|No. 5||Rome, November 2003|
Milk and Milk Products
International dairy product prices strengthened during the second half of 2003 as a result of limited export supplies and sustained import demand. The FAO price index for dairy products stood at 123 in October 2003, compared to an average of 114 during the first six months of the year: in October 2002, a year earlier, the index value was 90. To date this year, butter and cheese prices have increased more strongly than those of milk powder, (powder had risen strongly in the second half of 2002). Compared to mid-2003 prices (June–July average), October prices increased as follows: butter by 18 percent, cheese by 11 percent, skimmed milk powder by 6 percent and whole milk powder by 5 percent. International prices were higher in terms of US dollars; this rise was tempered, however, by an increase in the value of several important exporters’ national currencies (European euro, New Zealand and Australian dollars and Argentine peso) against the US dollar. As a result of rising international prices, the domestic industries in developing countries with relatively open markets have been less subject to competition from low-priced imports.
Indicative Dairy Export Prices
Source: Mid-point of price ranges reported by Farmnet (NZ) and USDA.
The increase in international prices is attributable mainly to marginal production growth and, in some cases, to declining production in exporting countries in Oceania, South America and some parts of Europe, leading to limited export supplies. As world prices rose, export subsidies paid by some high-cost producing countries in the Northern Hemisphere fell. In the case of the United States, average monthly export subsidies for skimmed milk powder declined from US$142 per tonne in March 2003 to US$121 per tonne in August 2003. In the EU, export subsidies for dairy products also fell, particularly for cheese – reflecting relatively stronger international prices for this product. In the EU at the end of August, subsidies for Gouda cheese were reduced from Euro 1 108 per tonne to Euro 1 000 per tonne – a 10 percent decline. At the same time, EU export subsidies on milk powder and butter were reduced by around 4 percent. Despite declines in export subsidies, the amount of subsidy required to bring domestic prices for dairy products in high-cost producing countries down to world market levels remains substantial. As an illustration, recent levels of subsidy needed to export butter were US$1 973 per tonne in the United States and Euro 1 780 per tonne in the EU.
Global milk output is expected to rise by approximately 1 percent during 2003, mainly as a result of increased production in Asia, Central America and New Zealand. In Oceania, milk production for the 2003/04 dairy year in New Zealand is anticipated to be 5 percent higher than for last year. Most areas of the country received plentiful rainfall during the spring, and prospects for pasture growth are good, although in some sections of North Island pastures were waterlogged. In Australia, continued reduced rainfall in some areas of the country is expected hinder recovery from last year’s drought. Consequently, milk production could rise only marginally, perhaps by 1–2 percent, in the coming 2003/04 season. In light of these factors, milk production for the end of the current dairy year for New Zealand is forecast at 15 million tonnes and for Australia at 10.6 million tonnes. In both countries, the national dairy herd is in a phase of expansion, in contrast to most other developed countries; however, in the case of Australia, culling linked to the last season’s drought could lead to a temporary reversal in herd growth. Since the beginning of 2003, the currencies of Australia and New Zealand have strengthened by 19 percent and 13 percent respectively against the US dollar, compounding the strong growth seen in 2002. As international prices for dairy products are quoted in US dollars, the appreciation has had the effect of diluting the rise in international prices during 2003, in terms of local currencies. For example, in Australia, despite a fall in production, farmgate prices for milk for the 2002/03 season were 9 percent below last year’s. Australia exports more than 50 percent of its milk production as milk and milk products, thus domestic returns are highly sensitive to changes in international prices and exchange rate fluctuations.
1/ Dairy years ending March 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, 2003 milk production is expected to be slightly higher than for last year to reach 77.5 million tonnes. Growth should stem from increased yields and cyclical herd rebuilding. During the second half of 2003, US producers introduced a scheme intended to reduce milk production and increase milk prices: “Cooperatives Working Together” (CWT), which may have some impact on national milk production in 2004. Milk production in a number of other developed countries (Canada, EU and Japan) is subject to policies that restrict output and consequently changes little from year to year.
In eastern Europe, milk production is not expected to increase in most countries in 2003, as a result of dry summer conditions. In most countries, yield per cow is increasing while the size of the national herd is decreasing. 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. In Hungary, it is estimated that 10 000 such producers may cease production. Other countries in the region, such as Bulgaria and Romania, have introduced government-funded incentives to raise milk quality standards. For example, Bulgaria has announced that in 2004 it will begin closing dairy farms and dairies that do not conform to EU standards; moreover, along with this process, domestic quality standards for milk will be raised.
Milk production in the Russian Federation, after a decade of decline, has stabilized in recent years, although an expected phase of growth has yet to materialize. In general within the Federation, the size of the milking herd has continued to decrease, but 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 a number of other member states of the CIS, where milk production also declined markedly throughout the 1990s, milk output in 2003 is expected to be stable compared with last year.
