|Global Market Analysis|
MILK AND MILK PRODUCTS
The FAO Dairy Price Index of international dairy product prices (100 in 2002-2004) fell by 58 percent from its peak in November 2007, to a value of 114 in February, 2009. Since then, prices appear to have bottomed out in the first quarter of 2009 and have recovered to124 by May 2009. While much uncertainty exists, there is evidence to suggest that, based on fundamental indicators, such as stagnant milk production in major exporters, prices may rise in the next few months. Product prices in the Oceania region were USD 1 900 per tonne for butter, USD 2 000 per tonne for skim milk powder, USD 2 200 per tonne for whole milk powder in April 2009 and USD 2 575 per tonne for Cheddar cheese in May 2009. These prices are about half their year earlier levels.
In the context of the rapid fall in international prices, private and public stocks of dairy products have increased. This was the case in New Zealand in recent months. The United States Commodity Credit Corporation has also bought butter, skimmed milk powder (SMP) and cheese into inventory, but so far the Government has refrained from using its Dairy Export Incentive Programme (DEIP) to subsidize the US exports of products. However, one of the most controversial developments has been the resumption of dairy export subsidies from the European Union. During the dairy price spike, such subsidies were not applied, as international prices rose considerably above intervention support prices. As Figure 45 indicates, export refunds had vanished for skim milk powder from July 2006 to January 2009, and on butter from June 2007 to January 2009. Relatively small refunds have been applied during the first few months of 2009. These refunds, paid on a per tonne basis, may be short lived if international prices increase, or they may remain quantitatively small if European Union milk production continues to decline, and surplus production diminishes.
Recent milk 2009 production estimates have been revised down to 699 million tonnes, 1.6 percent more than last year. This growth is below the global trend rate of 2.0 percent annually, which prevailed in the previous decade. Output in developing countries may reach 337 million tonnes, virtually counting for all the additional global output, as milk production in developed countries is anticipated to remain largely unchanged. As a result, the developing country’s share of global output is set to rise to over 48 percent, up from a 40 percent share ten years ago.
Production prospects for the world’s top five major exporters have deteriorated since the last Outlook. For 2009, their milk output is now set to total 273 million tonnes, which is the same level as it was in 2008 (Figure 46). While recovery in production is confirmed in Oceania, production may shrink in North America and Europe, due to relatively high feed prices (see Figure 47) Growth in South America is expected to slow due to poorer pasture conditions at the start of the year.
Milk production is now expected to rise by 3.5 percent in Asia, to 256 million tonnes. In China, damage control over the melamine crisis of 2008 has given rise to an improved inspection and regulatory framework. As the effects of the melamine crisis dissipate, milk output may rise 6 percent in 2009.
Milk production in India is expected to expand by 2.8 percent this year. Reports suggest that the expansion of demand for milk products has been somewhat weaker, as economic growth has cooled. Pakistan looks set to increase production again by 6 percent in 2009, as high internal prices have stimulated investments in the sector.
In South America, milk production is forecast to record a robust growth of 3.4 percent, to 58 million tonnes in 2009. Argentina’s output is expected to increase to 10.6 million tonnes, or by 2.9 percent in 2009, which is lower than the previous year, due to a drought, which has affected production during its summer period, but also to the imposition of large export taxes on milk products, which have dented producer returns. Milk production in Brazil may increase by 5 percent to 29.5 million tonnes (production estimates have been revised down). In milk equivalent terms Brazil will be the second largest exporter in the region this year. Colombia, the region’s fourth largest milk producer, will again post limited gains. Milk production in Uruguay is expected to increase marginally in 2009, as its sector has been most heavily affected by poor
Milk production in Africa is anticipated to advance only 1.0 percent in 2009, about half the rate of its population growth, to 36 million tonnes. Reflecting continued high maize prices and lower milk prices, output growth in South Africa will slow to 1.5 percent, down from almost 4 percent last year. Production in Algeria, which is by far Africa’s most significant importer of milk products, is also expected to expand by 2.2 percent, as a result of programmes to boost the sector. In Kenya, the dairy sector continues to struggle and production remains stagnant. Egpyt, the continent’s largest milk producer, may continue on its trend growth path of 1.0 percent per annum.
The United States’ dairy sector, which experienced seven consecutive years of robust growth, is now expected to contract in 2009, as low profitability and farm exit programmes have encouraged herd liquidation. Milk production is now expected to fall to 85.5 million tonnes in 2009. During its growth period, encouraged by a depreciated United States Dollar, and by high international prices, the United States sector had gained increasing market share on world markets. Weaker domestic demand in 2008-2009 has also led to lower domestic prices and increasing intervention purchases by the Commodity Credit Corporation. In Canada, production may remain in the 8.3 million tonne range, perhaps falling slightly from the previous year, under weak demand conditions.
In Europe, the European Union’s (EU-27) milk production started to contract in late 2008, under unprofitable conditions, ending the year down from 2007. For 2009, milk production is anticipated to fall slightly to 150.9 million tonnes, despite quota expansion offered in the previous year. Milk prices in the European Union have fallen considerably, and have been subject to much variation and uncertainty. Producers in a number of European Union members have called for supplementary subsidies. The fall in European Union milk production will help contain its net exportable surplus of milk products, which is expected to fall by almost 1 million tonnes in 2009 compared with 2008.
