FAO/GIEWS - Food Outlook No. 3, June 1998 Page 9

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Global output of milk is forecast to increase by 1 percent in 1998, continuing the steady progression in world milk output of recent years. Despite the effects of dry weather on production in both Australia and New Zealand in the current season, output in both countries is expected to increase: by 1 percent in the case of New Zealand, following last year's record increase of 12 percent, and by 4 percent in Australia. For both countries, general optimism regarding the long-term future of the international dairy market and higher returns from dairying relative to other animal products are the principal motives behind the expansion in output. In eastern Europe production could grow in a number of countries. For example, Poland, the largest milk producer in this group of countries, is expected to register a 3 percent rise in milk output in 1998. Cow numbers are increasing, following several years of decline, and yield per cow is also expected to rise. In the United States, milk production is anticipated to grow only marginally in 1998. There, an unfavourable milk price/production cost ratio is seen as the main constraint on output growth. Production in a number of other developed countries (the EC Canada, Japan, Norway, Switzerland) is subject to policies which restrict output and, as a result, changes little from year to year. In the CIS, total milk production is expected to continue to decline. This is anticipated to be largely a result of falling output in the two major producing countries, the Russian Federation and the Ukraine. In these two countries, milk production on many of the former state-owned farms, which account for the majority of milk output, continues to remain unprofitable. However, output in some of the other member states of the CIS, such as Belarus and Uzbekistan, may rise, possibly heralding the end of the sustained decline in milk production which this group of countries has experienced since the start of the 1990's.

In the developing countries, growth in milk output is expected to continue in Asia and Latin America. Assuming normal weather conditions and an average rate of production increase, India's milk output in the 1998/99 (April/March) marketing year could rise to 74 million tonnes. This would make India the world's largest milk producing country: slightly over 50 percent of India's milk comes from buffaloes. Growth in Indian milk production has been sustained by an expansion in domestic demand, although per caput consumption is still a relatively modest 65 kg of milk equivalent per year. Many Latin American countries are expected to see an expansion in milk output, mainly as a result of increased demand from their domestic markets. However, producers in the southern cone have had to cope with extremely heavy rains - attributed to the El Niño weather phenomenon - which has limited access to pastures. For example, by the end of March, some parts of Argentina had already exceeded the annual average rainfall for the year. For Latin American countries which are also exporters of dairy products, principally Argentina and Uruguay, a fall in international prices since the beginning of the year (see below) may also contribute to a slow-down in production growth. Despite a slow start to the year, imports by Brazil from the Mercosur are reported to be proceeding well, with the outlook good until Brazil's spring milk flush (September/October).


(. . . . . million tons . . . . .) 
WORLD  539  547  555 
EC  125  125  125 
United States  70  71  71 
India  68  71  74 
Russian Fed.  36  34  33 
Pakistan  20  21  22 
Brazil  19  21  22 
Ukraine  16  15  14 
Poland  11  12  12 
New Zealand  10  11  12 
Australia  10 
Demand for cheese in the main importing countries is anticipated to remain stable during 1998. In the case of butter, purchases by the Russian Federation, the major importer, may be less than in 1997. Similarly, decreased purchases of milk powder by South-East Asia, following the economic crisis which has affected several countries in the region, could result in a stagnation, and possibly a decline, in world demand for powder in 1998.

Export prices for most dairy products have fallen since the end of 1997 due to reduced import demand and, at the same time, rising output in several exporting countries, for example, Australia, New Zealand and Argentina, which has contributed to some growth in supplies to the world market. Products affected are butter, skimmed milk powder and whole milk powder: casein prices fell sharply in the first-half of 1997 and have remained depressed ever since. Cheese is the exception to the general trend as prices for this commodity have remained generally stable. Cheese prices have been sustained, to a degree, by commitments to limit subsidized exports under the Uruguay Round Agreement. For the remainder of 1998, international prices of dairy products are expected to remain weak as a result of ample export availabilities and sluggish import demand. Prices for butter and powder may fall further during the year, while those for cheese are expected to remain stable.

  United States 
(. . thousand tons . .) 
April '96  69  11 
April '97  58  116 
April '98  33  137 
Public stocks of butter in the EC in April 1998 were at a similar level to a year earlier, but they were lower if compared to the early 1990's, as a result of strong demand from the internal market and significant growth in exports. Similarly, EC public stocks of skimmed milk powder did not rise significantly from the level of the previous year. In the United States, public stocks of dairy products have been virtually non-existent in recent years; however, as a result of increased production, skimmed milk prices have fallen to sufficiently low levels to trigger Commodity Credit Corporation (CCC) purchases, although they have not been classified as "uncommitted inventories"; i.e., stocks.

High prices for dairy products on the international market in 1995 led many in the industry to look forward to a period of further increases, in part associated with decreasing export subsidies as a result of commitments under the Uruguay Round's Agreement on Agriculture. In some countries, the

optimism of 1995 led farmers to extend production - sometimes via the purchase of land at what today seem inflated prices. In many countries where prices are linked to those in the world market, the subsequent drop in world prices has led to a severe fall in profitability. The fall in world prices since the end of 1997 has in some cases been offset by currency devaluation (for example, in New Zealand and Australia), while in others (Argentina and Uruguay) it has been translated into sharply lower prices to the farmer. Should prices remain at current levels, this could limit production growth in such countries which export without the use of subsidies, although this could be partially offset by some growth in these countries' domestic use. Furthermore, low returns may be expected to speed-up the process of less efficient milk producers in these countries leaving the industry, with a concomitant increase in the average herd size.


( . . . . U.S.$/ton, f.o.b. . . . . ) 
Butter  1 425  1 775  1 675  1 675 
Skimmed milk powder  1 775  1 575  1 525  1 525 
Whole milk powder  1 775  1 800  1 725  1 725 
Cheddar cheese  2 150  2 163  2 113  2 100 
Acid casein  4 125  4 100  4 100  4 100 
For the net dairy importing countries, many of which are developing countries, lower world prices may mean that growth in their domestic industries is inhibited by competition from imports. However, this may be limited in those developing countries where much of the milk production and distribution takes place outside the framework of the formal processing sector (which would be the main user of imports). In the case of South East Asia, the sharp devaluation of many countries' currencies against the US dollar has meant that domestic milk prices (in dollar terms) fell below international levels and, hence, their dairy sectors should not be adversely affected by outside competition.

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