Dairy Production and Trade Developments

The remarkable strength of the international dairy markets continues, however, there are signs that demand has eased slightly and prices are likely to moderate in the next several months. Nevertheless, supplies will likely remain tight particularly since the anticipated jump in Oceania production is not expected to materialize as a result of adverse milk producing weather in New Zealand. Consequently, although Australian milk production for the 2005/06 season is forecast to expand, this is likely to be offset by production shortfalls in New Zealand, absent a late season recovery. As a result, Oceania milk output is currently forecast to remain largely unchanged from last season.

In the EU-25, milk production for 2006 is set to increase marginally, but strong internal consumption for dairy products will absorb additional production and thus exportable supplies will probably be similar to 2005. In contrast, U.S. milk production for 2006, following a year in which milk output surged by 3.5 percent, is expected to expand at a more moderate pace to 2.6 percent. While this will ensure that there are ample exportable supplies of nonfat dry milk (NDM), global markets for other dairy products are unlikely to be affected significantly since U.S. exports of cheese, butterfat, and whole milk powder are not as competitive.

From an economic perspective, import demand for 2006 should remain fairly steady as global growth in gross domestic product (GDP) is projected to exceed 3 percent annually. In the critical Asian markets, GDP is expected to exceed 6 percent in 2006 and in China, GDP growth is forecast to surpass 9 percent. In contrast, GDP growth in the EU-25 will improve modestly from around 1 percent in 2005 to a forecast 1.5 percent in 2006, while Japan’s economic growth is expected to ease with GDP growth expected to drop by .5 percent to 1.5 percent in 2006. In the United States, despite concerns over the trade and budget deficits and climbing interest rates, the outlook for 2006 is fairly optimistic with GDP growth currently pegged at over 3 percent. Nevertheless, despite these relatively solid economic factors, recent trade data for the first half of 2005 suggests that in some countries there has been a significant drop in import demand for dairy products, notably milk powders in China. These declines, however, may be offset by oil producing countries that are reaping the benefits of strong petroleum prices and maintaining strong import levels.

A further complicating factor is the role of currencies. The high world prices coupled with a weak U.S. dollar have provided U.S. dairy exporters with a competitive edge while at the same time diluting export returns to competing producers. In recent months, the value of the U.S. dollar relative to the Euro has been strengthening, effectively exerting downward pressure on EU dairy export prices. Currently, the U.S. dollar is projected to continue strengthening against the Euro in 2006, undermining the competitiveness of the U.S. dairy industry.

Australian milk production for the 2005/06 (July/June) season is forecast to increase by just over 3 percent as a result of timely rainfall that has greatly improved pasture conditions and increased the availability of irrigation water. Nevertheless, this is still 7 percent below the record volumes produced in 2001/02. Further, the dairy herd size is expected to remain virtually unchanged from last year and is nearly 14 percent smaller than in 2001/02, underscoring the significant impact of the past 3 years of drought. The strong Australian dollar has also been a factor in dampening export returns. These tough economic and environmental conditions have, however, led to a greater optimization of the industry and increased productivity. The additional milk production is expected to be channeled primarily into the production of cheese and whole milk powder (WMP), while the production of NDM and butter is forecast to remain largely unchanged from last year.

In New Zealand, poor weather conditions, characterized by lower than normal temperatures and persistent rains, were faulted for adversely affecting milk output in some key North Island areas. Milk flows were reported at the beginning of November – past the traditional peak spring flush in October – to be lagging 2 percent relative to year-ago to-date flows. As a result, New Zealand milk production for 2005/06 (June/May) is currently forecast to drop by about 2 percent, marking the second year in a row during which milk production contracted. The slowdown in milk production is expected to affect primarily the production of NDM and butterfat, down 8 percent and 4 percent, respectively.

For the 2005/06 season, the milk payout to Fonterra suppliers, i.e., the majority of New Zealand dairy farmers, is currently forecast by Fonterra at NZ$4.00 (US$2.86)/kg milk solids down nearly 13 percent from last year. A significant factor in this decline has been the strength of the New Zealand dollar vis-à-vis the U.S. dollar – since May 2004 to December 2005, the New Zealand dollar has appreciated from NZ$1.62/US$ to NZ$1.41/US$.

Following a drought in 2004, EU-25 milk production in 2005 is expected to rebound by nearly 1 percent, particularly in such countries as France and Germany. In fact, the increase led to the imposition of some €388 million ($461 million) in overproduction fines, i.e., "superlevies" during the marketing year 2004/05 (April/March). Approximately 80 percent of the levy was applied to Germany and Italy for exceeding their production quotas. For 2006, production is forecast to grow as the quota limits for some of the major producers in the EU-15 are being raised by 0.5 percent. In addition, some of the new member states, such as the Czech Republic and Poland, are benefiting from higher milk prices by expanding production.

In the United States, record milk prices in 2004 translated into surging milk output in 2005 that is expected to result in a more than 3 percent jump in annual production. Although replacement heifers remain scarce and costly, dairy producers were able to increase cow numbers and, with the return of bovine somatotropin hormones, raise productivity, recording milk per cow gains of about 3 percent. Ultimately, however, this rapid rise in production was sufficient to surpass even the strong growth in dairy product demand, undermining product prices. Nevertheless, the outlook for 2006 is fairly positive. Despite a continuing moderation in milk prices, production is not anticipated to be affected significantly – for 2006 U.S. milk production is forecast to grow by just under 3 percent.

