|No.2 December 2006|
|Global Market Analysis|
MILK AND MILK PRODUCTS
International prices for major traded dairy products softened over most of 2006, due to increased export supplies by Oceania and some emerging Latin American countries. The FAO international dairy product price index (1998-2000=100) fell to 132 in September 2006, compared with a 15 year high of 148 in September 2005. However, in October the index increased 4 points to 136 and early reports in November show further strengthening. Whether this rebound continues will depend largely on the export situation for Australia, which is experiencing drought problems in 2006, and on the export position of the European Union. Compared with a year earlier (October), prices for whole milk powder, cheese and butter are down 6 percent, 9 percent and 21 percent respectively. Reflecting shorter supplies, skim powder prices are up one percentcompared with2005.
The changing situation for the European Union is most evidenced by its export refund and intervention stock situation. Compared with2005 at this time, intervention stocks are down by about 30 percent for all products, except skim milk powder for which stocks have been nil since May 2006. Export refunds of the European Union have been lowered from 2005. While they remain significant at €310/tonne, €985/tonne, and €435/tonne for whole milk powder (WMP), butter and cheddar cheese respectively, those for butter are down 38 percent, and cheese down 23 percent; WMP refunds remain at 2005 levels. Export refunds for skim milk powder have been zero since June. This changing export situation marks a major change for dairy markets.
World production of milk in 2006 is expected to reach 657 million tonnes, up 2.2 percent from 2005; preliminary projections for 2007 are for this growth to continue. With an increase of over 4 percent, developing countries led by China, India and Pakistan and countries in South America, largely account for the change in global output. Developed countries recorded near zero growth for 2006, with declining output in Australia and the European Union, but increasing production in New Zealand and the United States. Developed countries continue to lose share. Growth by low cost emerging dairy producers and exporters has been encouraged by higher prices of the past three years. An important question will be the impact of recently higher feed grain prices.
Asia replaced Europe as the world’s largest milk production region in 2006. It now accounts for 34 percent of global output compared with 30 percent five years ago. Yearly production growth rates of around 5 percent were driven by the strong increase in the demand for milk and dairy products in the region, sustained by the strong economic growth. Within the Asian region, China has more than doubled its output over the past five years with growth rates of over 20 percent; this growth is expected to slow as input costs for farmers have increased while milk prices have remained unchanged. In India, the world’s largest single milk producing country, the sector continues to expand by over 3 percent p †††?d????A??er year, driven by increasing demand for value-added milk products on the consumer side and extensive dairy development programmes on the supply side. In Pakistan, milk output continues to expand by over 3 percent per year. The sector potential for growth is significant and the Government is launching several initiatives related to research, capacity building and improvements in the collection and storage systems. For the Islamic Republic of Iran, another country with a strong dairy tradition , production is expected to rise by over 5 percent, supported by higher milk prices.
Among Central American and Caribbean countries, Mexico’s production is increasing at about 1.5 percent, in response to increased demand for domestically produced fluid milk from LICONSA, the parastatal agency responsible for the Government’s social feeding programmes. In South America, Brazil, the largest milk producer of the region, with a share of almost 50 percent, became a net-exporter for the first time after a production surge of over 5 percent in 2005. Production growth for 2006 is expected to slow to 3 percent, due to weaker domestic demand and higher feed costs. Argentina is likely to increase its output by almost 8 percent in 2006, in response to expected growing demand in both the domestic and export markets. Growth may slow in 2007 because of increasing production costs and uncertainty regarding government policy decisions on domestic price measures and export taxes. Venezuela has registered output gains of over 5 percent since 2005, after a decade of stable production, as efforts have been made to improve the dairy herd and provide better access to credit for farmers. Output may rise in Chile by about 2 percent in 2006, reflecting better weather conditions and improving productivity and rise also in Uruguay in response to the higher international prices in the past two years.
Africa accounts for less than 5 percent of global milk output. Livestock production in the region is characterized by a large number of small-scale farmers producing for the informal market and plays an important role in food security, providing basic food while securing employment opportunities and household income for the rural population. Egypt, which accounts alone for over 50 percent of milk output in North Africa, has faced a production decline of 5 percent in 2006 due to outbreaks of lumpy skin and FMD. These are likely to affect output also in 2007 when production may decline by a further 8 percent. In Sub-Saharan Africa, the Sudan is increasing its production through the introduction of better breeds that find a suitable climate and extensive pasturelands in the country. Kenya has the largest and best developed dairy herd in the region but while domestic demand is expected to grow by 3 to 4 percent per year, milk production may remain below demand in the short term as farmers face competition from cheaper milk powder imports. The Government raised the tariff on imported dairy products in 2002, but production has not responded. Droughts in 2005 and the beginning of 2006 have also depressed milk output in 2006. In South Africa, milk output for 2006 may remain close to or slightly below the 2005 levels due to a decrease in producer prices and adverse production conditions.
