SUMMARY Cow milk production in selected countries for 1996 is estimated at 84.7 million tons, unchanged from 1995. Significant production declines in Russia and Ukraine and small declines in the United States and European Union (EU) were just offset by increases in the South America, Oceania, and India. For 1997, cow milk production is forecast up slightly to 386.9 million tons. South America, Oceania, and India are expected to show significant increases. Milk cow numbers continued trending downward in most countries during 1996, to 133.9 million head, but rising output per-cow maintained milk production at a relatively stable level. Further declines in cow numbers are forecast for 1997 but higher per cow yields due to improved genetics and better management are expected to facilitate an increase in milk production. For the major dairy products, only cheese production at 11.9 million tons showed an increase in 1996. With increased cheese output and no increase in milk production, output of butter, estimated at 5.2 million tons, was unchanged in 1996 while output of NDM, estimated at 3.0 million tons, was down. For 1997, cheese production is expected to gain another 2 percent, butter output will gain 1 percent while output of NDM declines about 2 percent. PRODUCTION North America: Milk production in the United States for 1996 is estimated at 70.1 million tons, down almost 1 percent from 1995. Growth in milk-per-cow was slowed by concerns about high feed prices, tight feed supplies, and uncertain prospects regarding the use of Bovine somatotropin (bST), and residual effects from the hot summer of 1995. With these concerns, the 1-percent decline in cow numbers was not offset by rising yields as is normally the case. Despite the downturn in output in 1996, U.S. milk output is forecast to increase less that 1 percent in 1997, to 70.7 million tons. Feed prices have moderated but growth in output-per-cow is expected to remain low. Also during the first month of 1997, California, Oregon, Washington, and Idaho were hit by severe floods while the upper Mid-West was hurt by severe winter conditions. According to current prospects, U.S. production of dairy products in 1997 will again be dominated by cheese, projected to gain 3 percent, while butter continues to decline. Canadian milk production continued its upward surge, during the 1995/96 (Aug./July) Canadian dairy year and actual output of manufacturing milk was 7 percent over the Market Share Quota (MSQ) for processing milk. Apparently many producers were quite optimistic about the potential benefits of the new dairy program which eliminated the levies for over-quota production. Instead of levies, the new policy calls for over-quota milk to be priced relative to either international prices or U.S. prices for dairy products. With both U.S. and international prices down from summer highs, over-quota production now looks less attractive to Canadian producers. Current estimates put 1996 Canadian milk production at 8.0 million tons, up 1 percent from 1995 but, in 1997 output may fall back to the 1995 level. Cow numbers are expected to remain at the 1.28 million head level. Canada's output of dairy products may ease somewhat is 1997, if milk production declines as expected. With relatively stronger demand, cheese production is expected to remain about the same as in 1996, while output of butter and NDM will decline somewhat. In Mexico, milk production is estimated at 11.5 million tons in 1996, up 3 percent from 1995. Production is forecast to increase again in 1997. The end of the drought in the Northern States plus higher productivity in larger dairies, particularly dairy cooperatives, enabled the production increase despite rising costs. Dairy cow numbers were stable in 1996 but may increase in 1997 with the improved feed supplies in the Northern States. South America: Milk production in Brazil continued its rapid expansion, rising to 19.8 million tons in 1996. The increase reflects gains in per-cow productivity due to genetic improvements, good weather in most regions, favorable returns to producers and increased dairy production from non-traditional milk-producing areas. Production is projected to continue its pattern of rapid growth in 1997. The potential to improve milk production in Brazil is great since only 10 percent of current output utilizes modern technology (specialized dairy breeds, milking machines, adequate nutrition, and herd management). Producers are increasing the use of modern inputs following the Government's decontrol of milk prices. If the current economic stabilization continues for the next two to three years, the dairy sector may be able to double its use of modern inputs. This will be necessary if, as some predict, Brazil needs to increase milk production substantially to meet consumer demand for milk and dairy products. Argentina's 1996 milk production is estimated at 8.9 million tons, up 6 percent from 1995. Output is projected to increase again in 1997, to a record 9.5 million tons. A stable economy, a free dairy sector, and increased domestic consumption in the past 5 years have made the sector one of the most profitable at both the farm and processor levels. The rapid growth is attracting large investment in the sector, mainly from local companies already in the business, but also from new foreign companies. The dairy industry, which currently boasts the highest per-cow yields in South America, is expected to become even more efficient as investment increases. Argentine farmers continue to adopt new technology and tools to improve returns. The use of artificial insemination continues to grow, as does the importation of foreign genetics, mainly semen. Argentina markets its exports as "natural" products and does not permit the use of BST. European Union (EU): Overall milk production was down slightly in 1996 and another small decline is projected for 1997. Under the EU quota system, "in-quota" milk production is very profitable with the result that most producers try very hard not to under produce. As a result, In years when conditions are favorable for milk production such as 1995, national quotas are often exceeded by significant quantities. German milk output in 1996 is estimated at 28.9 million tons, up 1 percent from 1995. Dairy farmers in Germany stepped up production in an effort to profit from the relatively low penalties imposed on over-quota production in 1995. Regional imbalances allowed many farmers to produce well over their quota in 1995 without exceeding the national quota. French cow milk production in 1996 is estimated at 25.4 million tons, slightly below 1995. Following several years of under-utilizing its quota, France exceeded its quota in 1995/96 (April-March) and French producers are now subject to a combined penalty equivalent to $US 84 million. Milk production in 1997 is expected to remain at the 1996 level. Milk production in the Netherlands in 1996 was down due to small reduction in cow numbers. Output in 1997 is expected to stay at the 1996 level. Within the Dutch production sector, the lower profit margins due to reduced subsidies for dairy product exports led to an exodus from the industry. Government sources estimate that the number of milk producers declined by 4 percent during 1996. However, farms with 70 for more cows increased their herds during 1996. In the United Kingdom, the dairy sector, like much of U.K. agriculture, is being dominated by the crisis caused by Bovine Spongiform Encephalopathy (BSE). In the short run, some cows were kept in production longer than expected because slaughter facilities were running at full capacity. In the longer run, the slaughter scheme has had the unintended effect of increasing the dairy herd replacement rate, which with the more rapid introduction of superior genetics and the greater production potential of young cows may hasten structural change in the production sector. In the EU, 1997 cheese production is expected to increase only marginally as reduced subsidies cut export prospects. At 1.8 million tons, 1997 EU butter production is expected to be only slightly ahead of 1996 and increased domestic consumption may take care of that. EU production of NDM is estimated at 1.2 million tons in 1997, approximately 3 percent below 1996 when surplus conditions forced some intervention buying. Eastern Europe: Poland's 1996 milk production is estimated at 11.6 million tons, up 1 percent from 1995. Faster growth is expected in 1997. Growing demand for dairy products has led to favorable prices for producers. For the 1996/97 dairy year, minimum procurement prices for Grade A milk were set at 0.5 zylotys ($US 0.19) per liter. The procurement price is supported by government purchases of butter and NDM. In Poland, increased milk production is expected to facilitate a 1997 increase In cheese production, where domestic demand is increasing, and in output of NDM, a traditional export item. Butter production for 1997 is expected to remain at the 1996 level. Former Soviet Union: The impact of economic reforms in Russia has been strongly felt in the dairy sector. Milk production continues to decline as both herd size and per cow yields drop. Milk production is estimated at 35.2 million tons in 1996, 10 percent below 1995. Based on another large drop in cow numbers, a similar decline is likely in 1997. In contrast to the national situation, some Russian dairy companies are successfully restructuring and competing and, as a result, have increased production. For example, one Moscow company has modernized 4 plants and is increasing production of fluid milk, yogurt, cottage cheese and other dairy products. Difficult economic conditions persist in Ukraine's dairy industry as milk production continued its downward trend in 1996, dropping to an estimated 16.7 million tons. Another decline is forecast for 1997 with production projected at 16.5 million tons. In both Russia and Ukraine, limited demand for fresh milk is expected to help maintain 1997 output of dairy products at the 1996 level. Asia: India's 1996 cow milk production is estimated at a record 33.5 million tons, up 3 percent from 1995. An additional 3-percent increase is projected for 1997 which would bring production to an all-time high of 34.5 million tons. Increased competition between the cooperative and private sector dairies for fluid milk is driving up producer prices. In addition to increasing their herds, this is encouraging farmers to increase the quantity and quality of feed given to animals and to adopt better animal husbandry practices. Japan's 1996 milk production is estimated at 8.7 million tons representing full recovery to the 1993 level. Two summers of record-breaking heat led to the 2-year decline. Demand for both fresh milk and processed dairy products is growing strongly. Also, the 1996 E-coli outbreak which hurt beef consumption appears to have provided an additional boost to demand for dairy products. Revised statistics for China show milk production is likely to continue its long-term upward trend. Production in 1996 is estimated at 6.2 million tons, up 8 percent from 1995. A further increase, to 6.7 million tons, is projected in 1997. The upward trend resumed after a period of stagnation which began in 1993 following free market reforms. In 1994, market controls were partially reinstated and subsidies began to flow again to the dairy sector. This includes favorable procurement prices, reported to average