|Global Market Analysis|
MILK AND MILK PRODUCTS
International market prices of dairy products have skyrocketed since the December Food Outlook. The extent of the price surge has been remarkable: FAO’s index of international dairy product prices has increased 46 percent between November 2006 and April 2007, when it reached a record value of 213 (basis 100 in 1998-2000) (see Figure30). Prices for milk powders have soared even higher: skim milk powder and whole milk powder prices have increased by 56 and 61 percent respectively since November. Cheese and butter prices have increased by a more modest 18 and 34 percent respectively. Record prices for all products are due to both short term and underlying structural causes. However the size of the price spike for milk powders is primarily attributable to the exhaustion of public stocks in the European Union.
Robust income growth in the Russian Federation and in many developing countries, especially in Asia, but also in oil exporting countries of Africa and Latin America and the Caribbean continues to drive the demand side for dairy products. Furthermore, the US dollar devaluation has moved prices of dairy products higher since these are denominated in that currency even though they are traded largely among non-US currency areas.
However, the essence of the price spike lies on the supply side where global milk production has not kept pace with strong demand. Successive droughts in Australia have limited its milk product exports, while export taxes by Argentina have hindered its supply response. A six month suspension of skim milk powder exports in India has eliminated its presence on world markets. High feed grain prices have also curtailed profitability in many feed intensive dairy sectors. Finally, and perhaps the most significant factor in recent times is current policy reforms in the European Union, which have resulted in a drastic reduction in public stocks of dairy products, especially milk powders, and a steep cut in EU’s export subsidies, in both value and quantity terms
How high may dairy product prices go? The answer to this question lies largely in the effective protection that is currently offered by various market access barriers of key milk producing/consuming countries. As Figure 31 illustrates, international dairy prices have risen so much that the equivalent international price of milk is now very close to levels prevailing in the United States and the EU, enabling them to export without requiring subsidies. Larger supplies from these countries would contain further price increases. As for individual dairy products, prices of milk powders are now far too high relative to the other milk products. For example, the ratio of whole milk powder to cheese prices has averaged about 0.85 in 2003-2006, but the ratio now stands at 1.25. Market correction should bring those prices more into line, as processors allocate more production to powders and less to other under priced dairy products, eventually resulting in a weakening of milk powder prices, possibly by September 2007.
Indicative world price based on butter and SMP prices,
less 15 percent processing charge. 2007 numbers as of May.
High milk prices are expected to boost growth in global milk production from 2.3 percent in 2006 to 2.7 percent in 2007, when it may reach 675 million tonnes. The expansion is being encouraged by higher milk prices and gains in productivity in certain developing countries, as well as in emerging exporting countries, where producers have been benefiting from the rise in world prices. Growth for developing countries is expected to reach 4.8 percent in 2007, sustained by an expansion in Argentina (+ 8 percent), Brazil (+3 percent), China (+18 percent), India (+3 percent) and Pakistan (+4.0 percent). By contrast, milk production in Africa continues to languish, with no gain expected this year. Growth in the developed countries, which rely mostly on intensive feeding systems, is expected to remain below 1 percent, dampened by high feed costs. This assumes production would expand by 1 percent in the European Union (25) after declining in 2006. Drought problems in Australia are estimated to constrain production in 2007 to less than 10 million tonnes.
In Asia, where growth in milk production has been the highest globally, two broad types of dairy industries exist. In some countries, such as India and Pakistan, where there has been a strong dairy tradition, markets remain largely insulated from international price variations, although some market opening has started. For these countries, output growth has remained firm, sustained by increases in domestic demand fuelled by economic and demographic growth. In the case of India, rapid domestic income growth, exceeding 6 percent, pushed milk prices higher in 2006 and 2007. Total milk output is expected to grow 3 percent in 2007. The tendency for prices to rise was accentuated by the country’s recent entrance onto the world skim milk powder market, and high milk powder prices as an exporter, which led the Government, in January 2007, to impose a six month ban on milk powder exports. As for Pakistan, the world’s fifth largest dairy producing country, the domestic sector is largely disconnected from world markets, but investments in milk processing are occurring at a fast pace, with milk output expected to rise by about 4 percent in 2007.
