|Global Market Analysis|
MILK AND MILK PRODUCTS
The FAO index of dairy product prices (base 1998-2000=100) reached a value of 266 in April 2008, 12 percent down from its all time high of 302 in November 2007, but still 25 percent above its April 2007 value. The decline was particularly pronounced for skim milk powder (SMP), which saw prices falling to USD 3 500 per tonne in April 2008, almost 32 percent below its peak in mid 2007. Of the main dairy products in trade, SMP prices had risen the most, which encouraged suppliers to reallocate milk to produce more SMP, boosting supply and triggering the sharp correction in prices. World quotations of other major milk products also fell from their peak in November: by 8 percent to USD 4 550/tonne in April 2008 in the case of whole milk powder ( WMP), by 5 percent to USD 3 950/tonne in the case of butter, and 8 percent to USD 5 050/tonne in the case of cheese.
However, in early May, there were some indications that world dairy prices could be on the rise again, although markets appear to be facing considerable uncertainty. On the one hand, dairy prices may remain firm, or head up again, under continued tight export supplies in 2008, due to drought in New Zealand, prohibitive export taxes in Argentina and a sluggish milk supply responses in Europe. On the other, many countries are responding to higher prices by stepping up milk production, especially where pasture based systems predominate, which may prompt several countries to cut imports, dampening the pressure for world prices to rise.
Uncertainties are compounded by the fact that public stocks in the European Union and the United States, the presence of which used to be an important feature of dairy markets, are virtually depleted. Another major uncertainty relates to the high feed grain costs (see Figure 36) which may soon constrain growth of supply in feed intensive production systems, encourage conversion of pasture to crops, and/or induce higher cull of livestock. If world milk production growth slows or turns negative, dairy product prices may remain high, and possibly rise further.
Table 9. World dairy market at a glance
* Jan-April 2008
Global milk production is estimated to have expanded by 1.8 percent to 676 million tonnes in 2007. Growth in 2008 is now expected to reach 2.5 percent, as producers respond to high prices in 2007. Production in the developing countries is expected to expand the most, thus increasing their global production share to 47.5 percent. However, milk production of the six leading exporting countries, responsible for over 40 percent of the world's milk aggregate and for about 80 percent of global exports, is expected to rise by only 1 percent in 2008. This modest increase follows a decline of 0.7 percent in 2007, and milk supplies therefore remain only slightly higher than they were in 2006. Consequently, after satisfying requirements for their own domestic markets, availability of milk products for exports from these key exporters remains limited. Strong growth in Belarus (3.9 percent), Argentina (6.0 percent), the United States (2.7 percent) and marginal growth in the European Union (0.6 percent) and the Ukraine (0.3 percent) will be offset, to a large extent, by significant declines in Australia (-3.5 percent) and New Zealand (-4.5 percent).
Milk production is expected to rise by 4.0 percent in Asia, the same rate as in 2007. The expansion in the region was less than expected last year, as estimates in China were revised down to show a growth of "only" 9.5 percent over 2006. Production in China is now projected to expand by 8.5 percent in 2008, down considerably from the near 20 percent average of the previous decade, as growth is being tempered by capacity constraints and high feed costs. The slower pace of expansion in China may be critical in the longer term for world dairy markets and, if domestic demand continues to grow at its current pace, Chinese imports could rise significantly. In India and Pakistan, the large traditional milk producers, strong milk production growth is also expected to remain strong, at 3 and 4 percent, respectively.
With an anticipated recovery in Argentina, milk production in Latin American and the Caribbean will be the fastest growing milk production region in 2008. Argentina's milk production, which fell by 7.0 percent in 2007 due to seasonal flooding, is expected to rebound by only 6.0 percent in 2008, insufficient to ensure a full recovery to 2006 levels. The expansion of the sector in Argentina is being limited by prohibitive export taxes on milk products, which have induced some milk producers to participate in national strikes and blockades. In addition, Argentina has been converting more of its pasture land to cash cropping. Milk production in Brazil, which posted the second fastest growth in 2007, at 10 percent, is expected to record an 8.0 percent expansion in 2008. These gains may again support Brazil as a net exporter of dairy products, as it was in 2007. Milk production in Uruguay, another emerging exporter in the region, is expected to rise by 6 percent in 2008, after having also experienced, like Argentina, a bad production year in 2007 due to poor pasture conditions. In Mexico, one of the world's largest importers of milk powders, production is again expected to grow by a lacklustre 0.8 percent, as high feed prices limit profitability.
