Dairy Production and Trade Developments

Global dairy markets continue to be stable as international dairy commodity prices continue to hold firm reflecting the relatively tight supply situation and strong import demand. Three key factors have played a key role in the evolution of this situation; exchange rates particularly the decline in the value of the U.S. dollar, have increased European Union export prices, lower than anticipated milk production in Oceania, and reduced exportable supplies in the EU. Although the dollar has lately strengthened, world dairy prices resisted any declines as the EU embarked on a round of aggressive export restitution cuts in response to a well balanced domestic market and budgetary pressures.

Prospects for the remainder of 2005 point to continued strength in international dairy prices despite the upcoming milk production season in Oceania. Although New Zealand milk production is likely to rebound substantially, Australian output will recover at a more moderate pace as cow numbers remain low following the severe drought in 2002/03. On the demand side, global economic growth is anticipated to expand at around 3.0 percent – down from the 3.9 percent registered in 2004 – but nevertheless a sufficient rate that will likely continue to fuel import demand. Consequently, while the upcoming Oceania production wave may provide some temporary relief, global dairy prices will likely remain strong for this year and probably the early part of 2006. The implication for U.S. dairy exporters is positive as the boom in U.S. exports, particularly nonfat dry milk, will likely be sustained throughout the remainder of this year and into 2006.

The Australian milk production forecast for 2004/05 (July/June) has been adjusted down 2.9 percent from the previous projection reflecting dry conditions in the early part of 2005 that negatively affected some key dairy producing regions. If this forecast is realized then Australian milk output will drop 1.7 percent from the previous year and will mark the third consecutive year that Australian milk production has declined. For the forthcoming production season, recent climatic forecasts have shown marked improvement; reducing the threat of an "El Niño" year and indicating a greater probability of beneficial rains. Nevertheless, the continuation of the strong Australian dollar will serve to dilute export earnings from high global dairy prices and will continue to financially handicap Australian farmers. From a broader perspective, the reduced dairy herd means that even if milk/cow yields are improved significantly, total milk production will probably be well below levels attained in 2000-2002.

Although New Zealand’s milk production 2004/05 (June/May) was initially expected to grow by 2.5 percent, the downward revision in the forecast caught markets by surprise. Milk output is now expected to drop by 2.5 percent as a result of slower than anticipated growth in the dairy herd and poor weather conditions that also led to flooding in some key producing regions. This is the first drop in New Zealand’s milk production recorded since the 1998/99 season. Assuming a return to normal weather conditions in the upcoming season, it is likely that New Zealand’s 2005/06 milk production will rebound completely as the size of the herd was unaffected. In fact, if milk/cow yields were to improve by 3 percent, total milk production would exceed the record levels posted in 2004/05. As in Australia, the strength of the New Zealand dollar has to some extent offset the benefits of a strong global dairy market; nevertheless, this is not expected to constrain production. In fact, Fonterra recently reported the second-highest payout to members since the formation of the cooperative in 2001 following a 4 percent rise in fiscal year revenue.

EU-25 milk production is forecast to recover in 2005 by 0.7 percent following the drought-affected reduction in 2004. The increased milk output figure not only reflects favorable production conditions but also the changing use of milk from farm use to milk delivered to dairy plants within the EU-10 (i.e. new member states). Nevertheless, exportable supplies of major dairy commodities were reduced sharply as a result of the growing consumption of cheese. Since EU milk production is held in check by production quotas, the growth of cheese consumption and necessarily cheese production has been at the expense of surplus fluid milk that would traditionally be channeled into the production of whole milk powder (WMP), and to a lesser extent nonfat dry milk (NDM) and butter. In fact, intervention stocks of NDM – standing at 35,000 in June - are reported to be fully committed and despite a cut in intervention prices, the domestic price of NDM is gaining strength.

The U.S. 2005 milk production forecast has been raised marginally by 125,000 tons bringing the projected total milk production figure to 79.075 million tons – up nearly 2.1 percent from 2004. Despite the lack of replacement heifers, this gain primarily reflects increased milk per cow productivity as a result of the wider availability of bovine somatotropin, favorable milk feed price ratios, and good weather conditions. In the second quarter of 2005, milk production posted a gain of 3.3 percent compared to the same period last year.

