FAO/GIEWS - Food Outlook No.5, November 1998

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MILK AND MILK PRODUCTS




Production

For 1998, a small rise in global milk output is expected, with production edging up in all major countries. In Australia and New Zealand, milk output for 1998/99 is expected to rise above last season’s record levels, despite dry weather at the beginning of the season. For both countries, higher returns from dairying directly resulting from currency devaluations are the principal motives behind the expansion in output. Herd expansion, as opposed to increased yields, was the main driving factor. Milk production in eastern Europe is also expected to grow. In Poland, the region’s largest milk producer, output could expand by 3 percent in 1998 as a result of growth in both herd size and yields; in Hungary, higher producer prices are expected to result in production growth by a similar percentage. In the United States, milk production is anticipated to rise marginally in 1998, as the effects of higher farm-gate prices for milk than the previous year have been tempered by the limited availability of forage during the first part of the year. 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, mid-year data showed that milk production in the two largest producing countries – the Russian Federation and the Ukraine – was slightly above levels for the same period a year earlier. Although the major economic changes which have occurred since the summer make any prediction highly tentative, they might signal a bottoming out of the production decline which this group of countries as a whole has experienced since 1990. For some of the smaller member states, such as Belarus and Uzbekistan, a reversal in the declining trend in milk production has already occurred.

MILK PRODUCTION


1996 1997
estim.
1998
f'cast

(. . . . . million tonnes . . . . .)
WORLD 539 546 556
EC 125 125 125
India 68 71 74
United States 70 71 72
Russian Fed. 36 33 33
Pakistan 20 21 22
Brazil 19 21 22
Ukraine 16 15 14
Poland 11 12 12
New Zealand 10 11 12
Australia 9 9 10


SOURCE: FAO

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 1998/99 (April/March) marketing year could rise to 74 million tonnes, after trebling in the last 30 years, making India the world’s largest milk producing country. However, as national figures are based on estimates, given that less than 10 percent of production passes through the formal processing sector, these figures have to be taken with some caution. Many Latin American countries are expected to see an expansion in milk output, mainly as a result of increased demand from their domestic markets. Some producers in the southern cone had to cope with extremely heavy rains attributed to the El Niño weather phenomenon in the first-half of the year, which limited access to pastures. However, spring rainfall for the southern cone countries is reported to be near average and pastures in good condition.



Trade in dairy products down this year

Import demand for cheese in the main importing countries is anticipated to be reduced somewhat during the remainder of 1998. This would be mainly the result of the substantial devaluation of the Russian Rouble causing imports by the Federation to fall. Similarly, global import demand for butter, of which the Russian Federation has accounted for an average of 50 percent in recent years, is expected to be negatively affected. In fact, foreign purchases by the Russian Federation during the first six months of 1998 were down by 52 percent. The crucial period will be December 1998-February 1999, when the Russian Federation traditionally imports most of its butter. Sales of butter to the United States were above the limit of import quotas during the first half of that year and, thus, provided some respite to the market. Since October, United States internal prices for butter have fallen substantially, curbing the prospects for consignments to this country. The limited supplies of butter in both Europe and Oceania have continued to sustain prices on the international market. For milk powder, the economic crisis has reduced purchases by several countries in South-East Asia, resulting in a stagnation, and possibly a decline, in world demand for 1998, with depressed demand likely to extend into 1999. By contrast, in Latin America, imports by Brazil of dairy products in milk equivalent, the most important market for exporters in the region, were 20 percent higher in the first seven months of the year than in the same period in 1997. This was principally the result of a substantial increase in imports of milk and whey powder.

INDICATIVE DAIRY EXPORT PRICES 1/


1997 1998

Sept. July Aug. Sept.

( . . . . US$/tonne, f.o.b. . . . . )
Butter 1 575 1 700 1 725 1 725
Skimmed milk powder 1 675 1 400 1 400 1 350
Whole milk powder 1 700 1 700 1 700 1 675
Cheddar cheese 2 175 2 000 2 000 1 925
Acid casein 4 100 4 100 4 100 4 000


1/ Mid-point of price ranges reported by the New Zealand Dairy Board.



Prices lower

Export prices for most dairy products have fallen since the beginning of the year, with skimmed milk powder being the product most affected. The downward pressure on international prices for milk products has been mainly the result of the reduction in import demand discussed above. Additionally, rising output in several exporting countries, including Australia, New Zealand and Argentina, have contributed to growing supplies to the world market. For the remainder of 1998, international prices are expected to remain weak as a result of ample export availabilities and the likely absence of a recovery in demand.




