|No. 2||Rome, April 2003|
Milk and Milk Products
In the context of sustained firm import demand, and limited export supplies, international prices continued to increase during the first quarter of 2003, although at a slower rate than during the second half of the previous year. The FAO price index for dairy products stood at 109 in March 2003, compared to 78 in August 2002 (the lowest monthly level in the price index data series since it began in 1990) and 101 in December 2002. Since their low points, the prices of all milk products, in US dollar terms, have risen substantially: milk powder prices increased most strongly, by around 60 percent, butter and casein prices rose by 30 percent, and cheese prices registered 20 percent growth. Compared to the same month in the previous year, March 2003 prices were higher for milk powder and butter and marginally lower for casein and cheese. However, while some international prices were substantially higher in terms of US dollars, in terms of national currencies of several important exporters, such as the Euro and the New Zealand and Australian dollars, this was tempered by an increase in their value against the US dollar. Increased international prices meant that the domestic industries in developing countries with relatively open markets were less subject to competition from low-priced imports.
Indicative Dairy Export Prices
Source: Mid-point of price ranges reported by Farmnet (NZ).
The rise in international prices is 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 fell. For example, average United States monthly export subsidies for skimmed milk powder declined from a high of US$864 per tonne in March 2002 to US$142 per tonne in March 2003. In a related policy development, 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 use of export subsidies. The changes were a contributing factor in the subsequent fall in the level of US export subsidies for skimmed milk powder. In the EU, export subsidies for milk powder also fell. For example, subsidies for skimmed milk powder exports stood at Euro 850 per tonne in mid-2002 but had declined to Euro 440 per tonne by the end of January 2003: skimmed milk powder subsidies were subsequently raised to Euro 510 per tonne in February 2003, to reflect an increase in the value of the Euro against the US dollar.
Global milk output is expected to rise by approximately 1 percent during 2003, 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 higher than the previous year, despite some areas being affected by drought. Dry conditions have particularly affected production in the second half of the dairy year. Milk output in New Zealand was expected to drop off more sharply than usual over March and April. Most New Zealand farmers milk through to the end of May, but this year cows are being dried off early and some farmers have switched to once-a-day milking. As a consequence, at the beginning of March, the principal exporter, Fonterra, warned that it might not be able to fulfil some supply commitments. In the case of Australia, below average rainfall in many parts of the country is expected to lead to a substantial reduction in production for the 2002/03 dairy year, perhaps by as much as 8 percent. In light of the above, milk production for the end of the current dairy year for New Zealand is forecast at 14.3 million tonnes and that of Australia at 10.4 million tonnes. In both countries, the national dairy herd is in a phase of expansion; however, in the case of Australia, culling linked to the current drought could lead to a temporary reversal in herd growth. From the beginning of 2002 until March 2003, the currencies of New Zealand and Australia strengthened by 33 percent and 16 percent respectively against the United States dollar. As international prices for dairy products are quoted in US dollars, the appreciation had the effect of diluting the rise in international prices which occurred from the second half of 2002 onwards. For example, the current forecast payment for New Zealand farmers for the 2002-2003 season is NZ$3.60 per kilogram of milk solids. This compares with a payment of NZ$5.30 per kilogram in the previous season. Similarly, dairy farmers’ average income in Australia is forecast to fall during the current season, as a result of higher fodder costs and lower returns from international sales. Falling returns could restrain production growth in Oceania during the 2003/04 dairy year.
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 the United States, milk production is expected to grow further in 2003, to reach 78 million tonnes. Growth should stem from increased yields and cyclical herd rebuilding. However, prevailing low prices and an unfavourable feed price ratio are expected to act as constraints to growth. 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. Conversely, 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. This action is necessary as domestic consumption in Norway is not growing sufficiently to compensate for the reduction in exports.
In eastern Europe, milk production is expected to increase in most countries in 2003. 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 1990s in this part of the world, it is anticipated that the latent potential for consumption growth is large. 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 - one result of which has been 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, have 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, and production is expected to move up moderately in 2003. Although, the size of the milking herd has continued to fall, feed availability has improved, thus raising yields per cow. Production is moving away from the large, former state-run farms to small-scale ownership and production. Similarly, in the other member states of the CIS, where milk production also declined markedly throughout the 1990s, output is expected to increase during 2003.
