MILK AND MILK PRODUCTS

How long will high prices hold?

The FAO international dairy product price index (1990-92=100) has stabilized in the range of 160-165 during 2005, reaching a 15 year high of 165 in September before falling back marginally to 163 in November. It is expected that, come the end of the year, the average value of the price index in 2005 will be 162, compared to 145 in the previous year. Prices have remained high, largely as a result of stronger demand growth in parts of South East Asia and North Africa, but also because of limited supplies in Oceania and reduced export subsidies by the European Union. Regarding the individual major milk products, November export prices from Oceania for butter and whole milk powder were up about 3 percent, while cheese (Cheddar) prices were up almost 5 percent from the same month a year ago. Converting the Oceania prices for butter and skim milk powder into a milk equivalent price level and adjusting for a 15 percent margin for processing, world farm prices of milk (basis Oceania) are about US$0.23 per kg, substantially above their trend value of around US$0.19 per kg. At such high prices, production would be expected to rise, which, ultimately, would bring prices down toward their trend values. Obviously, historical evidence shows milk product prices are highly volatile around such a trend; the question is when milk prices will decline, and by how much.

 

Throughout 2005, export refunds by the EU have been reduced substantially, given high world prices, declining intervention prices, and low intervention stocks. But these are still substantial at €921 per tonne, €100 per tonne, €459 per tonne and €50 per tonne for butter, skim milk powder, cheese and whole milk powder respectively. Since refunds vary inversely to world price movements, they tend to exacerbate price fluctuations, although their effect on markets is considered to be less since the EU share of export markets has declined.

Table 6. Indicitave dairy export prices (US$/tonne, f.o.b.)

Growth in global milk output strengthens in 2005

Encouraged by high international prices, milk production is estimated to grow 2.4 percent in 2005, after an increase of 1.9 percent in the previous year. Most of the expansion is accounted for by growth in Asia and in the United States. By economic group, milk production in the developing countries is expected to grow over 4 percent in 2005, compared to less than 1 percent in the developed countries. As in recent years, much of the dynamism of the dairy industry is stemming from developments in both supply and demand in developing countries.

But output growth remains limited in traditional exporting countries

Milk production in Oceania fell by more than 2 percent in the 2004/05 marketing year (ending May 2005), with New Zealand's production down 4 percent and Australia’s up only 0.5 percent. Unfavourable weather conditions in New Zealand have been blamed for the decrease there, while Australia is still recovering from drought in the previous year. Production in Oceania is expected to start increasing over the short term. An important question is whether full supply response to higher prices will be realized. It should be borne in mind that both New Zealand and Australia have experienced significant exchange rate appreciation in recent years, meaning that prices to their producers have not increased in line with US dollar prices.

In other developed countries, milk production in the United States is expected to increase 3.5 percent in 2005 in response to higher domestic prices and favourable feed conditions. In the EU, production may grow slightly in 2005, making up for a decrease in the previous year; production remains largely under supply quota and fluctuates around a level of 145-146 million tonnes. Similarly in other countries subject to production quantity limits, output varies around 7.8 million tonnes in Canada, 3.6 million tonnes in Switzerland and 8.2-8.3 million tonnes in Japan.

After increasing in the early years of this decade, milk production in many transition countries has declined in the past three years due largely to a contraction of dairy herds and the continuing adaptation to a market economy. For 2005, production is expected to grow somewhat in the Ukraine while it might fall by another 2.5 percent in the Russian Federation.

Asia is the strongest growing region

Among the developing countries, India's output keeps growing strongly on an annual basis as investments continue in the sector, while strong rises in domestic demand sustain prices. A normal monsoon this year has made ample fodder supplies available and production should rise by over 4 percent in 2005. The country now accounts for over half of the total milk output of Asia, and is reinforcing its position as the world's largest single milk producing country. With high international prices, export markets offer potential for further growth.

The country with the fastest production growth is China, which has almost doubled its milk output since 2001. However, some reports indicate the rate of growth has subsided somewhat in 2005, under higher costs of production. Production in 2005 is now expected to grow by 20 percent, down from 26 percent last year.

In Pakistan, which is the world's fifth largest milk producing country, output continues to rise at the rate of 3 percent per year. The dairy sector accounts for more than 40 percent of the value of agricultural output and is a critical revenue source. Consumption of dairy products constitutes almost 15 percent of daily calorie intake. The extent of the impact of the 8 October 2005 earthquake on the dairy sector is not fully known. There are reports stating that as many as 250 000 farm animals perished and that many others remained in undernourished conditions. Farmers are reported to be selling livestock assets for slaughter at reduced prices.

For Central America and the Caribbean, overall milk output is expected to grow by 2.7 percent in 2005 as low-cost milk producers responded to the high international prices of the past two years. Costa Rica’s output has hit record levels in 2005. In South America, growth continues to be strong, at 3.9 percent, with particularly high rates expected for Argentina, at 4.6 percent, and Brazil, at 4.0 percent. Chile’s production continues to expand by over 5 percent. Peru recorded an annual rate of 3-4 percent and this is expected to continue with higher prices. Milk output in Uruguay is expected to expand 8 percent in 2005, after two years of low growth.

In Africa, conditions for milk production vary significantly. The problem of locusts has subsided in western Africa and reports indicate that the rainy season this year was favourable. In Egypt, milk production is forecast to increase 2.6 percent in 2005, with higher milk yields per cow. Kenya's milk production in 2005 should increase in response to favourable weather conditions and stable prices. In South Africa, production is expected to have grown by 3 percent in the 2004/05 year, after an increase of over 6 percent in the 2003/04 marketing year.

Table7. Milk production of major producing countries (million tonnes)