RMB2.1/kg ($US 253 per metric ton). Some regional procurement prices are significantly higher. Oceania: New Zealand milk output in 1996/97 (June/May) is expected to total 11.0 million tons, an increase of 6 percent over last year's record output. Approximately half the increase is due to an increase in cow numbers while the other half is due to improved productivity. With the sheep and beef sectors depressed, dairying represents the most profitable alternative use for most agricultural land in New Zealand. Sheep and beef farms continue to be converted to dairy and an the same time, existing farms are adding to their herds. Thus far, this season has been characterized by ample to excessive rainfall. Within New Zealand, dairy industry analysts are expressing concern about the increasing cost structure of dairying. As payouts from the New Zealand Dairy Board increase, land costs have risen at the same time, threatening New Zealand's low-cost pasture based structure. In addition, producers are using supplemental feeds and other high-priced inputs which also tend to increase production costs. To keep costs down, producers are being urged to focus on fertilizer use and better pasture management to increase milk output rather than using grain and other high-priced inputs to boost production. Australia's 1996/97 (July/June) milk production is expected to total 9.4 million tons, 4 percent above last year's record. Nearly all the increase is due to increased herd numbers as producers add to their milk herds in response to generally favorable milk prices. Most of the increased production is expected to occur In the Eastern States, particularly Victoria and Tasmania where a larger share of the milk is used for manufacturing purposes. The 1996/97 season started with ample supples of soil moisture. In addition, lower grain prices are expected to make supplemental feeding more feasible. In both countries, improved supplies of milk will boost output of most dairy products. New Zealand cheese production is expected to expand 10 percent to 260,000 tons in 1996/97. Expanded cheese making capacity will help New Zealand export relatively more of its milk as cheese. Cheese production in Australia is expected to grow 4 percent to 278,000 tons. Output of butter is expected to expand in the 4 to 5 percent range in each country. However, current low international butter prices, if they continue, may cause additional switching to other products where feasible. In the milk powder market, both countries are forecast to funnel relatively more milk into whole milk powder production (WMP) compared to production of NDM.
SUMMARY: International trade flows for the major dairy products weakened somewhat in 1996 probably as a result of the high 1995 prices. Total butter exports in 1996 are estimated at 533,000 tons, 12 percent below 1995 because of lower shipments by both the U.S. and the EU. In both, operation of export subsidy programs plays an important role in determining the actual export level. Total 1997 butter exports are forecast to rise to 572,000 tons with increased shipments from Oceania and Argentina. Selected country butter imports for both 1996 and 1997 are expected to remain near the 1995 level. Total cheese exports in 1996 are estimated at 967,000 tons, only slightly above 1995. Rapid growth is expected in 1997 with increased exports from Argentina, New Zealand, and Australia which more than offset a downturn in EU exports. Brazilian imports were up sharply in 1995 as domestic importers raced to beat an expected tariff increase. However dairy product imports returned to normal levels in 1996. The Brazilian change was enough to pull total imports down in 1996. Renewed import growth is expected in 1997. Preliminary trade data for NDM indicate a sharp drop in 1996 exports of NDM, pushing total exports down to 810,000 tons in 1996. The United States, with slower DEIP activity, and the EU with limited supplies, account for most of the decline at the aggregate level. Aggregate exports of NDM are expected to increase by over 100,000 tons in 1997, largely due to increased exports from Oceania and the United States. For the covered countries, 1996 imports of NDM were down over 10 percent due to reductions by Mexico and Brazil. An import increase of approximately 5 percent is forecast for 1997. Trade in WMP turned downward in 1996, but 1997 may see renewed growth. Reduced exports by the United States, the EU, and Oceania accounted for the 1996 export downturn. Reduced Latin American imports caused the downturn in aggregate imports of WMP. UNITED STATES: During 1996, U.S. exports of major dairy products were sharply reduced due to limited supplies and reduced activity under the Dairy Export Incentive Program (DEIP) particularly during the first three-quarters of the calender year. With the stronger world prices, and the onset of Uruguay Round limitations, butterfat export incentives were not used at all during 1996 while activity for cheese, NDM, and WMP was greatly reduced. For 1997, falling milk prices have indicated a need to step up DEIP activity including reactivation of the butterfat program. (For additional information on U.S. dairy exports, see the special article entitled "Exports of Dairy Products from the United States".) CANADA : Exports of dairy products were sharply higher in 1996, aided, at least in part, by the new Special Classes program which enables processor/exporters to buy milk at world market prices. Exports of NDM, traditionally Canada's major dairy export, were up again in 1996 after making a big jump in 1995. During 1996 exports of butter jumped from 6,000 to 19,000 tons, while cheese exports declined modestly. Exports of most products are expected to be stable or