The 2005 forecast for total cheese exports in selected countries is revised down as a result of a cut in New Zealand exports following a disappointing production season and a drop in EU exports. The latter is partly due to a revision of figures as data collected from the New Member States (NMS) is refined and also reflects the more limited availability of exportable supplies as a result of strong growth in domestic consumption. In terms of major cheese exporters it appears that cheese exports during the 2002-2005 period remained virtually stagnant suggesting that the recent global price increases are attributable primarily to import demand growth by major cheese importing countries. In fact, while not comprehensive in coverage, cheese imports in selected countries jumped by nearly 171,000 tons in the period 2000 through 2005.

In terms of butter trade, revisions have been principally on the export side. The New Zealand 2005 export forecast has been adjusted down by 16 percent due to lower milk production. The longer term trend has been for a decline in butter exports as the focus has shifted to the higher returns gained from WMP and cheese exports. EU butter exports for 2004 and the 2005 forecast year have been adjusted upwards but the year-to-year change is negligible. EU butter production has been declining over the past several years and despite a drop in consumption, available supplies for the export market will likely remain limited. In fact, EU ending stocks for 2005 are forecast to drop by 22 percent.

The 2005 NDM export forecast for selected countries has been revised down sharply by 6.2 percent from the last report due to a decline in the EU export forecast but more significantly, a substantial cut in the Oceania forecast; nearly 19 percent or some 91,000 tons. In contrast, the outlook for U.S. exports of NDM has improved markedly and is now projected to hit 250,000 tons – up 66 percent from the previous forecast and a gain of 8 percent over 2004. In the first five months of 2005, U.S. exports of NDM reached 150,000 tons compared to 61,000 tons over the same period in 2004. During this period, the bulk of U.S. NDM exports were shipped to Mexico (30 percent), Philippines, and Indonesia.

Major Destinations for U.S. Exports of NDM
Metric Tons

Projected exports of WMP among major exporters for 2005 was reduced substantially by nearly 7.5 percent from the previous forecast largely reflecting the poor season in New Zealand. The export forecast for New Zealand WMP was lowered 12.3 percent and means that expected shipments of WMP are expected to decline by 10.6 percent compared to 2004. The EU export forecast was also pared-back due primarily to an expected 1 percent cut in WMP production for 2005. There are, however, indications that countries such as Argentina are becoming significant competitors to the EU. There is no official semi-annual update, but trade data indicates that for 2004, Argentine exports of WMP reached 175,000 tons with some 55,000 tons being shipped to Algeria – traditionally a EU market. For the Jan-April period, Argentine shipments of WMP are running 18 percent ahead of the comparable period in 2004 and at that current pace will surpass 200,000 tons for 2005.

The fundamental factors that set the stage for a rapid rise in international dairy prices continue to apply, i.e., tight supplies, a relatively weak dollar, and strong demand. Although the dollar value has lately strengthened, the anticipated drop in prices has been offset by the surprisingly aggressive round of EU export restitution cuts. With the peak spring-flush milk production season effectively over, the internal EU markets remain well balanced and prices are holding above intervention levels. Consequently, for the short term the EU is unlikely to reverse course and heavily promote dairy exports.

Absent any adverse weather, the up-coming milk production season in Oceania should yield a surge in supplies particularly from New Zealand. These added volumes will undoubtedly test the market, however, global economic output for 2005 – albeit more moderate - remains robust. In 2004, global GDP was estimated at 3.9 percent and for 2005 is expected to slip to around 3.0 percent. Nevertheless, key import markets such as China are forecast to post growth rates of approximately 9.0 percent (down only 0.5 percent from 2004) while the South-East Asian market will expand at around 5.0 percent. Therefore, it appears likely that import demand growth for dairy products will remain firm and while the added supplies from Oceania will probably only have a moderate impact on global dairy prices. The outlook for the rest of 2005 remains bright, but given the cyclic nature of dairy markets the likelihood of a price decline in 2006 becomes more probable.

This edition of the Dairy: World Markets and Trade circular is based on post reports submitted since October 2004 and on available secondary information. U.S. information is from USDA sources. Reflecting the greater availability of information electronically, production and trade data for some countries is only shown in aggregate. Scheduled reports were received from the following countries:

* Semi-annual updates submitted in May 2005

Detailed data for both listed and non-listed countries can be found on the following website:
http://www.fas.usda.gov/psdonline/psdHome.aspx

The individual country reports can be obtained from the following website:
http://www.fas.usda.gov/scriptsw/attacherep/default.asp

Situation and outlook information on the U.S. dairy industry can be obtained from:
http://www.ers.usda.gov/publications/so/view.asp?f=livestock/ldp-mbb/

Last modified: Sunday, March 17, 2013