International prices have dropped substantially since mid-2001, with the result that prices for most dairy products are currently at levels rarely seen over the past decade. The FAO price index for dairy products stood at 85 in April 2002, compared to 121 for the same month in 2001. The price decline concerned all commodities; however, milk powder was most affected: April 2002 prices for skimmed and whole milk powder were around 30 percent below those of 2001. For the same period, butter was 22 percent down; acid casein was 19 percent lower and cheddar cheese dropped by 7 percent. The extremely sharp fall in prices has been attributed to reduced import demand in some key markets in South East Asia and Latin America and a build-up of uncommitted stocks in the main dairy exporting countries, including New Zealand, Australia, Argentina, the United States and the EC. Of the two elements, the latter would appear to have had most influence on the drop in prices, as exporters sought to keep markets in the face of discount pricing by competitors. In order to be able to compete on the world market, a number of northern-hemisphere countries, which retain the right to use export subsidies under the World Trade Organization’s Uruguay Round Agreement (URA) increased the amount of subsidy paid on exports. For example, average United States monthly export subsidies for skimmed milk powder rose from US$386/tonne in December to US$864/tonne in March. Over the same period, EC export subsidies on skimmed milk powder rose from Euro 200/tonne (approx. US$181/tonne) to Euro 500/tonne (approx. US$ 441/tonne); and subsequently, on 11 April, the EC raised its subsidy to Euro 650/tonne.
By April 2002, it appeared that international prices for dairy products had stabilized, albeit at extremely low levels. This was a result of supply and demand becoming more evenly balanced, in particular a reduction of unsold dairy products in Oceania. Also, no further increases in export subsidies on the part of the United States and the EC were anticipated until at least the start of their next July-June WTO commitment year; thus removing importers’ expectations of further price reductions.
|( US$/tonne, f.o.b. )|
|Skimmed milk powder||2 038||1 574||1 473||1 371|
|Whole milk powder||2 000||1 549||1 488||1 416|
|Acid Casein||5 300||4 600||4 449||4 280|
|Cheddar cheese||2 025||1 987||1 924||1 880|
|Butter||1 275||1 094||1 036||1 001|
Global milk output is expected to rise by 1.5 percent during 2002. In Oceania, milk production for the 2001/02 dairy year in New Zealand is anticipated to be 3-4 percent above the previous year – which was a record. In the case of Australia, the main producing State, Victoria, experienced above average rainfall during the 2001/2002 production season, providing good pasture growth with an associated effect on production. As a result, milk output in Australia is expected to be 5 percent higher during the current season compared to the previous one, when production was negatively affected by drought in some areas of the country. In light of the above, milk production in New Zealand for the current dairy year is forecast at 13.7 million tonnes, and in Australia at 11.4 million tonnes. In both countries, the national dairy herd is in a phase of expansion. In the case of New Zealand, herd growth is taking place mainly in the dryer South Island and is largely dependent on irrigated pastures. As a consequence, South Island’s current 20 percent share of national milk production is expected to rise significantly over the coming decade. During the first four months of 2002, the currencies of both New Zealand and Australia strengthened by 8 percent and 6 percent respectively against the US dollar. As international prices for dairy products are quoted in US dollars, currency appreciation will have the effect of magnifying the fall in world prices, in local currency terms. This would imply a substantial fall in returns to the farmer, by perhaps as much as 30 percent, and would be most strongly felt in New Zealand, where 96 percent of milk produced is exported as dairy products. Falling returns may act as a damper on production growth in Oceania during the coming 2002/2003 milk production season.
|(. . . . . million tonnes . . . . .)|
In the United States, milk production is expected to recover during 2002, following a decline in 2001. Growth has been supported by low feed prices producing a favourable return to farmers. Production in a number of other developed countries (the EC, Canada, Japan, and Switzerland) is subject to policies, which restrict output, and, consequently, changes little from year to year.
In eastern Europe, milk production for 2002 is expected to be greater than in 2001. Most countries in the region are experiencing growth in demand for milk and milk products, associated with economic growth. As demand for dairy products dropped substantially during the 1990’s in this part of the world, it is anticipated that the latent potential for consumption growth is great. In some countries, anticipated accession to the EC is acting as an incentive for farmers to increase milk output, with the aim of increasing their entitlement to production quotas, once membership to the EC is achieved. Also in eastern Europe, for example in Poland and Hungary, the impetus of imminent membership to the EC has resulted in dairies raising quality standards for milk and milk products - one result of which has been a reduction in the number of small-scale dairy producers, some of whom will not be able to meet the required standards. Production growth in the region is mainly associated with rising yields per cow stemming from improved genetics and feeding. This has meant that, while production has increased, the size of the dairy herd has declined in many countries.