In Africa milk production is anticipated to advance by 1.7 percent in 2008, a slightly faster pace than last year, and a pattern that appears to be representative of most countries in the region. Production in South Africa should rebound by 1.2 percent in 2008, after declining in 2007, because of excessive rain. Production in Algeria, which is also among the world's largest milk powder importers, may grow at 2.4 percent, in response to high prices and to programmes designed to support the sector. In Kenya, a potential, but still small, exporting country in the region, milk production and distribution was reportedly to have fallen sharply, by as much as 40 percent, during the social unrest following its elections. However, production growth is expected to resume for the remainder of the year, sustained by higher prices.
In Canada, where target pricing systems based on cost of production are provided to producers, milk supplies are adjusted to meet domestic demand requirements. Milk production increased by 1.3 percent in 2007, and is expected to increase marginally in 2008, with higher domestic demand for cheese. Growth in the United States dairy sector is expected to accelerate from 2.1 percent in 2007 to 2.7 percent in 2008. High feed prices are a critical issue, however, which may constrain milk yields and induce higher culling of cows. However, while feed prices are very high, the availability of large quantities of distiller dried grains, a by product of ethanol production, is providing additional sources for both energy and protein feed. The low value of the US Dollar has made the United States dairy products very competitive on world markets.
In Europe, the European Union's (EU-25) milk production declined by 1.3 percent in 2007, and domestic prices soared in many states, causing milk product inventories to be reduced and export supplies to shrink. Production in a number of key producing states has started to increase, although high input costs, including feed and energy, are dampening down the positive European Union's supply response. Milk production is expected to increase by only 0.6 percent in 2008, despite a 2 percent increase in the production quota. With tight milk supplies and domestic product prices well above intervention levels, European Union public stocks have been drawn down to nil. Elsewhere in Europe, production in Ukraine declined by over 7 percent in 2007, as quality problems have plagued the industry in supplying exports to the Russian Federation, its largest external market. Milk production in Ukraine will remain stagnant and domestic prices low until it regains its export markets. At the same time, Belarus, which has emerged as an important regional exporter, has increased its production by almost 4 percent in 2007, and may repeat this again in 2008. Milk production in the Russian Federation continues to recover, growing now by over 2 percent annually, under the encouragement of investment programmes and higher milk product prices.
The situation and outlook of Oceania is a critical element in the current international milk product market. On the one hand, milk producers in both Australia and New Zealand have benefited from record prices in export markets, despite a significant appreciation of their currencies. On the other hand, climatic conditions have hit hard again, and Australia's output in its current marketing year (July-June) is expected to contract by another 3.5 percent from last year. This will be the third consecutive year of production decline, and Australia's milk production is at its lowest level in the last ten years. The prospect for rain has improved for its winter season, but milk supplies will remain tight. Since December, the North Island, and the northern parts of the South Island of New Zealand have experienced drought, causing production in these regions to be reduced by as much as 40 percent. For its 2007/08 marketing year (June-May), milk production in New Zealand is expected to fall 4.5 percent compared with the previous season. Weather conditions started to improve in April, and if sustained, milk production could resume growth for the remainder of this year under strongly positive profitability conditions.
In 2007, global export supplies of key milk products, in milk equivalent terms, dropped to 38.0 million tonnes, an amount which represents 5.6 percent only of milk production. This is the lowest trade share in many years, indicating some key potential changes in the structure of the world trade in milk products. The prospects for 2008 are for a further decline in trade, largely due to reduced export availabilities in the European Union (-11.5 percent) and in drought-affected Oceania (-10.4 percent). Supplies from Argentina will remain at low levels, as prohibitive export taxes have been implemented that are restraining international sales. On the other hand, there are rising supplies from other exporters. The United States which, in milk equivalent terms, has doubled its shipments since 2000, is expected to increase them by 7 percent in 2008, primarily in the form of skim milk powder, but also of other products including cheese, butter and concentrated milk solids. In recent years, Belarus has arisen as a significant exporter and is expected to increase sales by almost 10 percent in 2008.