In South America, Brazilian milk production has been expanding steadily over the past several years, reflecting the slow consolidation of the sector into more efficient units. In 2005, higher productivity and favorable returns are forecast to contribute to a 3 percent rise in milk production. For 2006, milk output is anticipated to expand by nearly 5 percent which should meet domestic consumption needs and allow for some exports of WMP. In the past, Brazil was a net importer of WMP, but in recent years, exports have been growing and are forecast to reach 30,000 tons in 2006.

In Argentina, the dairy sector is flourishing, stimulated by strong domestic demand and high export returns. In 2005, milk production is set to jump by almost 7 percent, and for 2006, is expected to tie the 1999 record level. High global dairy prices have been a key factor in promoting exports of Argentinean WMP and, to a lesser extent, cheese. However, there is some uncertainty since, early in 2005, the Government of Argentina (GOA) signed price agreements with the dairy sector – essentially imposing price controls – in an effort to stem inflationary pressures. As a further step, in late July 2005, the GOA temporarily (at least until further review) raised export taxes on dry milk and cheese in an effort to curb exports and increase the domestic supply.

Summary of Change in the 2005 to 2006 Production Forecast
for Fluid Milk and Dairy Products
(000 MT)

Cheese exports in selected countries are forecast to grow by about 5 percent with record export levels anticipated in the Ukraine and Argentina. The Ukrainian dairy products industry, despite facing quality problems and raw milk shortages, has recently expanded rapidly, particularly with respect to cheese production and exports. In the period 2002 through 2005, cheese exports grew at an annual average pace of 45 percent and are forecast to expand by 18 percent in 2006 to reach 130,000 tons. Russia remains the single largest market, accounting for 95 percent of Ukrainian export sales while the balance is shipped to other East European countries. Argentina cheese exports have been expanding rapidly stimulated by strong global prices, particularly for soft and semi-soft cheeses in Russia, Mexico, and Chile, and hard cheeses for the United States.

In the Oceania countries, cheese exports for 2005/06 are expected to expand modestly by 3 percent, reflecting production setbacks in New Zealand. Cheese exports by New Zealand are forecast to grow by some 17,000 tons largely by minimizing stocks rather than relying on production gains. For the EU-25, cheese exports are forecast to remain unchanged, as the 1-percent increase in cheese production is expected to be largely absorbed by strong domestic demand.

The 2006 outlook for butterfat trade in selected countries is mixed. Although exports for 2006 are slated to grow by over 2 percent to 823,000 tons, this is still below the 2003-05 average of 841,000 tons. EU-25 exports are forecast to remain stagnant; however, due to a combination of slightly lower production and internal consumption, ending stocks are expected to drop sharply. In New Zealand, butterfat exports will increase marginally but remain nearly 22 percent below levels attained in 2003. On the import side, Russian butterfat purchases are currently estimated to drop by nearly 12 percent in 2005; trade data indicates that in the first 6 months of 2005, imports of butterfat were down 36 percent over the same year-ago period. However, for 2006, butterfat imports are forecast to rebound to 170,000 tons to compensate for tight domestic supplies.

Exports of NDM for selected countries are forecast to drop by nearly 5 percent in 2006, largely reflecting a sharp cut in U.S. NDM shipments – down nearly 17 percent from 2005. Nevertheless, the U.S. NDM market is expected to remain well balanced since ending stocks for 2006 are pegged to rise by only 15,000 tons to 80,000 tons – well below the 5-year average of 334,000 tons for ending stocks. Elsewhere, EU-25 NDM exports are expected to decline by 11 percent as available exportable supplies are drawn down with no intervention stocks forecast to remain at the end of 2006. In Oceania, NDM shipments are expected to expand marginally but will remain around 108,000 tons lower than the peak levels attained in 2003.

Selected country imports of NDM for 2006 are projected to remain relatively stable despite high global prices. From the U.S. perspective, import demand from the key Mexican market is slated to remain relatively strong driven by domestic demand for dairy products in the processing, retail, and tourism sectors. In Asia, markets such as the Philippines and Indonesia are also expected to remain fairly stable. In China, NDM imports are anticipated to ease due to the imposition of new labeling regulations that are likely to particularly impact reconstituted milk products.

WMP exports in 2006 among selected exporters are expected to rebound sharply by 7 percent following last year’s poor production season in Oceania. Although New Zealand’s milk production season is currently faring poorly, conservative inventory management of WMP stocks in 2005 is expected to result in a near 10 percent jump in WMP exports. Australia is also forecast to experience a significant rise in WMP exports – nearly 15 percent – due to favorable milk production conditions. In South America, Argentinean WMP production has progressed rapidly and exports having grown by an average of nearly 30 percent since 2001 through 2005 are expected to hit a record 190,000 tons in 2006. In 2005, a significant portion of the WMP exports were targeted to Algeria, Venezuela, and Brazil.