Milk production in the Russian Federation, after a decade of decline, appears to have stabilized and could increase slightly during 2002; although the size of the milking herd continues to fall, feed availability has improved, raising yields per cow. Russian production is moving away from the large, former state-run farms to small-scale ownership and production. Similarly, in the Ukraine, where milk production also declined markedly throughout the 1990’s, the Ministry of Agriculture estimates an increase in milk output during 2002.
In developing countries, growth in milk production is expected to continue. In Asia, India’s milk production during the 2002/2003 (April/March) marketing year could rise to 83 million tonnes. Milk output in India is increasing through improved yields per animal, rather than through growth in animal numbers. The increased commercialization of the dairy industry, associated in part with rising urban demand and greater participation of the private sector in dairy processing, has acted as a stimulus to milk production. In China, milk output is also projected to rise as a result of strong consumer demand and the profitability of dairying relative to other types of agricultural production, such as grains. In Indonesia, favourable rains at the beginning of the year have resulted in excellent grass growth. This, combined with an increase in domestic demand, could lead to milk output growing by 5 percent in 2002. In Thailand, a marginal increase in milk output is anticipated, associated with growth in the herd size, rather than an increase in yield per cow. Along with many countries in South East Asia, demand for dairy products in Thailand continues to grow, as the population’s diet becomes more diversified.
In Latin America, milk production trends are expected to be mixed during 2002. In Argentina, milk production is anticipated to decline further in 2002, following reduced output in 2001. The main factor behind the drop is farmers leaving the industry due to low returns. Additionally, fodder crops were adversely affected by flooding in some parts of the country during late 2001. This, in turn, reduced feed availability in the first half of 2002. In contrast, herd expansion is expected to lead to an increase in milk production in Chile, where feed and fodder stocks are reported to be in good supply; however, growth in milk output may be tempered by reduced farm-gate prices for milk, which have been in effect since November 2001. Uruguay also enjoyed favourable conditions for silage production, and milk output is forecast to be higher in 2002. In Brazil, production could also increase during 2002; however, low farm-gate prices may act as a damper on growth. Elsewhere in Latin America, dry summer conditions in Venezuela could lead to a fall in milk output in 2002, while, in Mexico, genetic and technological improvements in the large farm sector are expected to be the main factors behind a 2 percent growth in milk output this year.
In Kenya, dairy farmers have had access to a wider range of milk buyers, following the collapse of the country’s main dairy processor, Kenya Co-operative Creameries, as both informal milk traders and newly-established commercial processors are competing for supplies. Favourable prices, in the region of US$0.20 to US$0.25 per kg, are expected to serve as an incentive for milk production to expand.
Low international prices could lead to increased purchases of milk powder by countries in South East Asia, and China. Elsewhere, imports by Central American countries and the important markets of Mexico and Algeria could increase. Conversely, imports of milk products by Brazil are expected to remain low, as domestic products are highly competitive, following the fall in the value of the Real. This would represent a continuation of the situation in 2001, when Brazilian imports of milk powder were only 40 percent of those of the previous year. Import demand by the Russian Federation for butter and cheese could increase, as a result of economic growth. For countries of eastern Europe and the Baltic States that have traditionally been dairy exporters – Poland, Latvia and the Czech Republic – growth in domestic demand may mean that less dairy products are available for export during 2002. Oceania is expected to lead to greater availabilities of cheese and whole milk powder for export. In South America, reduced imports by Brazil, will lead to fellow Mercosur members Argentina and Uruguay looking elsewhere in Latin America and further afield for markets. Indeed, under current conditions, Brazil may itself export some milk powder during its peak production season.
The price outlook for the remainder of 2002 is uncertain. It would appear that international prices have bottomed out, at historically low levels.
Prices could rise during the second half of the year, depending on the availability of supplies and import demand being sustained. Should a rise in price occur, the largest increase is expected for milk powders – in part as a counterbalance to the sharp fall in the price of these commodities since the second half of 2001. Cheese prices could also increase. Given low levels of international demand, the price of butter could remain depressed during the remainder of 2002.