Milk production in Ukraine is expected to decline again in 2009, down 6 percent from last year and over 20 percent below its 2002 peak. The contraction reflects problems that have plagued the industry in supplying exports to the Russian Federation, its largest external market. Belarus, which is emerging as the region’s largest exporter, will expand its production by another 5 percent on the previous year. Milk production in the Russian Federation may increase 1 percent, which, given weak demand conditions associated with its sizable economic contraction, may depress markets further.
In Oceania, milk production in the marketing 2007-08 fell 3.2 percent. In 2008-09, output is foreseen to recover in both Australia and New Zealand, by 1.9 and 6 percent, respectively. Australia’s milk output will reach 9.4 million tonnes in marketing year 2008-09 (ending June), the first yearly increase in four years, and almost 20 percent below its peak level of 2001-02. In New Zealand milk production could reach a record 16.2 million tonnes in 2008-09, which may help it to further consolidate its position as the world’s largest exporter of milk products. However, as exportable supplies have improved significantly, international prices have correspondingly fallen, and stocks are reported to be mounting in these countries. Producer returns are likely to plummet from the historical highs of the previous two years.
Global exports of key milk products, in milk equivalent terms, are forecast to decline to 39.4 million tonnes in 2009, down marginally by 0.3 million tonnes from the estimate for 2008. This decline is due to significant reductions in both United States and the European Union, in the order of 0.8 million tonnes less each. In the case of the European Union, it would bring its export share to a record low of 22 percent, which is less than one half its share in 2000. Lower exports by the European Union and the United States are expected to be offset by increased deliveries from Oceania of 1.2 million tonnes. South America, led by Brazil, may also increase shipments while exports from Asian countries, which are largely targeted to other Asian countries, are expected to be stagnant. Much depends on how China’s trade evolves in its post melamine crisis period.
An important issue facing world dairy trade is the impact of the financial crisis and recession. A key factor in the financial crisis is the access to credit which is increasingly difficult. An important driving force in the changing shape of the global dairy market has been international investments, and while it is too early to comment on the impact of adverse credit conditions, it is foreseen that global investments in dairy processing will diminish.
In the context of declining export supplies, an important factor impacting on international dairy markets is the slowdown in economic growth of key importing regions, as demand for dairy products is very much influenced by changes in purchasing power, particularly for higher cost items such as cheese. For example, in the Russian Federation, which is the world’s largest importer of dairy products, gross domestic product is now anticipated by the World Bank to fall by up to 6 percent in 2009. As a result, imports in 2009 into the Russian Federation could be much lower than currently forecast. In Asia where economic growth is expected to decline but still remain positive, the growth in imports is also expected to slow. Overall, against this macroeconomic backdrop, prices are likely to weaken, especially as milk production largely results from a long biological process and cannot be quickly adjusted downwards. Thus, unless stocks are held off the market, product prices could well fall.
Global exports of butter may drop to 798 thousand tonnes in 2009, down 1.4 percent from the previous year. Butter exports from the European Union are expected to remain around 150 thousand tonnes, its lowest level in decades. By contrast, New Zealand’s shipments should increase to around 338 thousand tonnes, depending on how stocks are managed given current low prices and uncertainty concerning their future evolution. Larger exports from Belarus are also forecast, taking a higher market share in the Russian market. However, the size of the import market in the Russian Federation, the world’s largest dairy product importer, appears uncertain given economic conditions in the country.
Skim milk powder exports are now expected to fall marginally to 1 186 thousand tonnes in 2009, down 2 percent from the previous year, largely due to a significant decline in exports from the United States to around the 350 thousand tonne level , as its excess supplies of milk have dropped. This will be the first fall in United States skim milk powder exports in six years. This decline should be almost offset by increased exports from Australia and New Zealand. Exports from the European Union are anticipated to hold steady around 180 thousand tonnes. Imports to Asian countries are expected to increase, stimulated by much lower prices. Imports by Mexico, supplied largely by the United States, are expected to continue at a recent historically high, given the importance of and support for its social feeding programmes. Imports of skim milk powder into Africa are expected to decrease again in 2009.
Global exports of whole milk powder are expected in the order of 1 826 thousand tonnes in 2009, 1.2 percent lower than in 2008, largely due to a sizeable forecast decline from the European Union of 100 thousand tonnes. Whole milk powder remains the key milk product exported by surplus milk producing regions, such as the European Union, to growing developing country markets. New Zealand, the largest whole milk powder exporter with a market share of some 38 percent, is set to increase exports in 2009 to a record 686 thousand tonnes. Deliveries by Australia are expected to remain near 2008 volumes, while those of Argentina, the third largest supplier, could decline. Imports by Algeria and Venezuela, the two largest buyers of whole milk powder, should remain near 2008 levels. Milk production in these two countries has been increasing, under efforts to replace imports.
International cheese trade continues to grow, albeit slowly. It is by far the highest value market for milk product trade; exports are expected to reach 1 766 thousand tonnes in 2009, up modestly from 2008 levels. Exports from the European Union, the world’s largest cheese producer and exporter , may rise marginally despite tight milk supplies, to 536 thousand tonnes. Exports from the United States, which has doubled its exports in the past six years, will fall as its supplies returns on international markets shrink. On the import side, most of the growth in trade has occurred in emerging Asian countries and in the Russian Federation, and the growth of these markets will depend on how these countries fare in the current economic conditions.
Table 11. World dairy market at a glance
* Jan-May 2009
Table 12. Major exporters of dairy products
* Excluding trade between the European Union Member States.
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