decline in 1997, consistent with smaller milk supplies. AUSTRALIA: Prices and Policy The major determinant of price paid for Australia's manufacturing milk is the international market. World prices for dairy products were generally favorable during early 1995/96 but declined later in the year. The favorable early year prices were sufficient to give producers a sharp boost in their returns. The Australian Bureau of Agricultural and Resource Economics (ABARE) forecasts that manufacturing milk prices for 1996/97 will decline due to lower world prices for dairy products. Returns to Australian Milk Producers ($A/liter) Year Manu. Milk Fresh Milk 1992/93 0.23 0.43 1993/94 0.21 0.44 1994/95 0.20 0.48 1995/96 0.26 0.50 1996/97f 0.25 0.51 In most Australian dairy producing regions the old method of valuing milk in terms of its milk fat content has been replaced by a formula based on three components: milk fat, protein, and volume. The new formula recognizes the change in consumer preference toward lower fat products. This move to a compositional method of payment will provide dairy farmers with clearer signals of the economic value of their milk and will help them adjust their breeding and management techniques to maximize industry returns. Payments from processors to individual farmers also vary marginally as firms operate a range of incentive/penalty payments relating to milk quality, sales volume, and out-of-season supplies. Cheese exports rose 5 percent during 1995/96. Australian cheese exports have increased steadily from 52,375 tons in 1990 to 116,061 tons in 1995/96. The majority of the increase in exports has gone to Asian markets, with Japan easily the most important. Exports to Saudi Arabia grew to 12,000 tons after 3 years of imports at the 10,000 tons level. Exports to the United States fell further during 1995/96 after growing steadily in recent years. NDM export sales declined by 20,000 tons in 1995/96. Despite the over-all downturn, sales followed the usual pattern with the Asian market taking the vast majority of exports. The Philippines, Japan, Malaysia, Thailand, Singapore, and Indonesia are the major market for Australian exports of NDM. Imports are becoming a factor in Australia due to higher domestic prices and a trade agreement with New Zealand. Cheese imports from New Zealand increased from less than 8,000 tons in 1988/89 to around 22,000 tons in 1995/96. Most cheese imports from New Zealand are used in the food service and processing industries. Imports of New Zealand butter, while still at a low level, are mainly for the bulk trade. NEW ZEALAND: Overview: The New Zealand dairy industry exported 0.9 million tons of dairy products in 1995/96 (June/May), down from 1.07 million tons in 1994/95. All exports of dairy products manufactured in New Zealand are carried out by the New Zealand Dairy Board, which was established and given monopoly powers by the Dairy Board Act. In 1996/97, increasing milk production will see output of manufactured products rise across nearly all categories. Improved market opportunities are expected to continue to boost New Zealand's cheese butter, and milk powder exports. Relative price changes have shifted emphasis so that cheese exports are favored. The United States remains the largest export market for casein and caseinates produced in New Zealand, even though Japan is growing in importance as a casein importer. Prices: Current forecasts from the Dairy Board indicate that the 1996/97 payout will range from N.Z.$3.15 and N.Z.$3.20 per kg of milksolids, down from N.Z.$3.60 in 1995/96. The lower payout reflects lower international dairy product prices and continued appreciation of the NZ dollar. For a typical dairy farmer, the lower payout translates to an income loss of NZ$20,000 (approximately $US 14,000). NZ DAIRY PRICES AT THE FARMGATE (per kilogram of milkfat) Year $NZ Ex. Rate $US 90/91 4.22 0.60 2.53 91/92 5.84 0.55 3.24 92/93 6.38 0.53 3.40 93/94 5.80 0.56 3.27 94/95 5.81 0.63 3.66 95/96 6.81 0.67 4.56 96/97f 6.20 0.70 4.34 f=forecast . Trade Highlights: In comparison to 1994/95 exports, the main market changes in 1995/96 included: (a) Increases in the U.K., Russian, and Iranian butter markets; shipments to Iran more than doubled. (b) Increased shipments of cheese to Japan, Australia and Russia while shipments to the United States declined; © The Japanese, Malaysian and Indonesian markets for NDM were up, while other Asian markets such as Taiwan and the Philippines were down; (d) Exports of WMP to Malaysia, Mexico, and Sri Lanka were down though they remained the leading markets. Exports to Venezuela declined from 33,000 to 19,000 tons. and (e) Casein exports fell just over 10 percent with most export markets down. EUROPEAN UNION (EU): In recognition of the improved world markets for dairy products and of its obligations under the Uruguay Round, the EU reduced its export subsidies several times in 1995; however, with changing world markets and some stock buildup some subsidy increases occurred in 1996. In addition, since GATT imposed limitations on cheese subsidies are a relatively more serious problem than for butter or powder, the EU selectively reduced the subsidies for some destinations, such as other European countries, where EU cheese is competitively priced without subsidy. Currently, the EU system allows subsidies to be prefixed for up to 4 months for cheese and up to 5 months for butterfat and milk powders. Prevailing subsidy rates to third countries at the beginning of 1997 are as follows: EU SUBSIDIES PER METRIC TON Product ECU $US NDM 630 788 WMP 1080 1350 Butter 1900 2375 Butteroil 2400 2624 Cheddar 1060 1325 * 1 ECU = $US 1.25 With EU milk production quite stable due to production quotas, production