International prices began to strengthen towards the end of 2002, after dropping substantially since mid-2001. Prices started to increase in September and continued to rise throughout the remainder of the year. The FAO price index for dairy products rose from 78 in August (the lowest monthly level since the start of this series in 1990) to 92 in November. The prices of all milk products have risen. Milk powder prices (whole and skimmed milk powder and casein) rose most strongly and butter prices somewhat less. Cheese prices began to rise only in November. Compared to their low points for the year, prices in November 2002 were 32 percent higher in the case of skimmed milk powder, 31 percent higher for whole milk powder, 23 percent higher for casein, 14 percent higher for butter and 4 percent higher for cheese. Despite this rebound, November prices for all products were substantially below those of the same month in 2001.
The rise in international prices in late 2002 was mainly attributable to limited production growth, and in some cases declining production, in Oceania and South America leading to a reduction in export supplies. As world prices rose, export subsidies paid by some high-cost producing countries in the northern hemisphere also fell. For example, average United States monthly export subsidies for skimmed milk powder were US$329 per tonne in November compared to US$864 per tonne in March. In the EU, skimmed milk powder export subsidies fell from €850 per tonne in mid 2002 to €540 per tonne in
early December. Over the same period, EU export subsidies for whole milk powder also decreased. Should world prices continue to rise, further cuts in export subsidies are anticipated. However, even at the lower rates, for a number of high-cost dairy producing countries in the northern hemisphere, the amount of subsidy required to export dairy commodities at prevailing international prices is substantial.
|( US$/tonne, f.o.b. )|
|Skimmed milk powder||1 875||1 285||1 361||1 481|
|Whole milk powder||1 863||1 239||1 352||1 487|
|Acid Casein||4 862||3 358||3 539||3 925|
|Cheddar cheese||2 213||1 500||1 501||1 563|
|Butter||1 275||1 029||1 067||1 107|
Source : Mid-point of price ranges reported by Farmnet (NZ).
In November 2002, the United States adjusted the levels of government support purchase prices, reducing the price of skimmed milk powder by 11 percent and increasing that of butter by 26 percent. These adjustments were felt to be necessary to bring support prices more in line with prevailing domestic prices, as the previously relatively high price for skimmed milk powder had resulted in a substantial build up of government stocks and necessitated increased funds for export subsidies. The changes are expected to be a contributing factor in the anticipated fall in the level of US export subsidies for skimmed milk powder over the coming months.
Global milk output is expected to rise by 1.5 percent during 2002, mainly as a result of increased production in Asia, the United States and eastern and central Europe. In Oceania, milk production for the 2002/03 dairy year in New Zealand is anticipated to be 3 percent above the previous year - which was a record. In the case of Australia, significantly below average rainfall in many parts of the country is expected to lead to a sharp fall in production for the 2002/03 dairy year, possibly by as much as 10 percent. In light of the above, milk production for the end of the current dairy year for New Zealand is forecast at 13.9 million tonnes and that of Australia at 10.2 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 2002, the currencies of New Zealand and Australia strengthened by 21 percent and 10 percent respectively against the United States dollar. As international prices for dairy products are quoted in US dollars, the appreciation had the effect of magnifying the fall in world prices during 2002, in local currency terms. Consequently, falling returns could restrain production growth in Oceania during 2003.
In the United States, milk production grew strongly in 2002, by 3 percent, following a decline in 2001. Growth was a result of increased yields and cyclical herd rebuilding, stemming from favourable returns in 2001. However, by late 2002, conditions had changed considerably because of regionalised drought reducing forage crop yields and quality, combined with increased feed costs and a sharp fall in milk prices. These factors are anticipated to lead to reduced growth in US milk production in 2003. Milk production in a number of other developed countries (the EU, Canada and Japan) is subject to policies which restrict output and, consequently, changes little from year to year. In the case of Switzerland, where production is also subject to milk quotas, the size of the national quota was increased by 1.5 percent for the 2002/03 dairy year, following a 3 percent increase in the previous year. The consequent increase in milk supplies lead to a sharp fall in domestic prices in 2002, resulting in the government granting Sfr 68 million in assistance to milk and cheese producers in mid 2002. In November, producers agreed to voluntarily reduce milk output by 2 percent. From 2003/04 onwards, quota levels will be set by the Swiss milk producers association, not by government: a further fall in quota, perhaps by 4 or 5 percent, is anticipated. Also, in Norway, national production quotas for milk are being progressively reduced, in order to keep national production in line with Uruguay Round Agreement limits on the maximum levels for dairy product export subsidies.
|(. . . . . million tonnes . . . . .)|
|New Zealand 2/||12.2||13.2||13.5|
Source : FAO
1/ Dairy years beginning April of the year shown.
2/ Dairy years ending May of the year shown.
3/ Dairy years ending June of the year shown.
In eastern Europe, milk production for 2002 increased in most countries. Many countries in the region are experiencing a rise 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 EU is acting as an incentive for farmers to increase milk output, with the aim of increasing their entitlement to production quota, once membership to the EU is achieved. Also in eastern Europe, for example in Poland and Hungary, the impetus of imminent membership to the EU has resulted in dairies raising quality standards for milk and milk products, supported by government financed incentive payments. One result of this was a reduction in the number of small-scale dairy producers, some of whom were not able to meet the required standards. Other countries in the region, such as Bulgaria and Romania, also introduced government funded incentives to raise milk quality standards. Production growth in the region is mainly associated with raising 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 begun a phase of growth, with production estimated to 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, output is also anticipated to increase during 2002.
