Dairy Production and Trade Developments

The outlook for international dairy markets for the balance of 2006 continues to be fairly positive as demand continues to be driven by strong economic growth – over 6 percent forecast in developing countries and over 7 percent in Asian nations. This strong growth, particularly in developing regions, translates into rising disposable income accelerating expenditures not only for basic food products but also higher value added branded products. In the key China market, growth is expected to drop only slightly from the previous year but still near 10 percent. However, concerns remain over the persistence of high oil prices and the upward adjustment of interest rates in response to inflationary fears generated by these energy prices.

Global prices for the major dairy commodities, i.e., nonfat dry milk (NDM), whole milk powder (WMP), and cheese experienced a mild decline but for the most part appear to be settling at relatively high levels. In contrast, butterfat markets remain unsettled as excess supplies in the EU have filled the limited intervention stores that offer a fixed support price. As a result, prices have been slipping in recent months and the EU has been raising export restitutions in order to stimulate butterfat exports and balance the domestic market.

The milk supply situation is forecast to remain stable with milk production in Oceania expected to increase by nearly one percent with gains in New Zealand being offset by a decline in Australian production. In the EU, milk output for 2006 is projected to be fractionally higher and aside from butterfat, the internal markets appear to be well balanced. The consumption of cheese and other dairy products continues to absorb excess supplies of milk and export restitutions for WMP, and cheese are low or have been eliminated in the case of NDM.

U.S. milk production is still posting strong gains; however, lower dairy product prices are expect to spur higher domestic disappearance of both fat and skim-solids. Exports on a fiscal year basis are forecast to moderate in 2006 from the record setting pace of last year but at $1.6 billion this will still be 33 percent above the 2001-2005 average of $1.2 billion. The weakness in the dollar will continue to provide a competitive edge to U.S. dairy exports and may add a further boost for the remainder of 2006. Already in calendar 2006, U.S. dairy exports through May are running 4 percent ahead of last year.

The 2006 forecast for Australian milk production was adjusted down by 5 percent to 10.25 million tons reflecting the emergence of dry conditions in southeastern Australia during the latter half of the season. This impact has been particularly severe in the main producing state of Victoria where milk production in March and April is reported to have dropped relative to last year by 8.9 percent and 5.8 percent, respectively. The Australian Bureau of Meteorology noted that "Australia-wide, it was the fifth driest June from 107 years of records, whilst it was the driest on record for Western Australia and the third driest for Victoria." Consequently, total Australian milk output is now expected to decline by 2 percent from last year. In addition, the appreciation of the Australian dollar coupled with a drop in export prices is lowering profit margins and keeping financial pressure on dairy farmers. For the beginning of the next production season, the Australian Bureau of Meteorology is currently forecasting average temperatures and rainfall.

The 2006 New Zealand milk production forecast has been raised by 6 percent and total milk output is now expected to rebound by 3 percent over last year to reach 14.9 million tons. The 2005/06 season was marked by the onset of poor weather conditions during the peak milk production period that capped milk flows and led to a reduction in milk per cow yields. However, the expansion in cow numbers - up 3 percent from last year – resulted in near record milk output. For the next season, a modest gain in milk per cow productivity will likely boost milk output to levels that could well exceed the record of 15 million tons set in 2003/04. In fact, given that the herd size has grown by an average of 2.7 percent over the past 5 years it seems highly likely that New Zealand milk production will rise by 2 to 3 percent.

The 2006 EU milk production forecast is raised marginally but total milk production is slated to increase by less than half a percent over last year despite higher milk quota limits. Under the 2003 Common Agricultural Policy (CAP) reforms the ceilings on 2006 production quotas for 11 EU members are raised by 0.5 percent. However, due to fears over excess supplies and low prices in such countries as the U.K., France, and Germany, the extra quota is unlikely to be exploited. Consequently, most of the reported increase in milk production is due to the greater flow of fluid milk to the processing industry in the new member states. Most of the additional milk that is being made available from greater production is being absorbed by the cheese industry which is expected to expand output by 1 percent. In contrast, the NDM and butter production is anticipated to decline while WMP output is stagnant.

In the United States, milk production is expected to increase due to expansion in the dairy herd – up about 1 percent over 2005 – and higher milk per cow productivity. Consequently, the 2006 forecast is raised by 332,000 tons to reach 82.58 million tons representing an increase of nearly 3 percent over last year’s level. Nevertheless, higher feed grain prices coupled with lower milk prices are eventually expected to dampen any expansionist tendencies. Cheese production is expected to grow by 2.4 percent over last year and is and is only slightly below the average annual growth rate of 2.8 percent registered over the past 5 years. Surprisingly, strong butter monthly production figures point to a significant increase in output this year and the forecast is raised by 40,000 tons to 660,000 tons which is an 8 percent jump over last year. NDM production is also anticipated to increase; however, rising commercial use is expected to limit CCC removals to less than 50,000 tons.