Asian countries with a weak tradition in dairy are among the most open importers, but also those recording the fastest expansion in production. Domestic demand is also growing rapidly in these countries, often outpacing production. As a result, milk powder imports occur for purposes of re-constitution in order to supplement the milk supply. China, where domestic demand and supply have been growing in excess of 20 percent for the past several years, is the best example; for the current year, growth in the country is forecast at 18 percent. Other large importers of milk powders, such as Thailand, Indonesia and the Philippines, may react to the high international prices by curtailing the growth of their imports while promoting domestic production.
Many countries of Latin America are open to trade and are emerging as important dairy exporters. Argentina is the prime example, and current high prices of dairy products, while muted by export taxes, are stimulating milk production and milk product exports, primarily cheese and whole milk powder. Milk production in Argentina grew 7 percent in 2006 and may grow by 8 percent this year given strong milk prices. Growth will be affected by high crop and feed grain prices that both reduce availability of pasture land and affect dairy profitability. Uruguay, the other main dairy exporting country in South America, may see output expand by 4 percent, adding to its growing export potential. Net importers in the Latin America region are also expanding production, amid high international prices. Output in Brazil is expected to expand by 3 percent or more in 2007, which may again position it as a net exporter. Mexico, which has been the largest skim milk powder importer, may expand milk output by another 1.5 percent in 2007. Venezuela, Chile and Columbia are set to expand output by 6 percent, 4 percent and 2 percent respectively, also reducing import requirements.
Milk production in Africa remains largely inert to international price movements, given the low participation of producers in its formal milk sector, and hence little or no production response to recent high prices is anticipated. African milk output is expected to remain stagnant in 2007, after falling slightly in the two previous years. Its import dependence on milk products is growing and consists almost exclusively of milk powders. This will expose the region to a large increase in import bills this year. The decline in milk production in Egypt, which reached a cumulative 20 percent in the past two years because of animal disease problems, is expected to be contained by policies to promote production. However, Kenya’s output is expect fall by another 3 percent as its industry is restructuring. South Africa, a net importer of dairy products subject to a tariff quota and internal price setting, is expected to see output shrink by a further 1 percent in 2007, as higher maize prices impact on milk profitability.
While milk output in Canada is expected to fall modestly, in line with domestic demand, that of the United States is anticipated to increase by 1 percent, as the positive effect of higher dairy product prices is tempered by higher feed costs. While the country is largely insulated from world markets for butter and cheese, it remains the largest or second largest skim milk powder exporter and the main exporter of high value milk components, such as whey proteins. As its linkage with world markets is increasing, continued gains in international prices could position the United States as a competitive and large supplier of a wider range of dairy products.
Due partly to weather related factors, milk output in the EU (25) fell by almost 1 percent in 2006, further reducing its excess milk supply and surpluses of dairy product. In 2007, more normal weather could foster a 1 percent recovery in milk output, although higher feed costs and the decoupling of subsidies from production in some member states may limit the size of the rebound. In January, 2007 the accession of Romania and Bulgaria to the EU has added an additional 7 500 thousand tonnes to the milk supply or about 5 percent of EU production. These two countries have been largely self-sufficient in milk products and milk production has been also stable, so accession will not significantly affect the EU’s trade position.
Policy reforms in the EU have progressively changed the economics of its milk production, by reducing incentives to produce and encouraging domestic consumption. The reduction in support prices for skim milk powder and butter, which started in 2003, will be completed this year. Milk product stocks have been progressively lowered (see Figure 32). As a result, export refunds have also reduced to zero for both skim milk powder and whole milk powder, and to historically low levels for butter at 750 euros/tonne and cheese at 348 Euros/tonne. EU’s market shares of the key dairy products in international trade have continued their descent (see Figure 33). As a result, it may lose its global position as the largest milk product exporter, in volume terms, in favour of New Zealand.
