|No.1 June 2006|
|Global Market Analysis|
MILK AND MILK PRODUCTS
The FAO international dairy product price index (1998-2000=100) fell to 133 in May 2006, after reaching a 15-year high of 148 in September 2005. It is expected that this index will average in the 130 range in 2006, compared with 145 in 2005. Prices have fallen recently due to higher export supplies in Australia, the United States and several emerging South American suppliers. Import demand growth in parts of Southeast Asia and North Africa continues to underpin markets. However, in some regions, supply/demand response to the high prices of the last several years has reduced import demand.
Regarding the individual major milk products, May export prices for butter from Oceania are down compared with May 2005 by 17 percent, while those for cheese (cheddar) and whole milk powder and skimmed milk powder are down 6 percent, 6 percent and 5 percent, respectively. The over-riding market question is how far will prices fall, and how fast? On the one hand, export supplies from the EU, one of the largest exporters, remain tight in the short term. However, increasing export supplies from Oceania, South America, and the United States, aided by other countries whose production is responding to two previous years of historically high prices, should continue to pressure prices down moderately in 2006. If New Zealand’s output recovers to trend levels, prices can be expected to fall further.
Note: The index is derived from a trade weighted average of a selection of representative internationally traded dairy products.
With lower international prices, EU export refunds have increased recently. At the end of April they stood at €995/tonne, €50/tonne, €459/tonne and €508/tonne for butter, skimmed milk powder, cheese (Gouda) and whole milk powder, respectively. As refunds vary inversely to world price movements, they tend to exacerbate price fluctuations, although their effect on markets is expected to be less pronounced as the EU’s share of export markets has declined. In addition, as EU intervention prices for dairy products are being reduced under the CAP reform, both intervention stocks and export refunds have also fallen. For the first time in many years, public stocks of skimmed milk powder were exhausted in April, as the EU has tended to buy and export whole milk powder. In the United States there were no purchases of skimmed milk powder from the Commodity Credit Corporation in 2005 as, for the first time in recent history, world prices exceeded domestic prices. Since early 2004 the Dairy Export Incentive Programme has not subsidized exports of dairy products. The question is whether this will continue as United States milk supplies increase and world prices decrease.
Encouraged by high international prices, global milk production is estimated to increase by 2.6 percent in 2006, similar to that of last year. This means that global per caput production of milk products will continue to increase in the range of 1.4-1.5 percent, which is high relative to most other agricultural commodity sectors. Most of the production increase is accounted for by several countries of Asia and Latin America and in the United States (see Appendix Table A17). By economic group, milk production in developing countries is expected to increase 4.5 percent in 2006, compared with 1.1 percent in developed countries. Even at a low base, milk production is growing slowly in LDCs, and this is projected to continue in 2006.
Asia is the largest dairy consuming region. It is also the largest importing region with over one half of global imports of dairy products (milk equivalent basis). Imports are continuing to grow as demand, driven largely by rapid income growth and urbanization, is exceeding supply. At the same time, the Asian region is also expected to become the world’s largest production region in 2006, illustrating that supply growth, at over 5 percent per year, is also dynamic. Of course the situation varies significantly across the region.
As the largest single dairy producing country, India's output continues to grow strongly in the 3-4 percent range, largely in response to internal demand growth and sustained by increasing productivity. India accounts for over half the total milk output of Asia. Given recent high international prices, it has started to enter certain export markets, particularly for skimmed milk powder. China, which has almost doubled its milk output since 2001, remains the country in which milk production is growing the fastest and is expected in 2006 to account for a full one third of the increase in world milk production. However, the annual growth rate of 18 percent projected for 2006 is less than in previous years, as the base of production has increased and higher production costs linked to both feed and water supplies may be starting to constrain continued high growth. In Pakistan, the world's fifth largest milk producing country, government initiatives are being undertaken to modernize milk collection and to improve milk and milk product storage capacity. The dairy sector is key to both rural economies and food security. Output continues to increase by about 3 percent each year, in line with increases in demand, but without significant trade developments. In the Islamic republic of Iran, where government measures are encouraging higher milk production, output is again expected to increase in 2006, in the range of 4 percent. In contrast, milk production in Turkey has been stagnant for several years because of low domestic milk prices and stagnant demand for dairy products. Production is expected to continue to decline in Japan, and as demand for dairy products also appears to be shrinking, import levels are expected to be down with current high import prices.
A number of other Asian countries are small milk producers, but some of the largest importers of dairy products, accounting for more than 20 percent of world imports (milk equivalent basis). In many of these countries, strong economic growth has resulted in demand growth exceeding that of supply and imports, despite relatively higher import prices.
Africa accounts for less than 5 percent of global milk output, and milk production continues to grow at a slow pace in most countries. The major producing countries are Egypt, Kenya, South Africa, and the Sudan. Egypt is facing production constraints due to an import ban on dairy cattle from countries affected by BSE and EBL (unexotic bovine leukosis). Kenyan milk output was affected by drought in late 2005 and early 2006. Algeria is one of the largest importers of milk powders, and despite programmes to stimulate domestic production and high prices, imports are likely to be sustained as high oil export revenues maintain demand.
Among Central American and Caribbean countries, Costa Rica’s output increased by 5 percent in 2005 and may reach record levels in 2006, while in Mexico production has been increasing slightly over the past years as a result of programmes to improve genetics and herd management practices. However, Mexico is also the world’s second largest importer of dairy products, after China, and driven by economic growth and reduced NAFTA tariffs, imports are expected to increase further in 2006.
