Dairy Production and Trade Developments
This update to the 'Dairy: World Markets and Trade' circular is based on reports from 12 leading producers and traders of dairy products and available secondary information. No changes were made in the data for countries not reviewed. That data is presented for consistency and context only.
Cow milk production in selected countries for 1997 is estimated at 386.5 million tons, essentially unchanged from the January forecast, but up marginally from 1996. Compared to January, the New Zealand production estimate is much higher than expected while small declines characterize most other countries. The estimate of milk cow numbers for 1997 has been revised to 133.2 million head, slightly lower than in 1996.
Butter production in selected countries for 1997 is estimated at 5.3 million tons, up from both the January forecast and 1996. Prospects for butter trade have risen sharply since the January report with increases expected for both Oceania and the EU. Most of the increased exports appear to be destined for Russia and other former members of the Soviet Union. As mentioned, although imports appear to have been above expectations, the estimates for Russia were not revised at this time.
Cheese production is expected to exceed 12 million tons in 1997, marginally below the January forecast, and only 1 percent higher than 1996. Export prospects for cheese are also down compared to the January forecast.
Nonfat dry milk production in 1997 is estimated at 3.0 million tons, marginally above both the January forecast and 1996. Compared to the January forecast, export prospects for NDM are up slightly as Australia and New Zealand find markets for their extra production.
United States: Milk production in the United States for 1997 is estimated at 70.5 million tons, up 1 percent from the revised 1996 estimate of 70.0 million tons. Cow numbers continue to fall but the boost in per cow production will allow an overall production increase. As of mid-1997, farm milk prices are down with the June Basic Formula Price (BFP) 23 percent below June 1996. The cold-late spring limited milk production throughout much of the northern half of the country; however, dairy product demand even failed to keep pace with the slow production growth. As a result, stocks have accumulated and prices have weakened significantly during the first half of the year.
U.S. cheese production in 1997 is now estimated at 3.3 million tons, up 2 percent from 1996. This compares with 4 percent growth in 1996. Lower prices, plus increased activity under the Dairy Export Incentive Program (DEIP), and effective market development efforts are expected to lead to a 10 percent increase in U.S. cheese exports in 1997.
U.S. butter production is expected to alter its multi-year downtrend and stablize in 1997. Compared to January estimates, much of the upturn in butter production is due to the soft market for cheese which has tended to increase supplies of milk available for butter production. With more plentiful supplies and lower prices, U.S. butter consumption may show a small up-tick during 1997.
Production of nonfat dry milk (NDM) during 1997 is estimated at 455,000 tons, above the January estimate, but 6 percent below 1996. With sharply increased DEIP activity, U.S. exports of NDM are estimated at 85,000 tons, nearly 3 times the size of the 1996 figure, but only half that in 1995, when DEIP was even more active.
Despite the better than expected production of most products and somewhat weaker than expected demand, end of year stocks of dairy products are expected to remain moderate. U.S. cheese stocks are forecast to close the year at 225,000 tons, only slightly above last year's 221,000 tons. Ending butter and NDM stocks, estimated at 8,000 and 30,000 tons respectively are in the working level range.
Canada: Milk production in 1997 is estimated at 7.7 million tons, 2 percent below 1996, which in turn, was slightly below the 1995 record. Based on preliminary monthly data through April, which has been down 3 percent, final data for the 1996/97 dairy year (Aug/July) are expected to show a 2.0 to 2.5 percent drop in Canadian production. In late 1995 and early 1996, favorable international prices for dairy products, plus Canada's new dairy program (see the accompanying special article) gave Canadian producers an optimistic outlook and production increased accordingly. Falling international dairy product prices in late 1996 and early 1997, plus a better understanding as to where world prices are relative to Canadian domestic prices cooled some of the earlier optimism and production has fallen accordingly.
For the 1997/98 dairy year, most analysts expect that the Canadian Milk Supply Management Committee will reduce the market sharing quota (MSQ) which covers everything except beverage milk, by 2 to 3 percent. Major factors behind the reduction, include indications that the 1996/97 MSQ will be over supplied and there is a need to make room for increased butter imports from New Zealand agreed to under the Uruguay Round. Also, the MSQ is a butterfat based calculation, with the result that the trend towards consumption of lower fat dairy products, implies that less milk is needed to fill the MSQ.