Stocks up in both EC and United States

Public stocks of butter in the EC at the end of September 1998 were moderately higher than a year earlier; however, supply and projected needs are well-balanced. EC public stocks of skimmed milk powder were also higher than last year and, in September, EC export subsidies to this product were raised from 740 ECU to 825 ECU per tonne in an effort to increase external sales. For the first time in years, there were public stocks of skimmed milk powder in the United States, although monthly production currently runs below last year’s levels. This, in conjunction with sales under the Dairy Export Incentive Programme (DEIP), is expected to restrain any build-up of stocks.

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


European
Community
United States

Butter Skimm
.milk
powder

Butter
Skimm.
milk
powder

(. . . . . . . thousand tonnes . . . . . . .)
Sept. '96 159 127 0 0
Sept. '97 126 138 0 0
Sept. '98 * 161 203 0 42


SOURCE: USDA, ZMP.
Note: At the end of the month.
* Estimated



Outlook

Devaluation has shielded New Zealand and Australian farmers from the fall in world prices to some extent, and they are receiving higher prices than last year for their milk. There is some evidence that this in turn has stimulated demand for dairy farms in these countries, especially by farmers seeking to increase the size of their dairy herds to take advantage of economies of scale.

For countries which in the past have based their export industries on the use of subsidies, there are indications that their dairy industries are reorienting themselves towards reaping maximum returns from protected, and therefore high-priced, domestic or regional markets. In terms of sales to the international market, industries in such countries are increasingly focusing on value-added and niche products, which can be traded on the international market without the use of subsidies. This process can be seen as both an adaptation to the reduction in export subsidies agreed under the Uruguay Round Agreement and, in the longer-term, as a preparation for further possible reductions in future rounds of multilateral negotiations, should they occur. At the same time, as many dairy companies are multi-nationals, an identifiable process of investment in countries with low costs of milk production and/or expanding consumer markets can be seen. Accordingly, dairy companies in Europe - where milk production is limited by quotas, consumption is stagnant and export subsidies are generally decreasing - are making substantial investments in other regions of the world, in order to take advantage of cheaper milk there and more buoyant consumption elsewhere in the world.

For the net dairy importing countries, many of which developing countries, lower world prices may mean that growth in their domestic industries is inhibited by competition from imports. However, the damage may be limited in those developing countries where much of milk production and distribution takes place outside the framework of the formal processing sector, the main destination of imports. Secondly, 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) are below international levels and, hence, their dairy sectors should not be adversely affected by outside competition, at least until the adjustment process is completed.




SCHOOL MILK IN THE 21ST CENTURY

The first international conference to deal with the subject of the distribution of milk in schools was held in the Pilanesberg National Park, South Africa from 27 to 29 October 1998. The technical programme for the meeting was coordinated by the Basic Foodstuffs Service of FAO’s Commodities and Trade Division and the conference was hosted by the South African dairy industry. Over 160 delegates from 37 countries attended the meeting.

The conference proceedings highlighted that, in many countries, programmes to distribute milk in schools have declined in importance over the past two decades, often associated with reduced funding from governments. A central theme of the conference was that programmes which encourage the distribution of milk in schools have an important role to play in establishing the habit of milk drinking amongst children, who will in turn be consumers of milk when adults. In a number of countries, new types of promotion programmes for milk in schools are being developed, using farmer or dairy industry funding instead of relying on governments. Such programmes are geared to presenting milk in an attractive and appetising form to the consumers, in particular school children. Presentations on the experience of milk promotion in schools in a wide cross-section of countries were a central focus of the meeting.

The school milk conference concluded that milk needed to be promoted in schools if it is to withstand stiff competition from other beverages – such as fruit juice and carbonated drinks – which had far greater funds for promotion and often offered canteen managers a higher profit margin than milk.

As a result of the extremely strong interest shown in the topic of school milk, the Basic Foodstuffs Service is considering holding regional follow-up meetings on the same theme: the first one, for Europe, in the United Kingdom in April 1999, and expressions of interest have been received for meetings in North America, Latin America, South East Asia, Africa and Oceania.

For further information regarding future conferences, please contact:

Michael Griffin, Commodity Specialist (Dairy Products), FAO
Viale delle Terme di Caracalla, 00100 Rome
Tel: 0039 06-5705-3837 Fax: 0039 06-5705-4495
E-mail: Michael.Griffin@fao.org



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