Initially, sustained high import demand from most markets, particularly from several emerging dairy consumer nations in North Africa and South Asia, created the large spike in international prices as markets tightened without any buffer stocks. That demand now appears to have loosened in the face of high prices, particularly as forward price contracts (up to six months), have been renewed at much higher price levels. Imports by developing countries, in milk equivalent terms are expected to drop by 5 percent in 2008, due to reduced purchases by key importing countries, notably Algeria, China, Egypt, Malaysia and Thailand. In many developing countries, high international prices have been transmitted to domestic milk prices, fostering an increase in production. As a result, some imports have been replaced by an increase in domestic product, typically in fresh fluid form, which is the most common form of milk product consumption in these countries. By contrast, import demand by most developed countries has remained firm despite high prices.
The product structure of world dairy markets has been changing, and current conditions are amplifying these. Trade has been declining for traditional dairy products, especially for butter and skim milk powder. Global exports of butter are expected to amount to only 704 thousand tonnes in 2008, down 26 percent from their peak in 2004. Butter exports from the European Union are expected to be only one half of their reduced level of last year; they have fallen from over 355 thousand tonnes in 2004 to an expected 105 thousand tonnes in 2008. New Zealand's tight supply of milk will also lead to lower butter exports in 2008. Belarus, which has become a major exporter of butter, is expected to boost sales this year. As for imports of butter, the Russian Federation remains the most important destination and imports are expected to increase modestly, underpinned by high income growth. In other developed markets, imports of butter, which are often regulated through quotas, continue to be sustained. By contrast, deliveries of butter to many developing countries where incomes are growing, but from a low base, may drop substantially, as a result of higher prices.
Skim milk powder exports are expected to decline by 4.6 percent in 2008, to 1 033 thousand tonnes, 20 percent below their peak in 2000. The contraction reflects the anticipation of slightly lower exports from Australia and New Zealand and, in particular, from the European Union, which may cut shipments to foreign markets by one-third this year. By contrast, exports from the United States, which has taken over as the world's largest exporter of skim milk powder, are forecast at 275 thousand tonnes in 2008, significantly higher than last year. As for imports, deliveries of skim milk powder are expected to fall in Africa (-9 percent) and Asia (-6 percent), as the impact of high prices are felt. However, imports by Mexico are expected to continue at previous levels, given the importance of and support for its social feeding programmes.
Global exports of whole milk powder declined by an estimated 6 percent in 2007, and a further decline of 1.5 percent is anticipated for 2008, to 1 714 thousand tonnes, constrained by reduced supplies from New Zealand. Import demand for whole milk powder remains strong even at current prices, as this product has been increasingly used for the reconstitution of other milk products, especially fluid milk products. Export supplies from the Australia, Argentina and the European Union are expected to remain near 2007 volumes. Algeria and Venezuela remain the two largest importers of whole milk powder. However, deliveries to Algeria have declined considerably, while those to Venezuela have remained firm, despite high prices. Milk production in these two countries has been increasing, under efforts to replace imports, and for 2008, imports may decline marginally.
International cheese markets have remained remarkably robust in international dairy trade throughout the price spike. Cheese exports, which increased by 3.6 percent in 2007, are expected to decline by only 0.5 percent in 2008, to 1 672 thousand tonnes, as import demand for this most income sensitive dairy product remains strong in spite of the 50 percent rise in prices in the past two years. The European Union, which is by far the largest supplier to the world market with a 35 percent market share, is forecast to step up deliveries in 2008, as an increasing share of its milk supply is allocated to cheese production for both a dynamic internal and external market. Exports from Australia and New Zealand, given their tight milk supplies, are expected to decline in 2008, and thus help sustain current high cheese prices. As has been the case for skim milk powder and certain other products, the United States has increased its exports of cheese, given attractive international prices, and has reduced its imports. As a result, its net exports of cheese have more than doubled in the past five years. On the import side, most of the growth in trade has occurred with emerging Asia countries, and trade with China continues to increase rapidly, albeit from a low base. Developed country imports of cheese remain firm despite higher international prices. These imports are often determined by tariff quotas, as imports above these levels prohibitively high tariffs apply, thus protecting domestic markets from international price variations.
Table 10. Major exporters of dairy products
* Excluding trade between the European Union Member States.
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