In late January 1997, the Canadian Dairy Commission announced that despite rising production costs, the target price for MSQ milk would remain at $C54.23 per hectoliter ($US17.30/cwt) during the second half of the dairy year. As part of that announcement, the support price for butter and non-fat dry milk were kept at $C5.32 and $C4.20 / kilogram ( $US1.75/lb and$US1.38/lb) respectively.
Although, as of mid-July, no official announcements have been made, many observers expect that these prices will also be kept stable for the first 6 months of the 1997/98 dairy year.
With less milk available, production of major dairy products is expected to remain at the 1996 level or decline slightly. Cheese exports in 1997 are expected to total 16,000 tons, up 16 percent from 1996. The United States and the UK remain Canada's largest cheese markets while Mexico and Japan have shown rapid growth.
Butter exports are forecast at 14,000 tons, just below last year's high level. North Africa and Russia were the major destinations for 1996 butter exports. Canada's 1997 NDM exports are expected to decline about 10 percent to 40,000 tons. Traditionally, North Africa and Mexico have been the major markets.
In addition to traditional products, Canadian exporters have also done well with some other products. With the reopening of trade, Canadian exports of beverage milk to the United States increased from 102 tons in 1995 to 3,658 tons in 1996. January -- May data indicate further acceleration in that trade. Nearly all milk exports to the United States are ultra high temperature (UHT) milk moving from the province of Quebec to Puerto Rico
Canadian exports of condensed and evaporated milk have also shown significant increases. In 1995, --4,000 tons valued at $C 3.1 million were exported. In 1996, those totals moved to 15,000 tons and $C 25.3 million respectively, while first quarter 1997 trade was nearly double the same period of 1996. Major destinations include Libya, Lebanon, and the United States.
Mexico: Milk output in 1997 is estimated to increase slightly to 11.5 million tons. The Government of Mexico has made policy changes with the objective of both increasing production and improving efficiency, however monthly production data for the commercial sector imply that large changes are unlikely this year. These policy changes generally involve allowing dairy prices to be more responsive to market conditions and encourage investment in the diary sector. Mexico's 1997 output of NDM is expected to remain stable or perhaps increase slightly, as limited milk supplies are utilized in the most profitable way.
With the recovery in the Mexican economy, fluid milk imports from the United States have also shown signs of rebounding. U.S. fluid milk exports to Mexico dropped from the pre-devaluation level of over 60 million liters, to only 17 million in 1995. Trade increased to 25 million liters in 1996 and another increase is likely in 1997. During the first five months of 1997, U. S. exports of fluid milk were approximately double the 1996 pace.
Mexican consumption of dairy products continues to show further recovery in 1997 following 1995's sharp decline due to devaluation of the peso. Cheese consumption is forecast to increase with the improving economy. Though imports of high-quality cheese continue to be small, U. S. cheeses are gaining market share due to effective promotional campaigns.
Europe and Asia
European Union (EU): EU milk production in 1997 is forecast at 120.2 million tons, down slightly from the January forecast and 1 percent lower than the 1996 volume of 121.4 million tons. Most of the reviewed countries were at or above EU quota for the 1996/97 quota year (April/March) and are subject to penalties for over-quota production. Cow numbers are expected to continue their long term downward trend as improving productivity allows the quota to be filled with fewer and fewer cows.
On the trade side, EU trade commitments made under the Uruguay Round were under threat in 1996/97 (July/June WTO year) especially for quantitative limits for cheese and 'other' dairy products (mostly whole milk powder). Though final figures are not yet available, both categories appear to have ended the year with subsidized exports at or very near the limits of 405,000 tons and 1,140,000 tons respectively. For 1997/98 the limits drop to 384,000 tons and 1,095,000 tons for cheese and other dairy products respectfully. To stay within the export limit for cheese, the EU Commission shifted the structure of subsidies and stopped issuing licenses for several weeks in June 1997.
In an effort to reduce the burden of its Uruguay Round dairy commitments, the EU has floated three major proposals. 1. Any one year's commitment can be stretched by adding any unused quantities left-over from prior years. 2. Since processed cheese usually contains butterfat and NDM, a fraction of processed cheese exports should really be counted against the limits for butterfat and NDM. 3. The EU should adopt a two-price system for dairy somewhat similar to that being used in Canada. (See special article).
As part of the farm price package for 1997/98, the EU decided to leave the dairy support system largely unchanged. That is intervention prices for butter and NDM will stay at ECU 3,282 and 2,055 per ton respectively. These prices are designed to support the target price for milk of ECU 310 per ton. The EU-wide production quota also remains at the 1996/97 level.
