MILK AND MILK PRODUCTS

• OVERVIEW
• PRODUCTION
• TRADE

OVERVIEW

Provisional FAO estimates suggest that world output of milk from cows, buffaloes, camels, sheep and goats could rise by 5 million tons in 1996, to reach 534 million tons. Output growth in Asia, Latin America, Oceania and the United States is expected to more than counterbalance a further decline in milk production in the Commonwealth of Independent States (CIS) and eastern Europe. This would represent the first significant upturn in world milk production since 1990.

World prices for most dairy products have declined since the end of 1995, following substantial price rises during that year. From late 1995, demand in a number of important importing countries weakened and there has been some downward movement in prices. In the case of butter, reduced demand was associated with some processors in importing countries switching to vegetable based substitutes. Despite continued weakness in the international market, prices of dairy products are not expected to fall to the levels seen in 1993 and 1994.

MILK PRODUCTION

PRODUCTION

In the European Community, 1996 milk production is expected to be the same as the previous year at 125 million tons, reflecting quota restrictions on output. In the United States, milk production could grow by 3 percent to reach 73 million tons. The increase should come from a rise in yields that will more than offset a reduction in the dairy herd. In Canada, the lack of any increase in the processing milk delivery quota for the 1995/96 marketing year (August-July) is expected to result in production in 1996 remaining unchanged from the previous year at 7.8 million tons.

In Japan, milk output for 1996 is also anticipated to remain at the same level as the previous year - 8.4 million tons. Growth in production is being inhibited by declining profitability and a reduction in the size of the dairy herd. In Oceania, generally good weather conditions are expected to lead to a strong finish to the 1995/96 dairy year. In New Zealand, continued growth in the dairy herd, stimulated by confidence in the international market for dairy products and favourable farm-gate returns, is expected to result in a production rise of 3 percent to 10 million tons. In Australia, production is expected to be 4 percent higher at 8.5 million tons.

Milk production in the CIS registered sharply lower output in 1995 and prospects for 1996 are for a further fall. Output has been negatively affected by reduced yields, aggravated by the lower availability, and poorer than average quality, of fodder, and a fall in cow numbers. The decline has mainly been associated with the state/collective farm sector, which still accounts for most of the milk output, where production has not been profitable. Reduced milk output has been reflected in lower production of dairy products, which has left processing capacity substantially under-utilised and has discouraged investment in new processing equipment. During 1995, in common with many foodstuffs, retail prices for milk and dairy products rose faster than growth in purchasing power: a factor which is expected to continue to suppress demand in 1996.

Amongst the majority of eastern European countries, herd reduction, together with hot and dry summer weather, resulted in lower output in 1995. For 1996, further herd reduction and poor quality feed supplies are expected to continue to depress production for these countries overall. Despite declining production, in a number of these countries domestic supply exceeds demand as price rises have discouraged consumption. As a result, in several countries governments have had to support the market through subsidized storage or export. In the case of butter, the availability of lower priced vegetable oil based substitutes has also played a role in reducing consumption. While consumption of the basic dairy products has been depressed, some items, such as long-life milk, soft cheeses, milk desserts and ice-cream, which were not previously readily available, are reported to be selling well.

In Asia, growth in milk production in India during the 1995/96 (April/March) marketing year was constrained due to poor fodder availability in some regions. If output growth returns to its historical trend, total milk production would be 67 million tons in 1996/97 compared with 64.5 million tons in the previous year. Following the liberalization of the Indian milk market in 1991 which allowed increased participation by the private sector in milk marketing and processing, access to the estimated 10 percent of total milk production which enters formal processing channels continues to be a contentious issue, with cooperatives and the private sector competing for supplies. As a result of increased competition, farmers have received a higher price for their milk. In China, production of milk in 1995 was 6.5 million tons, a six percent increase over the previous year. Growth in output was stimulated by the partial reintroduction of government subsidies to the dairy sector and improved prices for milk. China aims to raise milk output annually by 4-5 percent to the year 2000 - this would imply a level of milk output of 6.8 million tons in 1996. In comparison with most other countries, consumption of milk and dairy products in China is low - per caput consumption is currently 5 kg per year. Elsewhere in Asia, milk production in Pakistan is reported to have started the year well, as a result of favourable weather conditions encouraging good pasture growth.