Stemming from high profitability conditions in 2004 and 2005, milk production in the United States is expected to expand by about 2.8 percent in 2006, although growth has been revised down a bit from earlier forecasts due to unusually high summer temperatures in key milk-producing regions. Milk output in the country may rise further in 2007, but the impact of high feed prices may dampen growth. In Canada, milk production for 2006 is expected to decline marginally from 2005, reflecting production quota adjustments to weaker demand for dairy products in late 2005 and increased imports.
Despite the increase of 0.5 percent in production quota, milk production in the enlarged European Union area (EU-25) is expected to decline by over one percent in 2006. Prospects are for little growth in 2007. The reasons behind include drought in southern parts of Europe, Poland and the United Kingdom. Less efficient producers however, are also cutting output in response to recent policy reforms that have decoupled farm payments from production. Furthermore, Germany and Italy and several new members such as the Czech Republic and Poland, have decreased output to avoid paying super levies for overshooting their quota. Milk production in Ukraine, one of Europe’s emerging exporters, is set to fall by 4 percent in 2006, largely as a result of import bans by its most important market, the Russian Federation. Milk production in the Russian Federation may rise 1.8 percent in 2006, as national programmes aimed at improving the livestock sector encourage production. The positive trend should continue in 2007, although farmers are concerned about the depressing effect of imports on dairy prices. Romania, one of Europe’s emerging dairy markets, is preparing for accession to the European Union in January 2007, and may raise milk output by about 2 percent in 2006. It has been granted an annual European Union production quota of over 3 million tonnes and the Government recently offered incentives to milk producers to modernize their dairy plants in order to comply with European Union standards.
Whole milk powder is the most important dairy commodity traded in terms of volume. Among major importers is Algeria, where increasing demand is likely to be met mostly by imports. Increased imports are also expected for countries in Southeast Asia ( Indonesia, Malaysia, Mexico, t he Philippines and Thailand). However, Mexico is purchasing less milk powder as the Government is fostering the use of locally produced fresh milk for its public feeding programmes. Historically, the major suppliers of WMP have been countries in Oceania and the European Union, but whereas the latter will decrease exports by 5 percent in 2006, Oceanic suppliers are expected to increase theirs, with New Zealand up 8 percent, and Australia up almost 20 percentcompared with 2005. Among new suppliers, Argentina is gaining market share rapidly, as its exports of WMP are forecast to increase by 17 percent in 2006, despite the imposition of higher export taxes during the first half of the year.
Traders have been switching away from skim milk powder towards whole milk powder, which is preferred by importers who want to reconstitute powder into whole milk and other products. The European Union is likely to reduce exports by almost 50 percent in 2006 to a 30-year low. Increasing shipments are forecast to come from the Oceanic countries where New Zealand could increase sales by over 10 percent.
Cheese remains by far the largest traded milk product in value terms. The majority of cheese trade is conducted among developed countries (about 62 percent), following tariff rate quota allocations. Trade with some higher income developing countries is now also growing quickly. For 2006, Australian cheese exports are expected to fall by 11 percent from 2005, reflecting constrained milk supplies. In New Zealand, milk is being allocated mainly into the production of WMP and butter, leaving cheese output and exports largely unchanged from the previous year. In the European Union, cheese supplies to the world market are set to decline by almost 3 percent as more productsare absorbed by the domestic market. Among emerging exporters, Argentina is expected to increase its cheese shipments by over 5 percent. Ukraine is facing a severe cutback in dairy exports in 2006 after the outbreaks of animal diseases prompted the Russian Federation to impose an import ban on Ukraine’s dairy produce. Although the Russian Federation is forecast to cut overall cheese imports by about 8 percent in 2006, it remains the world’s largest cheese importer. The shortage from Ukraine has been partly made up by increased imports from Germany and Lithuania. Weak currency prospects in Japan, the second largest cheese importer worldwide, reduced its import demand prospects for cheese by about 6 percent in 2006. Among other developed countries, the European Union and the United States remain important cheese importers although higher demand is increasingly satisfied domestically.
Table 9. Exports of dairy products (000 tonnes)
1/ Dairy years ending in May of the year stated
2/ Dairy years ending in June of the year stated
3/ Excluding trade between the 25 European Union Member States
In Oceania, butter exports for 2006 are forecast to increase by 17 percent in New Zealand while Australian shipments may increase only marginally. The European Union, whose butter exports are expected to drop by about 30 percent in 2006, is about to lose its position as the world’s largest butter exporter; this is in spite of high export refunds for butter. After a decline in butter trade in 2005 with traditional importers buying less due to high prices, the situation for 2006 is forecast to improve slightly with some increase in demand from important importers such as Egyptand Mexico.
|GIEWS||global information and early warning system on food and agriculture|