and exports of the major dairy products tend to reflect relative market conditions. During 1996, exports of cheese and butter remained at the 1995 level; however both NDM and WMP exports dropped from the high 1995 level when favorable markets allowed significant stock reductions. In 1997, EU cheese exports are expected to decline again as subsidies are further reduced in line with GATT commitments. Export levels for butter, NDM and WMP are forecast to show little change from 1996. MEXICO: Mexico continues to be far from meeting overall dairy demand, although some larger, modern dairies effectively compete against imported products. As a result, Mexico likely will continue to be a large importer of NDM, to a lesser extent WMP, and other dairy products. However, NDM and WMP imports in 1996 were lower than in 1995 because of higher international prices and the loss of consumer purchasing power due to devaluation of the peso. According to some industry sources, 1996 demand by private processors was partially covered by milk substitutes such as whey protein concentrate, casein, lactose, and other dairy products as well as vegetable oils. NDM production and imports are projected to remain fairly stable for 1997; however some stock drawdown may facilitate an increase in consumption. Under the North America Free Trade Agreement (NAFTA), Mexico is obligated to provide duty-free access for 42,436 tons of U.S. milk powder in calendar year 1996. This duty-free quota rises 3 percent annually. The Government normal allocates the entire duty free import quota for NDM to CONASUPO, (a government buying agency) except for minimal amounts directly allocated to processors in border areas. CONASUPO continues to arrange NDM imports through direct purchases from suppliers without using public tenders. CONASUPO will probably remain the sole significant NDM importer during 1997. The Mexican market for imported cheese has grown rapidly in recent years, from 3 percent to 8 percent of the total domestic cheese market and over 30 percent of the market for hard and semi-hard cheeses. Another sharp increase in cheese imports is expected in 1997. Barriers to cheese imports are dropping rapidly under NAFTA and by the year 2003, U.S. produced cheese should enter Mexico duty-free compared to a rate of 40 percent for cheese from Europe or Oceania. BRAZIL: Imports of dairy products were at record high levels in 1995 because the local currency strengthened against the dollar making imported products more affordable, plus importers rushed to beat a tariff increase. Imports of most dairy products were down in 1996 and are expected to be down again in 1997. The declines are due to the sharp increase in domestic production which will facilitate consumption increases at the same time as imports are declining. Brazil's NDM consumption in 1997 is expected to continue rising due to economic growth and to the demand from states' social programs. Consumer demand for low-fat dairy products has also increased, although it represents a small portion of total demand. In contrast to butter and cheese, increased imports of NDM will be needed in 1997 to meet the expected growth in consumption. RUSSIA: Dairy products in Russia remain a significant part of the Russian's diet, although calculations based on official statistics show that per capita consumption of dairy products (in milk equivalent terms) decreased from 347 kilograms in 1991 to 252 kilograms in 1995. Variations in consumption of milk and products by regions are very significant. The lowest level of consumption is in the Far East and the Northern regions (150-160 kilograms per year), and the highest level is in West Siberia -- in Omsk consumption of milk and dairy products was 375 kilograms. Domestically produced dairy products (especially whole milk products) are often unpasteurized and must be consumed within a short period of time because they can not be stored for long periods for human consumption. The short expiration period is a big problem in marketing Russian dairy products. Cold storage facilities are primarily operated by the quasi-state organization Rosmyasmoltorg - the former state ministry of the meat and dairy processing industry. The company owns a network of cold storage facilities and markets about 20-50 percent of the dairy products sold in Russia. Prices: In the period from September 1995 through September 1996, the retail price of dairy products stabilized in Russia. The average retail price of a kilo of milk increased more slowly, from $US 0.52 in September 1995 to $US 0.56 in September 1996, the average retail price of butter decreased in the same period from $US 4.19 to $US 3.90, and the average retail price of cheese decreased from $4.95 to $4.73 per kilogram. Overall Trade Trends: Russia remains a net importer of dairy products, and the value of imports increased in 1995. In 1995, imports of dairy products increased to $796 million (almost 60 percent higher than in 1994), while exports decreased to $74 million (9 percent less than in 1994). The Ukraine, owing to its transparent borders with Russia and the tariff exemptions on imports from the Commonwealth of Independent States (CIS countries) in 1995 became the export leader among the suppliers of milk, cream, and butter to Russia. The Netherlands, Germany and New Zealand are Russia's largest non-CIS suppliers of milk, cream, butter, and cheese. Trade Policy: In spite of higher import tariffs, the 1994 imposition of a value added tax (VAT) on imported products, and the new per kilo minimum tariff on butter, Russian producers are still facing strong competition from imports of less expensive and sometimes higher quality products. The main reason is the high cost of production