As mentioned, based on new reports from Denmark, Ireland, France, Netherlands, United Kingdom and Sweden, the 1997 EU milk production estimate was reduced to 120.2 million tons with most of the change due to France. French producers were subject to unexpectedly high penalties for over-quota 1996/97 production stemming from a sharp increase in the butterfat content of their milk deliveries. Milk producers in Ireland were also well over their 1996/97 quota and are expected to reduce their output to stay within the 1997/98 quota.
EU butter production for 1997 is estimated at 1.75 million tons, essentially the same as in 1995 and 1996. EU butter exports are expected to be about 6 percent above the 1996 level due mainly to a recovery in Dutch export activity. Most of the increase is being sent to Russia or other parts of the former Soviet Union.
EU cheese production in 1997 is estimated at 5.7 million tons, virtually unchanged from the January forecast and 1996. French cheese production in 1997 is forecast at 1.6 million tons, only slightly higher than the 1996 level. French cheese consumption is also expected to increase. In the UK, a marginal decline, to 355,000 tons, is forecast for 1996. Higher domestic consumption, enhanced by the recent negative publicity about meat, appears to be the driving force behind a further increase in cheese production. With little change in trade, UK cheese stocks are expected to be drawn down.
In a reflection of the implementation of WTO restrictions on export subsidies to non-EU countries, Dutch cheese production in 1997 is expected to remain stable at the 1996 level. If so, this will be the first year since 1975 that Dutch cheese production has not risen. Dutch cheese exports to non-EU countries were down sharply in 1996 due to reduced export subsidies and successful efforts to increase shipments to other EU markets.
Loss of markets for feta cheese, is expected to cause a further fall in Danish cheese exports to non-EU markets. Iran and Egypt were Denmark's principal markets for feta cheese. The decline in exports to non-EU countries as a result of reduced subsidies is making it difficult for Denmark to find alternative markets for its cheese.
NDM production in the EU for 1997 is expected to decline 2 percent from 1996, to 1.2 million tons. Low profitability of calf fattening throughout Europe has resulted in soft demand for NDM to be used in calf feed. Further strengthening of the U.S. dollar relative to EU currencies has enabled EU traders to undercut U.S. prices at times, however some intervention buying has been needed to support EU producer prices for NDM. EU exports of NDM in 1997 are forecast at 285,000 tons, 8 percent above the 265,000 tons exported in 1996.
EU production of whole milk powder (WMP) is estimated to increase 2 percent in 1997, to 925,000 tons. The production of WMP fluctuates based on the relative price margins with competing products, such as cheese and condensed.
EU exports of WMP are forecast at 617,000 tons in 1997, essentially the same as in 1996. Like other dairy products, during late 1997 WMP faces soft demand on international markets. However, most exporters need to ship relatively more butterfat and that will tend to keep trade at a high level.
Asia: Japan's milk output in 1997 is forecast at 8.7 million tons, barely above 1996. The February 1997 cattle inventory showed continued contraction of the dairy herd. While milking cow numbers were only slightly reduced from February 1996, the number of replacement heifers dropped 3 percent. In 1996, the number of Japanese dairy farms fell 5 percent, to less than 40,000 farms. The decline farm numbers is due primarily to small inefficient farms leaving the industry.
On the consumption side, moderate growth is forecast in use of milk for processing while beverage use declines. Also utilization statistics suggest Japanese consumers are drinking more processed milk at the expense of regular beverage milk. However, much of that trend is merely adding another stage of processing to make the product more desirable. Popularity of flavored milk and increasing sales of non-fat and low fat milk calcium-enriched milk and drinking yogurt (all considered processed milk) continued to grow in 1996 and that trend is expected to continue in 1997.
Japan's cheese imports are expected to continue a pattern of steady growth in 1997, rising to 170,000 tons, 6 percent above 1996. In recent years, the U.S. share of the Japanese cheese market has been increasing, though Australia and New Zealand remain the major suppliers.
With somewhat more milk available for processing and soft demand, imports of NDM are expected to decline again in 1997. Imports are forecast at 55,000 tons, down from 75,000 tons in 1996 and 105,000 tons in 1993.
Australia: Milk output in 1997 (actually 1996/97, July/June) is estimated at 9.2 million tons, 3 percent above 1996. Cow numbers are estimated at 1.88 million head, also up 3 percent. Favorable prices in recent years have given producers the incentive to expand their herds. The 1996/97 dairy year started with excellent seasonal conditions in major production regions, but that turned to excessively wet weather in late winter/early spring. Hot and dry conditions in February 1997 hurt production in Victoria, the largest producing state. Those hot dry conditions were the main cause to the downward revision in estimated 1996/97 production.