In developing countries overall, 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 82 million tonnes. This would represent a smaller increase than that seen in recent years, and reflects the effect of prolonged drought experienced in some dairying regions. Assuming normal weather conditions, production in 2003 should rebound and may reach 85 million tonnes. Increased participation of private sector dairies has been an element in raising farm-gate prices in India, which have acted as a stimulus to farmers to increase production. Increased output in India is based more on improved feeding and genetics than herd expansion. 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. In Thailand, milk output is anticipated to increase further in 2002, by almost 10 percent. Production has been stimulated by favourable domestic milk prices. 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 were mixed during 2002. In Argentina, milk output declined sharply in 2002, following reduced output in 2001. The main factor behind the drop was farmers leaving the industry, as production was unprofitable, and a reduction in the use of feed concentrate. 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 Chile, lower farm-gate prices for milk acted as a damper on production growth, despite favourable conditions for pasture growth. Consequently, output for 2002 is anticipated to be similar to the previous year's total of 2.1 million tonnes. Low prices led to a fall in milk production in Uruguay in 2002, by an estimated 3 percent. Depressed prices even led some farmers to give away milk free to consumers, in protest. The lack of profitability of dairy production caused the government of Uruguay to introduce a US$80 million package of assistance to the sector in 2002. In Brazil, low returns to farmers in 2001 led to production growth faltering in 2002. While there was a rise in farm prices during 2002, grain prices increased substantially, affected profitability. Additionally, low rainfall during the wet season (May to October) reduced pasture quality and availability. Elsewhere in Latin America, a dry summer in Venezuela also led to poor pasture conditions and consequently, output in 2002 is anticipated to be below the average of 1.3 million tonnes seen in recent years. In Costa Rica, production in 2002 is anticipated to remain at a level similar to the previous year, despite pastures in some areas of the country being adversely affected by El Niņo related weather conditions. In Mexico, genetic and technological improvements in the large farm sector were the main factors behind 2 percent growth in milk output this year.
Some countries in Western Africa suffered from a lack of rainfall during 2002 and, consequently, milk production was negatively affected. For example, in Senegal, rainfall was reported to be approximately 30 percent below average, causing a depletion of grass reserves and a fall in milk production. Neighbouring Mauritania also received very little rain, especially in the south-western region of the country, where a substantial part of the country's milk is produced. Many farmers migrated with their cattle in search of better pastures: to the east of the country and south to Senegal. Late 2002 and the first part of 2003 were expected to be difficult for farmers, due to a shortage of grazing and fodder. 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.
An anticipated rise in prices for dairy products is not expected to have a significant dampening effect on international demand, as prices would still be well below the average levels of recent years. Consequently, in 2003, continued demand for milk powder from countries
in South East Asia, and China, is anticipated. Elsewhere, imports by Central American countries and the important markets of Mexico and Algeria should also be maintained and in some instances could increase. In this regard, in the second half of 2002, Mexico announced that it was increasing its WTO tariff rate quota for milk powder imports by 43 000 tonnes, a rise of over 50 percent, to meet domestic milk processors' requirements. Imports of butter and cheese by the Russian Federation grew substantially in 2002, despite an increase in tariffs, and further growth is expected in 2003. Following reduced imports in 2001/02, imports of milk products by Brazil could increase in the first half of 2003 as a result of domestic production not keeping pace with demand.
For the 2002/03 dairy season, combined export supplies of dairy products from New Zealand and Australia are expected to be less than in the previous season. Consequently, as commercial stocks are small or non-existent, the volume of exports from Oceania is expected to decrease in the first half of 2003. In Argentina, a further sharp fall in milk output could well lead to reduced export availability; however, it is not clear how much domestic demand will also fall, liberating supplies for export. For countries of eastern Europe and the Baltic States which are traditional dairy exporters - Hungary, Poland, Latvia, the Czech Republic and the Slovak Republic - low international prices meant that exporters where highly dependent on export subsidies during 2002. In some cases, for example Poland, available funds were not sufficient to export all surplus products and government introduced purchase and storage schemes. Should international prices rise, it is expected that this group of countries will be more active in the market in 2003. As a result of limited international supplies of dairy products, exports by both the EU and the United States are anticipated to be higher in 2003, compared to the previous year. While exports of bulk dairy commodities from both countries is constrained by Uruguay Round Agreement limits on the use of export subsidies, recent years have seen a growth in the export of higher value products, which do not require subsidies. In the case of the United States, such exports now account for a greater volume of exports than bulk items requiring subsidy.
The outlook for 2003 is for prices to continue to increase. This would be in response to sustained international demand and limited export supplies. In the short term, the greatest increases are expected for cheese, as this product was slowest to recover from the price falls in 2002. The price of milk powders could also rise. Relatively plentiful supplies and limited demand are expected to moderate any increase in the price of butter.