of domestic dairy products. However, the efforts of protectionism by the Russian Government are constrained by the Russia's plans to join the World Trade Organization. Also, consumers in the large metropolitan areas are demanding high quality, processed, packaged dairy products, much of which the domestic industry cannot supply. During 1996, import duties for dairy products were unchanged with one exception: the import duty for butter was changed to include a minimum levy of 0.3 ECU per kilogram. There are no export duties for milk products shipped from Russia. JAPAN: Cheese consumption maintained an upward trend in 1996, with estimated annual total consumption reaching 190,000 tons, up 4 percent from 1995. The gain was mainly due to increased imports since domestic production of both natural and processed cheese did not rise above the previous year's level of 30,000 tons. Smaller individually packed items are said to be the most popular in the marketplace, regardless of whether domestic or imported, natural or processed. Japan's total imports of cheese for 1996 are estimated at 160,000 tons, up 3,000 tons from 1995. Interim trade data for January - September 1996 show that total cheese imports rose 11 percent from the year earlier period with cheese imports from Australia up 11 percent, New Zealand up 4 percent and Denmark down about 4 percent. Shipments from the United States, though much smaller than the 3 leaders, were up 65 percent for the period. The overall growth is mainly attributed to a combination of factors such as real consumption increases and some switching from meat products to dairy products. Imports from the United States are up, largely owing to increases in both fresh cheeses (cream cheese) and grated (pizza) cheese categories.
SUMMARY: After a steady decline for most of 1996, world dairy prices appear to have stabilized. In fact, there are even some signs of underlying strength particularly in the milk powder and cheese markets. Butter prices, which experienced the sharpest declines with prices falling from a peak of around $2,500/ton in 1995 to a low point of around $1,500/ton in late 1996, also appear to be stabilizing. In the EU, butter export prices have recently rebounded to around $1,700/ton. These may be short-lived trends but are nevertheless an improvement from earlier predictions which suggested a dim outlook for dairy markets during 1997. The historical price chart suggests that perhaps markets (at least for powder and cheese) are settling at new price ranges. For example, nonfat dry milk traded in the range of around $500/ton to $1,000/ton in the period 1979-1987, then around the $1,500/ton mark from 1988-1994 before breaching the $2,000/ton level in 1995. Since then, while the price has dropped, it now appears to have stabilized in the $1,900/ton to $2,000/ton range. Since butter has closely followed the price of nonfat dry milk, it is not inconceivable that butter prices could hover around the $1,500/ton level for the rest of the year. The case for cheese is more persuasive, since in the period from 1986 prices have exhibited an upward trend and since 1994 have remained above the $2,000/ton level. This implies that during the past few years import demand for cheese, primarily cheddar cheese, has in general exceeded supply, thus pulling prices up. Further, in contrast to other dairy commodities cheese prices have remained fairly resilient with prices trading in the $2,300-$2,600/ton range during 1996. NONFAT DRY MILK: NonFat Dry Milk (NDM) prices are currently trading in the $1,875-$1,950/ton range and, for the near future, are expected to remain in that range. A key factor, however, will be the level of import demand in the next few months, since the availability of exportable supplies from major exporters is limited. In fact, the EU is the only supplier of NDM that can currently meet substantial purchasing orders on world markets. Consequently, even a moderate increase in demand could pressure prices upwards. For example, the December 1996 EU sale of some 17,000 ton of NDM to Mexico at prices ranging from $1,995-$2,010/ton C&F for Dec.-Feb. delivery was sufficient to cause EU domestic prices to climb. More upward pressure could occur if the unconfirmed report of an additional 47,000-ton sale proves correct. As a result of the tightness in NDM markets, it appears any price advantage gained by EU exporters as a consequence of the recent surge in the value of the dollar is being negated whenever substantial sales are being concluded. This is particularly evident for nearby delivery sales because EU milk production is at its seasonal low and dairy producers in a number of EU countries are cutting back production in order to remain within their production quotas. The harsh winter weather has also played a role, albeit to a lesser degree. For deferred deliveries, EU exporters will probably be willing to sell short and aggressively in expectation of the spring flush. Consequently, the action of buyers such as Mexico and Algeria could have a substantial bearing on prices particularly if they seek nearby delivery. Nevertheless, NDM prices will be hard pressed to climb substantially since the EU maintains substantial intervention stocks. With respect to major purchasers, indications are that Algeria is currently seeking to purchase some 12,000 ton of powder, although, Algeria is reported to be currently taking delivery of some 20,000 ton of Polish NDM which should cover its nearby needs. Meanwhile, Mexico, in a departure from past purchasing patterns when it bought the bulk of its needs between October and January, appears to be buying smaller quantities on a more regular basis. Consequently, many traders expect that Mexico