WORLD DAIRY PRICES
During the first half of 1999, prices for major dairy products continued their unrelenting downward path as demand in key markets remains stagnant. This drop was most notable for whole milk powder (WMP) which fell from around $1,710/ton in January 1999 to a current level of around $1,390/ton FOB. Butterfat also experienced a similar dramatic drop. The decrease in price for cheese has been more moderate while prices for nonfat dry milk, after an initial drop have, for the most part, remained stable despite a strengthening dollar.
The probability that dairy prices will recover during the last half of this year remains remote as stocks of dairy products accumulate, particularly in the EU. Further, demand in Asia, Brazil, and Russia continues to be sluggish. There are, however, some positive financial indications in a number of Asian countries suggesting that their economies are in a relatively stable condition with some countries even starting to enter a recovery phase. Nevertheless, without the Russian market, the ability of the EU to funnel surplus milk products from its domestic markets is severely restricted and has prompted an increase in export subsidy levels for a number of dairy products, in particular cheese.
NONFAT DRY MILK (NDM):
After an initial decline precipitated by a sharp increase in EU subsidy levels, export prices for NDM had been relatively stable during the past five months, fluctuating around the $1,200/ton FOB level. It became apparent early in the year that non-committed exportable supplies of NDM from Australia and particularly New Zealand were limited, thus leaving the EU and to a lesser extent the United States., as the principal suppliers of NDM. In fact, at the end of January 1999, the United States only had a remaining balance of around 15,000 tons under the Dairy Export Incentive Program (DEIP), and even that was exhausted by early March.
Consequently, the EU action in February to raise export restitutions by 75 euro/ton (approximately $80/ton) to 900 euro/ton was surprising and served primarily to reduce world prices of NDM rather than give the EU any competitive advantage. In essence, prices rather than stabilizing at around $1,300/ton settled at around $1,200/ton FOB - equivalent to the intervention support price. It appears that the EU, reacting to the slow pace of pre-fixation contracts, feared substantial stock accumulation during the period when intervention buying is open (March-August).
Since intervention purchases are up only modestly for the March-early July period, (78,574 tons compared to 75,619 in 1998); it now seems unlikely that the EU will reach the annual limit of 106,000 tons by the end of August. However, total intervention stocks currently near 250,000 tons, are substantial and are at their highest level since May 1992.
End-of-July prices of NDM have firmed by some $30/ton-$50/ton with export prices now ranging from $1,225/ton-$1,260/ton. To a large extent, this is due to the sharp turnaround in the value of the dollar which had been expected to reach parity with the euro. In addition, there appears to have been some pent-up demand as buyers anticipating lower prices held-off purchases and then started buying en masse for near term deliveries. In fact, in the first two weeks of the new DEIP year, close to 15,000 tons of NDM were sold. Further, compounding the problem for purchasers was a ban imposed by a number of countries on the importation of certain EU dairy products as a result of contamination of animal feed with dioxin in Europe, principally Belgium.
Despite this recent upswing in prices it remains questionable whether this will translate into a long-term trend or simply reflects a price spike. In the EU, internal and export demand particularly from such countries as India (which reportedly purchased 10,000-15,000 tons) has been sufficiently strong to cause some firming of internal prices. In the next 2 or 3 months, demand is likely to remain fairly strong as key buyers such as Mexico and Algeria are expected to purchase 40,000-50,000 tons for the last half of the year.
On the supply side, the EU has substantial stocks although the amounts available as fresh NDM are limited. The United States. is also accumulating stocks, however, WTO export subsidy restrictions limit the export availability of these stocks. In the first three weeks of July U.S. sales under the DEIP accounted for 15 percent of the annual (July/June) allocation of around 101,000 tons (including the rollover quantities). Oceania production from their 1999/2000 season will become increasingly in August and that should keep the market well supplied and prices at competitive levels normal production patterns prevail.
WHOLE MILK POWDER (WMP):
After a fairly stable period in 1998, export prices of WMP have plunged by nearly 20 percent since January 1999, underscoring the fragility of the market. A sharp drop was registered in early February, when the EU increased restitutions dropping prices by $65/ton in an attempt to boost the pace of sales. The main motivating factor was that EU subsidized exports under the "other milk products" products category (which includes primarily, WMP and condensed milk) stood at 57 percent of the total WTO limit of 1.049 million tons. In contrast, at the same time last year the figure was 71 percent.
Prices are currently trading in the $1,350-$1,400/ton FOB range with Irish powder being the most competitive. In view of the approaching production season in Oceania and the expectation that milk supplies will be higher than last year it seems likely that there will be substantial supplies of WMP weighing on world markets.
In addition due to the economic crisis in Brazil, there will probably be more Argentine WMP being offered on world markets. Given this scenario, while the recent increase in the value of the euro may provide some temporary support, the probability of further price declines in the export price of WMP appears high.
In recent years, the EU has heavily relied the Russian market to absorb substantial volumes of its surplus butterfat. Consequently, the economic crisis in Russia which led to a decline of butterfat imports - from 250,000 tons in 1997 to a forecast 150,000 tons in 1999 - had a substantial impact on major butterfat exporters, particularly in the EU. In fact, intervention purchases for butter this calendar year have already surpassed 30,000 tons. In addition, at the end of June 140,000 tons were being held under the EUs private storage scheme (PSA). The impact of this stock buildup has been lower internal prices and export prices that have plummeted nearly 25 percent to around $1,250/ton-$1,350/ton FOB. Some trade reports indicate that lingering supplies from Australia have been offered as low as $1,150/ton FOB.
It is difficult to envisage a scenario which would lead to recovery in butter markets without an improvement in the Russian economy. Russian imports of cheese have also dropped considerably and again the EU was a major supplier. As a consequence, within the EU dairy industry, milk normally destined for the manufacture of cheese is instead being converted into butter and NDM, further adding to the stocks problem.
Therefore, the outlook for butterfat prices appears relatively unfavorable as the substantial supplies overhanging the market which will probably continue to pressure prices down.
The outlook for cheese is similar to butterfat with the market being largely influenced by Russia. Any recovery in Russia will help absorb surplus volumes of cheese from the EU, particularly from Germany, which will tend to support internal prices. Import demand in such key markets as Japan and the U.S. remains fairly solid, however, these markets are primarily supplied by Australia and New Zealand.
EU cheese prices are low in comparison to previous years and producers will be seeking alternative markets for their products. Even with an increase in export restitutions, the EU will find it difficult to compete with Oceania which can undercut EU prices fairly easily, particularly in Asian markets. Thus, it seems probable - at least for the next six months - that international cheese prices are unlikely to show any strength and may slide further. (Paul Kiendl: Kiendl@fas.usda.gov or 202-720-8870)