980s. Original plans which indicated a target of 30 million tons by the year 2000 have been revised downwards as feed supply is lagging behind the requirements of the livestock sector.
In South East Asia imported milk products became popular among urban consumers after the Second World War, but local milk production is a more recent phenomenon, with Indonesia and Thailand experiencing the most rapid growth. As in China, dairy development in these two countries is based on domestic feed and cattle of European or North American origin and crossbreeds. However, whereas China shifted emphasis from dairying on large-scale state or collective farms to milk production by smallholders in the 1980s, Thailand and Indonesia have right from the start given priority to smallholder dairying within their rural development policies.
The same has been true of India, the biggest milk producer among developing countries, where milk output is projected to rise by some 40 percent to 61 million tons by 1995 with per caput consumption increasing from its present level of 58 kg per year to about 68 kg. Under the project “Operation Flood”, the world's largest dairy development project, a resource-conscious policy of production largely based on local feeds and indigenous cattle and buffaloes and accompanied by efficient marketing of milk and milk products has benefited both rural producers, especially small-holders, and urban consumers. The success of this project, not only from a technical but also from a socio-economic viewpoint, has in the meantime aroused increasing interest in dairy and agricultural development planning throughout the developing countries.
As in South Asia, milk production and consumption has a long tradition in West Asia and most parts of Africa and Latin America. However, in the latter three regions prospects for dairy development appear to be less favourable than in South and East Asia. This reflects not so much natural resource endowment but rather the outlook for general economic development. During the remainder of the century, economic growth and rises in incomes are likely to be considerably higher in the eastern and southern parts of Asia than in the other developing regions. Hence, as in the recent past, strong consumer demand is likely to be a major stimulus to dairying in southern and eastern Asia, an area which will comprise almost half of the world's population by the turn of the century.
THE FUTURE FOR MILK IN DEVELOPING COUNTRIES
However, although milk production is a relatively efficient way of converting vegetable material into animal food and dairy cows, buffaloes, goat and sheep can eat fodder and crop by-products which are not eaten by humans, the loss of nutrients involved in production and the large amounts, often imported, of energy and equipment required in milk handling inevitably make milk a comparatively expensive food. Also, if dairying is to play its part in rural development policies, the price to milk producers has to be remunerative. In a situation of increased international prices, low availabilities of food aid and foreign exchange constraints, large-scale subsidisation of milk consumption will be difficult in the majority of developing countries. Hence, in the foreseeable future, milk and milk products in the majority of developing countries will not play the same role in nutrition as in the affluent societies of developed countries. Effective demand will come mainly from middle and high income consumers in urban areas.
There are of course ways to mitigate the effects of unequal distribution of incomes. In Cuba where the government attaches high priority to milk in its food and nutrition policy, all pre-school children, urban and rural alike, receive a daily ration of almost a litre of milk at a reduced price, and cheap milk and milk products are made available to certain other vulnerable groups, while milk products outside the rationing system are sold at a price which is well above cost level. Until recently most fresh milk in the big cities of China was reserved for infants and hospitals, but with the increase in supply rationing has been relaxed. In other countries dairy industries have attempted to reach lower income consumers by variation of compositional quality or packaging and distribution methods or blending milk and vegetable ingredients in formula foods for vulnerable groups. For instance, pricing of products rich in butter fat or in more luxury packaging above cost level so as to enable sales of high protein milk products at a somewhat reduced price has been widely practised in developing countries.