Global dairy product prices during 2005 have remained remarkably resilient sustained by well balanced markets, a weak dollar trend, and solid world economic growth. For milk powder and cheese, the export prices at the end of 2005 are virtually unchanged from the early part of the year. Butter has been easing in the past few months, but nevertheless, remains historically strong.

For 2006, the outlook is mixed. On the negative side, the high crude oil prices being experienced are likely to create economic drag in some country economies. In addition, the recent rather erratic strengthening of the dollar, if sustained, will serve to weaken prices. In principle, the U.S. Federal Reserve likely will continue to raise short-term interest rates in an effort to stem inflationary pressures, and that should lead to an appreciation of the dollar throughout 2006. There are, however, several positive factors: global GDP for 2006 is currently expected to exceed 3 percent; the anticipated wave of Oceania dairy supplies for the current season appears less likely as New Zealand milk production falters; world dairy inventory levels remain fairly tight; and some major importing nations that are also petroleum exporters, such as Mexico, Algeria, and Russia, will benefit from high oil prices. Therefore any price projections for 2006 will be particularly tenuous. Nevertheless, the outlook for the first half of 2006, at this time, appears to be fairly bright with the expectation that world dairy prices will weaken slightly but will still remain relatively high.

NDM prices are currently trading in the range of $2,125-$2,250 FOB N. Europe and may remain in that range despite downward pressure from an appreciating dollar. The EU-25 has held a tight rein on export subsidies, cutting them aggressively from around € 280/MT early in 2005 to €100/MT in September 2005. If intervention stock levels – currently minimal at less than 10,000 tons – remain low, the EU may continue this budget saving strategy. An appreciating dollar would also offset any cuts in export subsidies. At present, internal EU prices for NDM have, since July 2005, eased by around 6 percent to €1,920/MT ($2,275/MT) in late November, but nevertheless remain well above the intervention price of €1,850/MT that prevail once intervention stores are opened on March 1, 2006. By July 1, 2006, the intervention price will be cut by 5.5 percent to €1,747/MT ($2,061/MT). At present, early indications for December suggest that EU NDM prices have stabilized and may be on an upswing which would be indicative of a well balanced market.

The table below provides a view of the sensitivity of EU internal prices and various exchange rates on calculated export prices. For example, at an internal price of €1.93/kg and an exchange rate of $1.18/€, results in a theoretical export price of NDM – assuming a €100/MT restitution – is around $2,202/MT.

In Oceania, exports of NDM will be largely unchanged from last year and in the United States, exports are predicted to be pared back. A further dynamic operating in the United States is the significant outflow of milk powder blends, including milk protein concentrates, to the export market that is providing another significant export channel for skimmed milk solids. Consequently, for the next 6 months, while prices may slide due to currency movements, and assuming that current production parameters (particularly with respect to New Zealand) apply, then NDM market prices should remain historically strong as supplies remain relatively limited.

The global markets for WMP have paralleled the trends in the NDM markets. Currently, prices are high in the range of $2,200-$2,275/MT FOB N. Europe and have only declined marginally from prices prevailing early in the year. The EU has aggressively scaled back export restitutions from around €700/MT ($826/MT) early in 2005 to €500/MT ($590/MT) late in the year. Internal EU WMP prices are low, relative to 2004 and 2003, but are presently stable. EU-25 WMP production is forecast to decline slightly in 2006. In Oceania, however, the WMP forecast calls for increased export supplies, and any slackening in import demand could quickly undermine price levels. In some markets, imports of WMP have already declined, e.g., in China, imports of WMP are estimated to have fallen by around 26 percent in 2005 and are expected to drop further in 2006. Some major importing markets, however, are also major oil producers, e.g., Algeria, Iraq, and Venezuela, and are likely to continue purchasing substantial volumes.

Global cheese prices have recently declined as a result of the appreciating U.S. dollar coupled with more readily available supplies from Oceania. Import demand in major consuming countries, such as the United States, the EU-25 and Russia, is expected to remain relatively robust while Japanese purchases are forecast to decline slightly. However, the escalation in cheese prices since 2003 relative to other dairy products has been extreme – nearly 80 percent from January 2003 through Oct 2005. Consequently, it would not be surprising if in the next few months cheese export prices decline as demand in the smaller importing nations is adversely impacted. A healthy global economy will, however, help ensure that any price correction will be relatively moderate and prices will still probably remain at historically high levels.

Butter prices have been sliding since August 2005 reflecting the arrival of the New Zealand milk production season and slack demand particularly in the Russian market. For 2006, ample supplies from Oceania and the EU-25 will likely place downward pressure on prices. However, import demand in Russia is expected to rebound, and purchases from some of the North African and Middle-East markets should remain fairly solid. Further, EU-25 exports of butterfat are forecast to repeat 2005 levels but rely on a sharp drawdown of stock levels to sustain exports. Consequently, although the outlook for butter markets is for a continuing decline in prices, further cuts in EU export restitutions in anticipation of lower intervention prices in July 2006 could reverse any price declines.

This edition of the Dairy: World Markets and Trade circular is based on post reports submitted since October 2005 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:

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