While producing only 4 percent of world production, Oceania is the largest milk product exporting region, with a market share of over 35 percent. Successive droughts and policy reform (2000) in Australia have contained that countries milk production to levels below 10 years ago. For the 2006-07 marketing season (ending June), Australia’s milk output is expected to tumble a further 7 percent as drought took hold at the end of 2006 and has been sustained through to May 2007. Milk output in New Zealand is expected to increase only 1 percent in the 2006-07 marketing season (ending May), also as a result of poor growing conditions. Such reduction in milk supply will imply that the region will struggle to sustain milk product exports.
In milk equivalent terms, total milk product exports are expected to increase marginally in 2007 compared to 2006, reflecting a decline in exports by the EU and Australia, the key exporters, but more than offset by increased sales of New Zealand and Argentina. Over the year, a key question is how the export situation will evolve from the European Union and from Australia. A further concern is how much emerging exporting countries can respond to higher prices? While exports from these countries may expand, the size of their market shares is small and they cannot be expected in the short term to cover the existing excess demand for some time. Finally, a further issue is how world wide milk product production and export will respond to the current misalignment in prices. Current price ratios suggest that more milk will be allocated for additional production and export of milk powders and less for butter, cheese and other currently undervalued products.
Demand for whole milk powder remains firm and it is expected that, despite current high prices, trade will increase by 2.4 percent in 2007 to another record level, especially as a good proportion of imports are pre-paid on longer term (six month) contracts. Algeria, the largest importer of WMP, is anticipated to increase its imports by only 1 percent in 2007, as higher prices restrain demand and domestic schemes to enhance milk production to substitute for imports take some effect. China, the second largest importer, is anticipated to purchase 15 percent more this year, largely because strong domestic demand continues to outstrip supply. By contrast, high import prices may lower purchases by Indonesia this year. As for exports, New Zealand and Argentina are set to increase shipments by 5 percent and 14 percent respectively as high prices induce higher production. However, as outlined earlier both EU and Australia are expected to reduce their deliveries. Overall, however, increased export supplies (following a reallocation of milk processing and exports) are expected to reduce WMP price by the end of 2007.
Largely reflecting lower exportable supplies by the EU, skim milk powder (SMP) exports have stagnated in recent years, Developing countries account for over 90 percent of world imports of skim milk powder. Mexico is the largest market for skim milk powder, but the prevailing high world prices are now expected to reduce its imports in 2007, as high prices will tend to reduce the amounts that can be purchased on food assistance budgets, but also because government programs are stimulating domestic milk production. Algeria is the second largest importer of SMP, and its imports will also moderate in 2007 as efforts are made to expand domestic production. Over 60 percent of SMP imports are destined to Asian countries, especially those experiencing fast income growth; this explains why prices have risen so much under short supply.
Such increases have pulled more product into international markets to satisfy rising demand for milk protein. Increasing significantly have been both sales from the United States and New Zealand, which are now the top two global exporters. The EU export share has fallen drastically in recent years. Since 2004, exports by the United States have been undertaken without export subsidy. As the second largest producer of SMP, after the EU and with current world prices above domestic prices, it is likely that the United States will increase its exports to take advantage of the global market buoyancy. These are now expected to show a moderate increase in 2007. India remains a major uncertainty for the market: if its current ban on SMP exports is not extended beyond August, 2007, a major question is how much might the country export and how will this impact world markets.
Since 2004 both butter and cheese trade has remained largely stagnant, while prices have risen further. In 2007, global butter exports are foreseen to decline by 2.3 percent, largely as a result of lower export supplies from the EU, while cheese exports may increase modestly by 1.2 percent, as larger supplies from Argentina become available. Compared to other milk products, the proportion of butter and cheese trade exchanged among developed countries is higher, with this share at 38 percent and 64 percent respectively. Because demand in these countries is less dynamic and also because butter and cheese are more subject to tariff rate quotas in various countries, their prices have not risen to the same extent as the other milk products. The divergence in prices is expected to lead to additional milk production allocation to the other products, as margins are equilibrated.
Table 11. Exports of dairy products
1 Excluding trade between the 25 European Union Member States.
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