will purchase further quantities for delivery during the second quarter of 1997. Most of this product will probably be of EU origin although smaller quantities may be sourced from Canada and the United States. The only other major purchaser of powder is Japan, which is reportedly tendering for some 15,000 tons which will likely be covered by purchases from Australia and New Zealand. With respect to New Zealand and Australia, it appears that they have committed the majority of their exportable supplies to the Asian region and are holding only residual unsold balances for premium markets. Based on estimated prices it appears that the Oceania countries marketed their product at well below EU prices in order to capture the Asian markets. This is evident since Oceania prices were at their most aggressive during the August and September period when they traditionally market the bulk of their initial and anticipated production. Since the EU export prices are dependent on the fixed level of restitutions they are fairly transparent and predictable and thus easily undercut. In contrast U. S. DEIP prices are tailored to meet prices prevailing in different markets of the world and thus may pose a greater competitive threat. However, this threat is somewhat exaggerated since, as the chart demonstrates, the share of the world NDM export market is clearly dominated by Australia and the New Zealand Dairy Board (NZDB). Given that the Uruguay Round spells out the limits for subsidies of U.S. powder, it seems that objections to the DEIP are rooted mainly in the limited price competition that DEIP offers. This is particularly evident when some major purchasing clients of the NZDB are also its major competitors of consumer branded products in many Asian countries. Prospects for exports of large volumes of NDM under the DEIP appear limited since the future availability of domestic supplies is difficult to gauge. Certainly, the wide price fluctuations experienced during 1996 have currently made U.S. suppliers extremely reluctant to commit substantial volumes at fixed prices. Since the virtual elimination of CCC stocks, domestic markets have become increasingly volatile and unpredictable. WHOLE MILK POWDER: Prices for WMP are currently estimated to be trading at a premium to NDM with prices ranging from $1,925 to $2,000/ton. The EU last increased restitutions for WMP in September 1996 and given that prices have remained virtually unchanged since then this suggests that WMP markets are fairly well balanced. Despite the recent strength of the dollar there has been some firming of WMP prices which may have been fed by unconfirmed reports of heavy purchases by Iraq and tenders from Algeria. The outlook for WMP prices is similar to NDM but prices are likely to be more resilient should markets ease. BUTTER: The plunge in butter prices experienced during 1996 appears to have ended. In fact, the recent gain in EU export prices points to a modest recovery . EU prices, after sliding to around $1,500/ton have recently climbed to around $1,700/ton. Two factors seem to account for this upward movement. First, Russian demand has been fairly strong since November 1996 and some sources report that some 30,000 tons of EU butter has already been sold or shipped. Second, internal consumption appears to have increased as a result of lower prices and the EU's internal subsidy scheme for food manufacturing. This is supported by the chart tracking EU private stocks which highlights the rapid drawdown in stocks relative to either the average of 1991-1995 or last year. Admittedly, this probably reflects exports but also implies increased domestic usage. Since intervention stocks only total around 40,000 tons, it seems likely that there will be further marginal strengthening of internal and export prices through early spring. A key determinant, however, will be the pattern of Russian purchases. At the other end of the scale, Australian exporters, which are expected to increase exports of butter by 25 percent in the current 1996/97 season, aggressively priced butter early in the season in order to keep inventories down. It now appears that the volume being offered has declined substantially. Currently, Oceania suppliers are reported to be offering butter in the range of $1,300-$1,375/ton FOB Oceania and export prices appear steady. Like NDM, the outlook for U.S. exports of butter under DEIP will be largely dependent on domestic availability. The recent gyrations of U.S. butter prices which ranged from around $3,375/metric ton down to $1,605/ton and back up to $2,010/ton in the space of three months will undoubtedly present a hurdle for prospective exporters for the same reasons cited for NDM. If exporters have difficulty in sourcing supplies of butter during the current period, traditionally the surplus season, then the role of the United States as an exporter of butter for the near future will probably be limited. CHEESE: Although Cheddar cheese prices have been somewhat erratic at the top end of the price range, prices have remained fairly stable for most of 1996. This is probably due to the strong level of import demand on world markets and the impact of the Uruguay Round limitations of subsidized exports of cheese from the EU. In an effort to remain within the confines of these limitations the EU reduced export restitutions (to 3rd countries) by 20 percent during 1996 and zeroed out subsidies for some minor markets. Strong internal demand as well as continued pressure to reduce the level of subsidized exports will continue to lend support to EU export prices and world markets.