In South America, many countries are increasing milk production, and, either as emerging larger exporters or as new exporters, the region’s net export position is being consolidated. Brazil, the largest milk producer of the region, became for the first time a net exporter of dairy products in 2005, as a surge in production, which combined with weak domestic demand, caused milk prices to fall nearly 30 percent in the latter half of the year. Output is expected to grow by about 3.0 percent in 2006, but higher production will not be sustained if prices do not return to profitable levels. Spurred largely by higher international prices and exchange rate depreciation earlier this decade, milk production in Argentina is set to grow 4.5 percent in 2006, down from 4.9 percent in the previous year. Investments in processing are positioning Argentina as a significant exporter on world markets, particularly for whole milk powder but increasingly for cheese. However, export taxes (now 15 percent for milk powder and 10 percent for cheese) are restraining both domestic prices and production, thus limiting further export growth. Uruguay, which expanded its production in 2005 by 8 percent after two years of low growth in response to higher international prices, is expected to expand further in 2006.
Stemming from high profitability in 2004 and 2005, milk production in the United States is expected to expand by a further 2.5 percent in 2006 to 82.3 million tonnes, making it another record production year. Largely due to strong demand for milk fat, domestic milk prices had reached historic highs in 2004, and with favourable feed prices, milk production has been expanding and is now pressing prices lower. Prices for milk proteins have remained relatively low, despite some increase in 2004 and 2005. In the past two years, the world skimmed milk powder price has risen above the United States’ support price for the first time in recent history. As a result, skimmed milk powder exports have surged, positioning the United States as the world’s largest exporter of this product in 2005, without the use of export subsidies. For 2006, this situation is unlikely to be sustained if international prices fall as expected. It is significant to note that milk fat prices in the United States are significantly over-valued in relation to milk protein prices, compared with international markets. In Canada, milk production is anticipated to decline marginally as a result of quota adjustments made to keep supply in check with domestic milk requirements.
The EU milk sector continues to adjust under the reforms of the past several years, in which intervention prices are being reduced, with single farm payments that are decoupled from production. EU expansion has also been a factor affecting markets. Milk supplies are expected to increase marginally in 2006, but not match the 0.5 percent increase in milk delivery quotas agreed under the 2003 reforms. Additional supplies are expected to come mainly from new member countries. Some countries threatened by superlevies, such as France and Germany, have been reducing output. In the context of policy reform since 2000, public stocks of most dairy products have been down until recently; e.g. public skimmed milk powder stocks were zero in early 2006. Milk product exports have been down, particularly for skimmed milk powder, and this is expected to persist for the remainder of 2006.
In former transition countries, milk production is also anticipated to increase. In the Russian Federation, where milk production had been declining in recent years, output is recovering, with growth concentrated in larger farms where productivity is higher. Milk output is therefore projected to increase 2.5 percent in 2006. The Russian Federation remains the third largest net importer of dairy products, the largest importer of butter and the second largest importer of cheese. In Ukraine, the emerging exporter of the region (exports mainly to the Russian Federation), milk output and trade are expected to increase further in 2006.
Taken together, Australia and New Zealand form the largest net dairy exporting region of the world, with net exports about one-third of total world exports (milk equivalent). Supply variations in these two countries have considerable impact on world product prices. For example, a production shock which lowers milk yields in these countries by 5 percent in one year generates 3-5 percent higher world prices for traded milk products (estimated using FAO’s commodity simulation system). This is a large effect given that these two countries account for only 4 percent of world milk production.
Recent policy reforms in Australia and exchange rate appreciation and droughts in both Australia and New Zealand in the past several years have limited their production and export supplies, a major cause of the large increase in international dairy prices from 2002 to their peak in 2005. Australian milk production has responded slowly to these shocks, and finally increased 0.5 percent in 2005. For 2006 (dairy year ending May), a growth of 1.2 percent in milk production is expected, showing response to improved prices on international markets. In New Zealand, output fell almost 4 percent in 2005 (dairy year ending in May 2005) but increased 3 percent in the 2006 marketing year, as growing conditions in the last part of the marketing year were favourable. Furthermore, Fonterra reportedly rebuilt product inventories in 2005. Production early in calendar year 2006 exceeded expectations. As recovery continues, depending on the extent of response, additional supplies will have considerable impact on international markets.
Table 10. Major exporters of dairy products
1 Dairy years ending May of the year stated
2Dairy years ending June of the year stated
3 Excluding trade between the 25 EU member countries
In milk equivalent terms, total dairy product trade fell in 2005 as a result of lower export supplies from the EU and New Zealand. Preliminary estimates show that global exports for all major products were lower in 2005 (see Figure 31 and Table 10). In recent years, trade in butter and skimmed milk powder has been declining in favour of larger trade in both whole milk powder and cheese. Demand for these two products is segmented largely by income profile; whole milk powder is exported almost exclusively to developing countries (about 95 percent) for the reconstitution of whole milk, while cheese is mostly traded to developed countries (about 62 percent), and to rapidly growing higher income developing countries. For 2006, on the basis of increasing export availability and continuing firm import demand, increased trade is projected for whole milk powder and cheese. However, further decline in trade is anticipated for butter and skimmed milk powder, as exporters find more favourable demand for other milk products.
|GIEWS||global information and early warning system on food and agriculture|