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WORLD DAIRY PRICES
SUMMARY:
During the past year, dairy prices have sagged primarily due to the continuing financial erosion of Asian economies and the economic turmoil roiling through Russia. In the case of NDM, prices have plunged from $1,600 per ton (FOB) early in the year to a low of around $1,325 per ton in the late Fall. Even NDM prices in the EU, which in past years had served as a bellwether for exporters, became largely irrelevant as export prices dropped well below EU intervention prices.
Nevertheless, there are indications of some recovery which may help stabilize markets. For example, in Asia, the economies of such countries as the Philippines remain relatively healthy and demand for NDM is strong. Similarly in Mexico, where strong domestic use in the last quarter of 1998 led to significant purchases of NDM that caused world prices to surge by more than $100 per ton in the space of 2-3 weeks. Consequently, there is a sense that NDM prices have bottomed-out and are experiencing a modest recovery.
Cheese markets have also experienced some growth particularly in Japan and the United States, where imports in 1998 are expected to exceed previous year levels. However, concerns about the loss of the Russian cheese market will undoubtedly continue to undermine any resurgence in prices.
In the case of WMP and butter, there is a similar weak undertone. Though indications are that butteroil trade remains active. In summary, while prices for some dairy products appear to have stabilized or even improved there is still apprehension regarding the outlook.
NONFAT DRY MILK (NDM):
Despite the fall in the value of the dollar, which normally supports NDM prices) during 1998 international NDM prices continued to slide, underscoring the sharp drop in world demand, particularly Asian demand. Even more indicative of the state of the market was this decline continued during the second half of the year when the EU was virtually absent from the market. Price levels since January 1998 declined by $250-$300 per ton and are now trading in the range of $1,325-$1,375 per ton.
There is, however, a glimmer of optimism as prices have recently begun to rebound. For example, recent sales to Mexico started at around $1,330 per ton C&F and rapidly accelerated to well over $1,400 per ton C&F. Furthermore, DEIP sales in excess of 20,000 tons in the span of 2-3 weeks suggest that demand is more robust that previously anticipated.
However, this recovery may be tempered by the presence of the EU which has accumulated substantial stocks - now totaling some 200,000 tons. The problem for the EU is that with falling prices and soft demand it has very little leeway in stimulating exports. Given the transparent nature of its export restitution system coupled with its intervention system it has become a simple exercise for competitors to rapidly adjust prices as subsidy levels are increased.
As a consequence, in recent months, EU prices have been at the upper end of the acceptable range while NDM from Oceania at $1,275-1,350 per ton FOB, has been closer to the bottom as Australia and New Zealand have vied with each other to capture markets. Polish powder has been available at even lower prices as evidenced by the substantial sales (some 13,000 tons) to Algeria at prices ranging from $1,380-$1,400 per ton C&F.
The near term outlook for NDM prices points to a modest recovery as the availability of supplies from Oceania - where production peaks in October and November - fades away. Already there are signs that New Zealand=s milk production is below pre-season forecasts limiting the availability of NDM. In fact, modest sales by New Zealand and Australia of NDM to Algeria and their virtual absence from recent tenders in the Mexican market suggest that Oceania has adopted a much more conservative approach in pricing their NDM.
As the March 1, 1999, opening of intervention approaches, domestic EU producers will start pegging prices at intervention equivalents which currently equate to export prices of around $1,400 per ton FOB. It seems unlikely that the EU will make any effort to raise restitution rates since changes during the past year have been largely ineffective. Further, the planned donation of 50,000 tons of NDM to Russia may ease part of the surplus burden.
In summary, assuming no dramatic interruptions in availability and current exchange rates, it appears likely that NDM prices will probably continue their recent rise to stabilize around $1,375-$1,425 per ton FOB N. Europe.
WHOLE MILK POWDER (WMP):
Despite sagging world demand, WMP prices have been surprisingly resilient during the past year. Only recently has there been a notable downturn in prices primarily as a result of the seasonal surge in supplies from Oceania. This weakness became evident when Algeria entered the market to purchase a substantial volume of WMP.
EU exporters, which viewed Algeria as almost a proprietary market, clamored for an increase in restitutions in order to remain competitive. The subsequent increase (in November 1998) in restitutions of 114 ECU per ton (approx. $130/mt) to 1,114 ECU/ton, however, did little to improve the EU=s competitiveness as Algeria purchased some 10,000 tons of WMP principally from New Zealand and Eastern Europe at prices ranging from $1,750-$1,800 per ton C&F.
Shortly thereafter Mexico, also purchased some 16,000 tons of WMP from New Zealand at around $1,700-$1,725/mt C&F and about 5,000 tons of fat-filled powder from the EU at prices around $1,680 per ton C&F.
Traditionally, in a typical year, Mexico purchases some 30,000 tons of WMP primarily from New Zealand as well as 5,000 to 6,000 tons of filled powder (NDM plus vegetable oil) from the EU.
For the next few months, it seems probable that world WMP prices will stagnate or weaken but much will depend on Asia=s economic health and to a lesser extent Russia=s. If Russian demand for butterfat is cut severely then exporting countries may attempt to boost exports of WMP to use as vehicle to remove surplus butterfat.
Nevertheless, for the approaching months, as Oceania=s production declines and their influence wanes, the only major remaining supplier will be the EU and this in itself may lend support to prices.
BUTTER:
Like WMP, the world markets for butter have until recently been surprisingly robust. Although prices have slid from around $2,000 per ton FOB early in the year (1998) to around $1,650-$1,750 per ton. Much of the downturn has occurred recently as demand from Russia has failed to materialize and Oceania supplies have pressured the market.
For most of the year, world prices have generally been trading in $1,800-$1,900 per ton range since EU export activity has been largely dormant. This was largely due to tight markets within the EU, which buoyed by strong domestic demand, kept domestic prices on a firm footing.
The experience in the United States. was similar albeit more extreme. In the United States, the seemingly insatiable appetite for butterfat in a diverse range of products coupled with declining domestic production propelled prices to a record $6,215 per ton. This precipitated an unprecedented surge in import demand leading to the importation of around 30,000 tons of butter - some 20,000 tons above the tariff-rate quota - mostly from New Zealand.
In the coming months, the direction of world butter prices will hinge primarily on demand from Russia. Traders report some volumes of bulk butter are starting to be shipped to Russia but credit and cash constraints pose a significant obstacle that will likely hinder sales.
The EU has substantial stockpiles of butter available under the private storage scheme and the collapse of sales to Russia will probably pressure EU domestic prices. Any surplus volumes will either overflow onto world markets or into intervention.
CHEESE:
World cheese prices languished in recent months with Oceania trading Cheddar at prices below $2,000 per ton while EU prices have been largely above that level. The recent slide in prices is largely attributed to the economic malaise affecting Russia which has forced its importers to curtail purchases of cheese. A significant portion of Russia=s purchases has traditionally originated from the EU. In 1997, Russia imported around 200,000 tons of cheese, ranking Russia as the top import market in the world.
A further concern in the EU is that the loss of the Russian market will lead to an increase in the production of NDM and butter as processors seek alternative ways to market fluid milk. The EU attempted to alleviate the potential loss of Russian sales by boosting export refunds on some types of cheeses by up to 120 percent. So far the impact has been mixed.
Imports of cheese by Japan and the United States have strengthened during the last half of 1998 providing a strong base for Australian and New Zealand exports. Consequently, prices for Oceania Cheddar are expected to remain stable at around $1,850-$1,950 per ton FOB for the near term while EU prices will probably continue to decline toward the $2,000 per ton FOB level. (Paul Kiendl)
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