Productivity gains and increasing cow numbers continue to underpin the growth in milk supply. This has reversed the trend of declining cow numbers that prevailed from the 1960's to the early 1990's. Milk yield per cow has also been increasing steadily in recent years due to an improved genetic pool, superior husbandry practices, and an increase in the use of supplementary feeding.
The majority of the increase in 1997 milk production will again be directed to manufacturing. The production of all manufactured dairy products, except for cheese, is estimated to increase during 1996/97. The export volume of all manufactured dairy products is expected to increase during 1996/97.
When final data are released, average manufacturing milk prices are expected to be down 12 percent compared to 1995/96. The decline is due to reduced returns on the export market. Australian exports of manufactured dairy products rely on prevailing world market conditions.
New Zealand: New Zealand fluid milk production in the 1996/97 season is forecast to increase 10 percent over last season to a record 11.5 million tons (872,000 tons of milksolids). The expansion has been driven by excellent pasture growth in key dairying areas and a steadily increasing national dairy herd brought about by conversions of many beef/sheep farms to dairying in recent years.
Farmers also wanted to produce more milk in 1996/97 in order to raise their stake in their cooperative dairy companies. Legislation enacted in December 1996 clarified the shareholding system that links shareholding in the New Zealand Dairy Board (NZDB), cooperative companies and production expansion. In 1997/98 under many new cooperative regulations, the increased costs of processing new milk will be paid by those bringing forth the extra production, no matter whether they are new entrants to dairying or just farmers expanding their production.
With the higher fees, more modest milk production growth - between 2 percent and 3 percent - is expected in the 1997/98 year. Further, the rate of sheep/beef conversions to dairying has slowed from last year's peak due to lower forecast payouts in dairy. If, as some expect, El Nino weather patterns develop, then dry conditions will return and pasture growth will be significantly less than in 1996/97.
The position of the NZDB is that to take full advantage of their policy of exporting value-added dairy products, production volume should increase no more than 5 percent per year. Thus, most of the 1996/97 dramatic increase in milk production will be processed into bulk commodities. Output of manufactured products increased across nearly all product categories. The NZDB estimates that it had an additional 100,000 tons of dairy products to sell as a result of the 1996/97 season milk increase.
The 1996/97 final New Zealand Dairy Board payout to farmers has been set at $NZ3.18 per kg milksolids, a decline of 11 percent compared to the previous season. The main factors behind the lower payout were lower international dairy prices and the rise in the New Zealand dollar relative to the US dollar and the British pound. The high New Zealand dollar eroded earnings by an estimated $NZ140 million - the equivalent of $NZ0.17 per kg of milksolids - during the season.
The NZDB's payout will be "topped up" with an additional payment from individual dairy cooperatives. Top-up payments will vary considerably across the 11 dairy cooperatives which supply the dairy products to the Board for export. For example, in 1995/96 Alpine Dairy, a small cooperative in the South Island, paid no additional top-up, while the industry's dominant cooperative, New Zealand Dairy Group, paid an additional $NZ0.50 per kg of milksolids. For the 1997/98 season, the NZDB is predicting a further cut in the payout, probably in the range of 4 to 7 percent.
Dairy trade figures for the first three-quarters of the 1996/97 marketing year reveal sharply larger volumes being sold. On the strength of large butter sales to Russia, New Zealand butter exports thus far this year already exceed the total for 1995/96. Total dairy product sales to Russia are expected to exceed 90,000 tons with approximately one-third of the product in consumer-ready packs. In addition, Venezuela, Mexico, and Algeria have returned as significant purchases of New Zealand's products.
Several additional export destinations for New Zealand dairy products have emerged. Exports of butter have increased significantly to Belgium (22,585 mt), Indonesia (5,366 mt) and the United Arab Emirates (4,099 mt) in the three quarters to March 1997.
Meanwhile, New Zealand cheese exports for the first three quarters of the year, totaling 170,198 tons were nearly equal to the total for the entire 1995/96 year of 172,778 tons. Exports of non-fat dry milk powder are in a situation similar to that of cheese, with 152,527 tons shipped, compared with 149,616 tons sold in all of the 1995/96. Sales of NDM to Russia and China have increased to just over 2,000 tons each. Overall sales of whole milk powder are expected to increase once again, returning to 1994/95 levels.