|No. 4||Rome, December 2004|
Milk and Milk Products
International dairy product prices have increased throughout 2004. The FAO price index (1990-92=100) for dairy products stood at 156 in November, which was 26 percent above the same month last year, and the highest since 1990 when the index was first computed. The increase in prices is largely the result of growing international demand in Asia, in the context of limited export supplies and reduced export subsidies.
For individual products, export prices have increased as follows: cheese up 33 percent, butter up 28 percent, skimmed milk powder up 20 percent, and whole milk powder up 17 percent.
Indicative Dairy Export Prices
Source: Mid-point of price ranges reported by Farmnet (NZ) and USDA.
Prices in international dairy markets are very sensitive to supply changes. Markets are relatively thin, with trade being a small percentage of milk output. Export subsidies also exacerbate price fluctuations as they increase or decrease in opposite directions to price change. As world prices have risen, export subsidies have also fallen accordingly, bidding market prices up further. Since the start of 2004, EU export refunds have been reduced from US$82 to US$38 in November for skimmed milk powder, from US$225 to US$170 for butter, and from US$120 to US$75 for Gouda cheese. Intervention (public) stocks in the EU have fallen to their lowest levels since the autumn of 2002. Domestic markets in the United States have also been tight, and latest figures show the Commodity Credit Corporation has no uncommitted inventories.
Despite high international US dollar denominated prices, profitability in some regions has not greatly improved given concurrent exchange rate appreciation. This is the case of key milk exporting countries like New Zealand and Australia.
Prices are expected to remain at or around the current levels in the short term, but then may ease as trade responds to these high price signals.
Global milk output is estimated to grow by about 1.9 percent in 2004 compared to only 1.1 percent in 2003, largely as a result of increasing production in Asia and Latin America, as well as in New Zealand.
In the developed countries, milk production for the 2003/04 dairy year in New Zealand is anticipated to be 4.2 percent higher, after having increased 3.6 percent last year. By contrast, milk output in Australia may fall 2.5 percent this year, after the decrease of 8.8 percent during the previous year’s drought; however this decline is less than previously anticipated and there are signs of a resurgence of production in the past months. In the United States, while total milk output in 2004 is expected to show little change over the previous year, production has picked up in the latter part of the year in response to high domestic prices. Milk production in a number of other developed countries is subject to policies which restrict output. Output in Canada should rebound 3 percent after declines in the previous two years while that in Japan is estimated unchanged in 2004. Production in the EU-15 is expected to fall 1 percent. The 10 new member states that joined the EU on May 1, 2004 are adjusting their raw milk output to their production quota allocations, and are responding quickly to EU quality standards. Exports, mainly from Poland and Slovakia, have reached record levels since accession due to significant price differences in EU-15 countries.
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.
Elsewhere in Europe, milk production developments have been mixed. In the Russian Federation, output is estimated to be down by some 4.2 percent in 2004, due largely to a decline in the dairy herd, and to limited feed supplies in the past year. In Ukraine, production has increased in the latter part of the year and it is expected to remain around the level of last year.
Growth in milk production in most developing countries has continued, in some cases quite spectacularly. China’s milk output is estimated to be up 20 percent in 2004, following increases of 25 percent in each of the two previous years. These increases are on the basis of a low per caput output, and come in response to growing consumer demand, improved marketing, and also profitable domestic producer prices. India, the world’s largest milk producing country, may increase output by 4.9 percent in the 2003/04 (April/March) marketing year. In Thailand and the Philippines, milk output is also anticipated to increase further in 2004, 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, not only as incomes and population increase but also as diets diversify.
In Latin America, growth of milk production has rebounded in 2004, after depression and macroeconomic instability in recent years. In particular, large depreciation of currencies in several important producing countries, has increased export prices, but destabilized input markets for feed. In Argentina, production is now expected to rebound almost 20 percent after declines of 7 and 11 percent in the two previous years. Brazil, which has at times been an important importer of milk products, will continue its expansion with output growing 3.8 percent in 2004.As a result, it is expected to have a trade surplus in dairy products this year, and may soon emerge more significantly into export markets. In Uruguay and Chile, milk output also appears to have grown in 2004. Elsewhere in Latin America, milk production is expected to increase in Peru in 2004, rising by over 4 percent. Domestic demand is strong, making dairy production one of the most profitable agricultural activities. In Mexico, milk production may increase modestly by 1 percent. Mexico’s milk output has increased significantly since its policy reforms of the early 1990’s.
Throughout Africa, the milk production situation varies substantially. In Egypt milk production has been stagnant, despite large domestic milk price increases, as restrictions on imports of cattle and higher input prices have limited production response. In southern Africa, good fodder availability has fostered a favourable outlook for milk production in 2004 but in eastern Africa drought in pastoral areas is adversely affecting livestock. In western parts, the outlook for milk production is uncertain, particularly in areas of high locust infestation.
For the 2004/05 dairy year, export supplies of dairy products are anticipated to be higher from New Zealand as milk output resumed expansion at its trend rate of 4 percent; whole milk powder exports are up the most rising by 8 percent. As Australia’s milk output still has not recovered from low levels in the past year, exports will be down again. For 2004, its exports of whole milk powder and skimmed milk powder are estimated to fall by 18 and 14 percent respectively, and butter exports to be down 24 percent. However, export availabilities from South America in 2004 have expanded as production has recovered from the low levels of the previous two years. Exports of whole milk powder from Argentina may rise over 70 percent. Exports by the EU have increased in 2004, particularly for butter (7 percent) and whole milk powder (9 percent), and cheese (4 percent). In the United States, net removals of product have been lower in 2004, but exports of some dairy products have been higher given high international prices. In particular non-fat dry milk exports have increased some 80 percent, and whole milk powder exports were up by over 50 percent in the first nine months of 2004.
International demand for dairy products continues to grow largely due to high income growth in some developing countries. It is thought that increased oil revenues in the past few years in producing countries have also helped to boost demand. However, import demand will be restrained to some extent by high import prices, particularly in some countries whose economies have not performed so well. Increased purchases of milk powder by countries in South East Asia - for example, the Philippines, Thailand, Malaysia and Indonesia - and China, are anticipated to help meet rising domestic demand as income growth continues rapidly in these countries. Elsewhere, imports by Central American countries and the important markets of Mexico and Algeria may also increase, though tempered by prices. Important demand remains high in the Russian Federation, which continues to be the largest importer of butter (with EU-15 a close second). By contrast, imports of milk products by Brazil, once an important purchaser, are expected to be limited as growth in domestic production replaces import requirements. Purchase of butter by some countries in the Near East and Africa, which are the most price sensitive importing regions, may stagnate in the light of the higher international prices.
In recent years, whole milk powder has emerged as the fastest growing major export product, with a wide base of demand. Compared to other dairy products imports are not so highly concentrated by country – for example only one-third are absorbed by the top ten importers. Trade in whole milk powder would appear to have important food security characteristics, as imports are almost exclusively by developing and transition countries.
International dairy prices are expected to remain at or near their current high levels for the short term, but signs of increased supplies are now showing, which should result in reducing high price pressures in 2005.