In developing countries overall, growth in milk production is expected to continue; however, a number of countries in Latin America may experience a drop in output. In Asia, India’s milk production during the 2003/2004 (April/March) marketing year could rise to 85 million tonnes. 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 and the Philippines, milk output is anticipated to increase further in 2003, as a result of favourable domestic milk prices. Along with most of the rest of South East Asia, demand for dairy products in these countries continues to grow, as the population’s diet becomes more diversified.
In Latin America, milk production was affected in many areas by low prices and, in some cases, the weather. Consequently, output in a number of countries is anticipated to decline. In Argentina, milk output appears set to decline further in 2003, following a sharp reduction in 2002. The main factor behind the drop is farmers leaving the industry, as production is unprofitable, or switching to crop activities which may provide a higher return than dairying. In Chile, lower farm-gate prices for milk could also act as a damper on production growth in 2003, despite favourable pasture conditions during the year. Consequently, little growth in output for 2003 is anticipated. Low prices are also anticipated to constrain growth in milk output in Uruguay, despite the year beginning with pasture in good condition and adequate stocks of silage. In Brazil, low farm-gate prices led to faltering production growth in 2002, raising questions as to whether or not output will increase in 2003. Additionally, some farmers have converted land from pasture to more profitable soya bean cultivation. Elsewhere in Latin America, dry summer conditions in Venezuela and poor returns to farmers constrained growth in milk production. Consequently, output in 2003 is anticipated to be below the average of 1.3 million tonnes seen in recent years. As a result of poor returns from dairying in Venezuela, cattle still suitable for breeding and milk production have been slaughtered, indicating that further declines in output can be expected. On the other hand, milk production in Peru is expected to grow in 2003 in response to higher prices resulting from rising domestic demand, including purchases by the Government for social assistance programmes. In Costa Rica, production in 2003 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 Niño-related weather conditions. In Mexico, genetic and technological improvements in the large farm sector are anticipated to be the main factors supporting growth in milk output this year.
Some countries in West Africa suffered from a lack of rainfall during 2002, which could affect milk output in 2003 as they are beginning the year with pastures in poor condition. 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. In some areas, farmers migrated with their cattle in search of better pastures (transhumance). This caused a shortage of fresh milk supplies for dairies in some parts of the country, which had to turn to supplies of imported milk powder to meet their processing needs. 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, and many farmers also resorted to transhumance in search of better pastures in the east of the country and south to Senegal. In Ethiopia, shortage of rainfall negatively affected milk production in 2002 and the first months of 2003, as pasture and forage quality were poor. Conversely, in the case of Kenya, well distributed rains in 2002 spilled over into 2003 – providing good pasture conditions and a favourable outlook production. Also, following the collapse of the country’s main dairy processor, Kenya Co-operative Creameries, in the previous year, some of the company’s plants were reopened – improving market conditions for producers.
International demand for dairy products is expected to remain firm particularly in certain Asian countries. Increased purchases of milk powder by countries in South East Asia, and China, are anticipated to meet rising domestic demand. Elsewhere, imports by Central American countries and the important markets of Mexico and Algeria could increase. Imports of milk powder into Brazil could also grow moderately as a result of the new Government’s emphasis on social programmes providing food for the poor. 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. However, purchases by some countries in the Near East and Africa, which are the most price sensitive importing regions, could fall. Amongst the countries which may reduce imports are Egypt, Lebanon, Nigeria, Kenya and Tanzania.
For the 2003/04 dairy year, export supplies of dairy products from New Zealand and Australia are expected to increase modestly, as the effects of drought may result in poor pasture conditions at the start of the season. For countries of eastern Europe and the Baltic States which are traditional dairy exporters – Hungary, Poland, Bulgaria, Latvia, the Czech Republic and the Slovak Republic – higher international prices should see an increased level of market participation 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. 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. Exports of skimmed milk powder and ghee from India could also grow in 2003. In Argentina, a further fall in milk output could well lead to reduced export supplies; however, it is not clear how much domestic demand will also fall, liberating supplies for export. Following a WTO ruling at the end of 2002 against Canada’s dual pricing system for milk, which allowed milk produced outside the country’s quota system to be exported, Canadian dairy product exports are expected to fall in 2003.
Continued price rises in 2003 are anticipated in response to sustained international demand and limited export supplies. The outlook for the remainder of 2003 is for prices to move moderately higher, but to increase more slowly than the substantial pace seen in the second half of 2002. In the short term, the greatest rise in price is expected for cheese, as this product was slowest to recover from the falls in 2002. The prices of the other main dairy products traded are expected to show only limited increases.