Prior to the breakup of the USSR, the three Baltic countries, Latvia, Lithuania, and Estonia, were important suppliers of dairy products to Russia, particularly the cities of Moscow and St. Petersburg. Following their independence, new economic relations with Russia plus unfavorable economic conditions in the region sent the dairy sectors of each of these 3 countries into a steep decline. Reports from the region indicate that 1994-95 probably represented the bottom and conditions have started to improve for both producers and consumers. With improving prospects for production, the Baltic region is looking to international markets, particularly nearby EU markets as an outlet for dairy product exports. The Baltic Free Trade Area (FTA) for agricultural commodities went into effect on January 1, 1997. If the FTA is implemented as planned, it will expose less competitive agricultural sectors to competition from the other 2 countries. In the case of dairy, this means Latvia's relatively less competitive dairy sector may suffer in the face of competition from Estonia and Lithuania. In Estonia the total volume of processed raw milk is 1.5 times larger, and in Lithuania 3 times larger, than in Latvia. Raw milk purchase prices are lowest in Lithuania due to government subsidies and as a result that country has the cheapest dairy products. The Estonia dairy sector is highly industrialized, and Estonia has the lowest priced electrical power in the Baltics--two factors which make Estonian dairy products very competitive despite the small production base. The resulting competition will undoubtedly put downward pressure on future dairy product prices. The following table details the decline that took place in cow numbers and milk production since 1990. Similar declines characteried other aspects of the dairy sector in each of the three countries. It should be noted that despite the sharp downturn in production, each of the 3 countries is till self sufficient and has product available for export. Based on a report from the U.S. Agricultural Attache in Stockholm, the following data present a statistical overview of the dairy sector in each of the 3 countries. The Stockholm report also presents some additional detail for Latvia. Additional Details on the Latvian Dairy Sector After the decline in dairy cattle numbers and milk production commencing in 1991, 1995 is viewed as the low point in the sector's development; and 1996 production levels reflect a turnaround in output. Official production data show January-September 1996, milk production totaled 721,400 tons, slightly below the comparable 1995 period. However, third quarter milk sales to processors totaled over 144,000 tons, an increase of 22 percent compared to 1995. Farmgate milk prices are well above 1995 levels, although the margins have narrowed recently. One reason for the increased optimism in the Latvian dairy industry is the EU/Latvian FTA which sets EU quotas for Latvian exports and envisions them increasing by 5 percent annually. For 1996/97 the quotas were set at 2,363 tons for skim milk powder, 1,313 for butter and 1,103 for cheese. In 1996, butter exports to the EU helped stabilize the Latvian butter market. Through mid October 1996, Latvia was able to fulfill its export quota for butter at the relatively attractive price of $2,170 to $2,200 per ton. While export prices did not cover butter production costs, they at least did not worsen the financial situation of dairies. In the summer 1996, butter prices were $1,700 per ton in the Russian market -- levels that would have only contributed to losses for Latvian dairies that export butter. With the EU quota filled, prospects for Latvian butter exports during the next few months are rather pessimistic. Returns of approximately $2000 per ton are needed to avoid losses while the international price is currently well below that level. Similar to the situation for butter, the fact that Latvia has fulfilled its EU export quotas, means there is little opportunity for additional cheese exports. This is particularly true since the EU market requires mainly Cheddar cheese.
Final Bureau of the Census data are expected to show that the value of U.S. dairy product exports declined in 1996. Total value was down 7 percent for the first 11 months of 1996 compared to the same period of 1995. On a product basis, most of the decline is due to reduced shipments of milk powders and butterfats, product categories where the Dairy Export Incentive Program (DEIP) has a major impact. Shipments of yogurts and similar products are also expected to be sharply lower with that decline caused by reduced trade with Mexico where local production capacity has been improved. On the plus side, 1996 exports of fluid milk and cream, whey products and other dairy products are running significantly better than in 1995. Improving economic conditions in Mexico, the primary market, have boosted the fluid milk complex. However, 1996 shipments are still well below exports in 1994, the last full year before peso devaluation. The category other dairy products' consists mainly of lactose and of ready-mix food preparations with a high dairy product content. Analysis of food preparations exports is beyond the scope of this article. Tables on the destination of U.S. exports of whey powder, lactose, and whey protein concentrate are presented below. SUPPLEMENTAL INFORMATION ON IMPORTS In an effort to provide additional information regarding international demand for dairy products, selected import data from the Food and Agricultural Organization (FAO) are included. Only the major dairy products for countries not included in this circular were included in these tables. As a note of caution, FAO procedures for collecting and maintaining its database make it likely that some of FAO's data may differ significantly from data maintained by USDA.