Summary of Change In The 2005 to 2006 Production Forecast
For Fluid Milk And Dairy Products
(000 MT)

The 2006 forecast for cheese trade in selected countries has been revised down by 4 percent since the December 2005 forecast due to lower export projections for the EU and Oceania. In New Zealand, cheese production is virtually unchanged and exports of cheese are expected to remain flat from 2005. Most of the additional milk flows are being channeled into the production of WMP and butterfat. However, Australian exports of cheese are now expected to fall significantly by 14 percent from 2005, reflecting lower milk production and lower export returns for cheese. In the EU, the cheese export forecast has also been lowered by 4 percent to 480,000 tons which is a 2 percent decline from 2005. This comes despite an expected rise in domestic production and is indicative of growing domestic consumption for cheese and increased competition in international markets.

Although U.S. cheese exports are relatively minor in world trade, higher world prices have boosted exports of U.S. cheese which are expected to jump by 21 percent over 2005 to reach a record 70,000 tons. Exports to Mexico have been particularly strong and year-to-date data through May 2006 indicates that relative to last year’s pace, U.S. shipments to Mexico are up 57 percent. The other major markets are Canada, Japan, and Korea.

U.S. imports of cheese for 2006 were originally expected to grow above last year; however, imports are currently trailing last year’s rate largely as a result of low domestic prices. Consequently, U.S. imports of cheese for 2006 are now anticipated to decline by 11 percent to 187,000 tons.

The global situation for butterfat has changed significantly particularly with respect to the EU where the export picture has deteriorated substantially. Originally the EU was expected to ship volumes similar to last year; however, strong export competition has led to a 22 percent downward revision in the 2006 export forecast. This was particularly evident in sales to Russia which suffered due to strong competition from the Ukraine. EU exports of butterfat are now forecast to drop by 18 percent this year to 280,000 tons. As a result, domestic prices have declined and producers have filled intervention stores up to the 50,000-ton limit for a guaranteed price (i.e., 92 percent of €2,824.4/ton or $3,530/ton). Further EU intervention purchases have taken place but under a tender system which offers lower than the buy-in price. Starting July 1, 2006, the intervention price of butter drops by 8 percent to €2,595.2/ton ($3,244/ton) and will be limited to 40,000 tons in 2007. Additional, purchases may take place at the discretion of the EU Commission.

In Oceania, the 2006 butter export forecast for New Zealand was raised by 21 percent due to increased milk flows which in turn led to higher butterfat production. Butter exports for 2006 are now estimated to grow by 17 percent over 2005 but will still remain below the peak levels of 2003 and 2004.

The 2006 forecast in NDM exports in selected countries was raised by 4 percent in expectation of higher than anticipated exports from Oceania. Nevertheless, this is only a small increase from 2005 – 2 percent – and is well below the average of 2003 and 2004 when NDM trade was 100,000 tons higher. This suggests that global markets will likely remain well balanced for the remainder of the year. The U.S. export forecast remains unchanged and reflects the slower pace of shipments through May 2006 which were down 22 percent compared to the same period last year.

In terms of WMP there have been no significant changes in the export outlook with exports among selected countries expected to be 3 percent lower than forecast but still 4 percent above 2005 exports. For Oceania, the 2006 projection has been decreased marginally – less than 1 percent – but still represents an increase of 54,000 tons in comparison to 2005. In contrast, EU shipments in 2006 are expected to be lower than in 2005. The EU appears to have adopted a conservative posture by not increasing export restitutions in order to match lower global prices and competition from Oceania.

International dairy prices for cheese and WMP have been sliding for the past 6-12 months but appear to be stabilizing above $2,000/ton FOB N. Europe. This is likely to remain the case for the balance of the year as economic conditions favor continued growth in demand for dairy products and supplies are relatively well balanced. The milk production season in Oceania is completed and new season dairy product shipments will probably not start to ramp up significantly until October 2006. In the EU, the Commission has kept export restitutions for milk powder and cheese under tight control while the United States is not considered a major supplier of cheese and WMP. Consequently, there is unlikely to be any downward pressure on prices for the remainder of the year.

The butterfat outlook is for a continued slide in prices as the EU attempts to deal with surplus supplies by raising export restitutions. Since the beginning of the year export refunds for butter have been increased by 8 percent to the current €995/ton ($1,245/ton). However, the volume of excess supplies is not substantial since EU private and public stocks for July total around 216,000 tons which is well below the past 5-year average of 277,000 tons. Further, EU butter stocks tend to reach their maximum level in August and September and are subsequently drawn down as domestic production declines until the following spring. Consequently, world butterfat prices will probably start to stabilize in early fall.

The extreme range for NDM prices reflects at one end the globally competitive price of U.S. NDM trading at around $2,000/mt FOB and at the other extreme, the price of EU NDM. At present, the EU domestic market looks set to remain balanced for the remainder of the year and there are no intervention stocks of NDM. In fact, the EU has terminated export restitutions and given that internal prices have been strengthening, EU exports of NDM are likely to be limited for the foreseeable future. Consequently, this leaves the United States as the major global supplier. Since the U.S. CCC support price is at $1,764/ton (ex-plant) this effectively sets a price floor for world prices for the balance of the year.

This edition of the Dairy: World Markets and Trade circular is based on post reports submitted since May 2006 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: Friday, September 22, 2006