In Latin America, most countries are expected to register positive growth in milk production during 1996. In Brazil, the largest producer in the region, improved returns to producers and expansion of production into non-traditional milk producing areas are expected to lead to growth in output. Similarly, increased production is anticipated in several other South American countries, including Argentina, Chile and Uruguay. By contrast, milk production is expected to fall in Venezuela due to continued low profitability associated with retail price controls. In Mexico, the government moved towards lifting price controls on milk when it authorised the raising of the retail price for milk by approximately 30 percent in March of this year. Producers had argued that prices controls were limiting the industry's growth (in the past decade many Latin American countries have abolished price controls on milk and milk products and have subsequently seen milk production increase substantially). In Jamaica, milk production has dropped markedly since 1992 as a result of changes in trade regulations, which allowed increased imports of milk products, especially milk powder. In an effort to resuscitate domestic production, the government has announced that it will raise the import tariff for milk powder from 30 to 50 percent from June 1996.

For developing countries in Africa, weather conditions during the first quarter of 1996 were generally favourable for pasture growth, indicating that milk production for the region as a whole may increase in 1996. Algeria recently announced plans to promote milk production, including changes to its milk pricing policy. One manifestation of these changes was the raising of the retail price for milk in April 1996 by 25 percent which followed earlier price increases. However, even at the higher level, milk prices are still subsidized by the government. Algeria remains one of the largest importers of dairy products with imports totalling approximately U.S.$ 600 million annually.

TRADE

A slight growth in world trade in dairy products is forecast for 1996. Increased supplies of dairy products for export are expected from Oceania; however, these will be counterbalanced to a degree by restrictions on subsidized exports from the EC and the United States agreed under the Uruguay Round. While international demand should remain firm, limitations on the ability of some major importing countries to pay for imports could lead to a weakening of international prices.

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

In the United States, public stocks of butter are currently exhausted as a result of lower production. In the EC, public stocks of butter are at a similarly low level to the previous year and substantially below their level in 1994. Publicly held stocks of skimmed milk powder in both the EC and the United States are also at low levels. While no substantial increase in public stocks in the United States is expected, falling prices within the EC may result in year-end stocks being higher than in 1995. In the case of skimmed milk powder, an additional factor which may cause stocks to accumulate could be reduced feed demand from the EC veal calf sector.

INDICATIVE DAIRY EXPORT PRICES 1/

Since the end of 1995, international prices for all dairy products, except cheese, have weakened. In the EC, this led to the value of export refunds per ton of butter fat being increased by about 9 percent effective 26 April 1996 to encourage exports and relieve pressure on the internal market. Bonuses paid under the United States' Dairy Export Incentive Programme (DEIP), principally for milk powder, have also risen since the beginning of the year.

The weakening of the international dairy market during the first part of the year is attributable to demand rather than supply factors. An additional element has been the strengthening of the United States' dollar against some European currencies.

For milk powder, the main importers are the developing countries - many of which experienced difficulties in paying the substantially higher prices seen in 1995 resulting in a number of importers deferring purchases. Regarding skimmed milk powder (SMP), the two main importing countries - Mexico and Algeria - where most imports are by government agencies and a significant proportion of supplies are sold on the national market at subsidised prices, sought to buy at the lower end of the market. For other countries, such as the Philippines, Thailand and Malaysia, where imports are mainly by the private sector, difficulty was experienced in passing the higher prices on to consumers. Similar factors, affected whole milk powder (WMP). Here, the increased severity of foreign exchange controls in Venezuela was a constraint to imports. Conversely, Brazil substantially increased its imports of WMP during 1995, as the Real appreciated against the U.S. dollar making imports profitable relative to the cost of locally produced powder. Higher imports of WMP, and cheese, by Brazil are expected to be maintained during 1996, benefiting in particular fellow Mercosur members, Argentina and Uruguay, which enjoy duty-free access to the Brazilian market under the Mercosur and, due to their proximity, have lower freight costs than other supplying countries.

For butter-fat, an important element in the reduction in international prices was a slackening of import demand from the Russian Federation during the winter (January to March butter imports in 1996 were 28 000 tons compared to 99 000 tons in the same period in 1995). However, this was to a degree mitigated by increased imports by the Islamic Republic of Iran. Also, butter-fat prices have been influenced by similar factors to those affecting SMP, as many developing countries import butter oil for recombination. In this regard, high butter prices have lead to the increased use of butter substitutes by the processing industry.

During 1995, international cheese prices rose less than those of other dairy products; however, prices have remained firm in 1996: most imports are by high-income countries - the three main importers are Japan, the United States and the EC - and demand has been good. Furthermore, the fact that a high proportion of international trade takes place within the context of import quotas has lent stability to the cheese market.

Average prices for dairy products during 1996 are expected to be lower than those in 1995; however, they should remain substantially above those of 1993 and 1994. An exception could be cheese prices which are expected to maintain a level similar to that seen in 1995.