In the developing countries overall, growth in milk production is expected to continue; however, a number of countries in Latin America could see a decline in output. In Asia, India’s milk production during the 2003/04 (April/March) marketing year could rise to above 90 million tonnes. This year, heavy rainfall during the monsoon season points to greater availability of fodder in India. Increased milk output in India is based more on improved feeding and genetics than on herd expansion. In China, milk output is also projected to rise as a result of strong consumer demand and the profitability of dairying compared with other types of agricultural production. As a result of rising international prices, dairy companies turned to expanding domestic supplies of milk during 2003 – principally by increasing herd size. In Thailand and the Philippines, milk output will probably 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 people’s diet becomes more diversified.
In Latin America, milk production was affected in many areas by low prices; consequently, it is anticipated that output in a number of countries will decline. In Argentina, milk output is set to decline further in 2003, following a sharp reduction in 2002, as a result of variable pasture quality and low milk prices. Most recently, improved international prices and some recovery in domestic demand led to growth in intake by processors and to higher farm-gate prices: in October 2003 prices were between US$0.15 and US$0.17 per litre. For 2004, this price increase may be sufficient to halt, or at least stem, the sharp falls in Argentine milk output experienced over the past three years. Producers in Uruguay also suffered from low farm-gate prices as result of decreased domestic and regional demand and low international prices. For the 2002/2003 season, prices averaged US$0.10 per litre, the lowest price in 25 years. As a result, production has dropped despite a government support programme and favourable weather conditions for pasture growth. Since mid-2003, however, farmgate prices in Uruguay have risen significantly. Not only have higher international prices contributed to this rise, but there has also been increased competition for milk supplies as Argentine dairies have begun sourcing milk in Uruguay. It appears that the dairy industry in Uruguay has passed the most difficult period; however, it is doubtful if production growth will return to the levels seen in the 1990s, as other activities – such as meat and oilseed production – are yielding higher returns than milk. Following a fall of 1 percent in 2002, milk production is expected to decline further in Chile in 2003, perhaps by as much as 5 percent. Major factors in this drop are low prices and stagnant domestic demand.
Elsewhere in Latin America, 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. Output is also anticipated to increase in Honduras as a result of improved infrastructure stemming from the construction of milk collection centres around the country’s main producing regions, where groups of 10 to 15 farmers cool their milk before selling and delivering it to processing plants, receiving a premium price over their once-warm milk.
Some countries in West Africa suffered from a lack of rainfall during 2002. In 2003, while rainfall has been generally good, milk production has been slow to recover as the number of cows in calf was severely reduced in the aftermath of the previous year’s drought. In some areas, for example Senegal and Mauritania, farmers migrated with their cattle in search of better pastures. This caused a shortage of fresh milk supplies for dairies in urban areas, which found themselves obliged to turn to supplies of imported milk powder to meet their processing needs. In Senegal, a large private-sector dairy withdrew from processing domestic milk in September 2003 to concentrate on producing dairy products based on imported materials. While the company’s processing capacity was taken over by a government agency, the development of a domestic industry in the face of competition from imports is expected to be a significant challenge. In Kenya, well-distributed rains in 2003 provided good fodder availability and a favourable production outlook. Production has also been encouraged by stronger retail prices for milk in the main market – Nairobi – which also led to milk being shipped in from outside the usual Nairobi milk shed. Many other countries in East Africa received abundant rain during the year, resulting in favourable conditions for fodder and pasture growth.
International demand for dairy products is expected to remain firm, particularly in certain Asian countries. Increased purchases of milk powder by countries in Southeast 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 products by Brazil had fallen by 60 percent from January to September compared to the same period in the previous year. This drop reflected a fall in domestic demand caused by a lack of economic growth. Purchases of milk powder by Venezuela were also anticipated to be lower, in part as a result of difficulties faced by traders in obtaining import licenses. Imports of butter and cheese by the Russian Federation grew substantially in 2003, despite an increase in tariffs in the previous year. However, purchases of butter by some countries in the Near East and Africa, which are the most price-sensitive importing regions, could fall in the light of the higher international prices seen during 2003. Amongst the countries which may reduce imports are Egypt, Lebanon, Nigeria and Kenya.
For the 2003/04 dairy year, export supplies of dairy products are anticipated to be moderately higher from New Zealand and slightly higher from Australia – reflecting different rates of milk production growth. Export availabilities from South America are expected to be similar to the previous year, while those from eastern Europe and the Baltic States could be lower as a result of reduced milk production. 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. 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 are constrained by the 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.
Continued moderate price rises for the remainder of 2003 are anticipated in response to sustained international demand and limited export supplies. It is expected that the greatest price rise will be seen for cheese and butter.