World Dairy Prices
The performance of world dairy markets during the past six months has been mixed ranging from the mildly declining price trend of butterfat to some unexpected strength in milk powder. This is particularly true of nonfat dry milk (NDM). In the July circular it was noted that an increase in NDM prices was anticipated but the article questioned whether the increase could be sustained in view of the oncoming tide of product from New Zealand and Australia. In addition the ample stocks available in the European Union (EU) and the United States and the long-term outlook pointed to a limit in any upward strength. Since then prices for NDM have climbed an impressive 20 percent within a period of five months - an unprecedented rise during a time-frame when there have been no weather induced interruptions in production. The obvious conclusion is that demand, particularly in Asia, has picked up significantly - certainly to a level sufficient to absorb the additional supplies available on world markets.
Other dairy products have not fared as well but the tone of the market is more positive than forecast in July. Whole milk powder (WMP) prices remain stable and some recent slight firming suggests that for the time being major suppliers are finding strong demand. Butterfat prices have languished but recently appear to be stabilizing. However, without any substantial demand materializing from Russia, it is difficult to envisage a scenario where butterfat prices recover significantly. Cheese prices have also declined slightly but appear to have reached a certain equilibrium.
Thus after several years of languishing, prices for most dairy products appear to have reached a low point and are starting to recover. In the case of butterfat and cheese, markets appear to have reached a certain equilibrium sufficient to arrest any further declines. In contrast, the outlook for prices of milk powder notably NDM remains positive. While this view is to a certain extent influenced by the Uruguay Round (UR) restrictions on export subsidies which are starting to materially affect the available supplies to the market, the demand side of the equation remains encouraging. In this respect, the recovery in the economies of Asia has been critical, spurring demand sufficiently to absorb supplies and help correct previous market imbalances.
NONFAT DRY MILK (NDM):
The rebound of NDM prices surprised many market participants who anticipated that with substantial stocks in the EU and the United States, any recovery would be short lived. The reality, however, proved otherwise with prices for NDM climbing from around $1,200/ton to over $1,450/ton FOB North European ports in the space of six months. The initial explanation pointed to the drop in the value of the dollar and the dioxin crisis in Belgium as factors which moved prices up. However, it soon became apparent that import demand was the driving force as evidenced by rapid pace of sales under the Dairy Export Incentive Program (DEIP) which totaled close to 35,000 tons in the first six weeks. In fact, from June 1, 1999, to Dec. 23, 1999, sales under the DEIP reached nearly 80,000 tons.
In the EU, contrary to expectations, demand was sufficiently strong to force exporters to bid domestic prices up while the steady flow of shipments kept markets tight.
On world markets, buyers have also been caught unawares. Following several years of low or declining prices, purchasers anticipated that with the seasonal presence of Australian and New Zealand production, prices would be under pressure. It now appears that the economic recovery in Asia has progressed sufficiently to absorb any additional NDM production that may have materialized from Oceania. Further, supplies from Poland have been extremely limited forcing heavy importers such as Algeria to purchase in the EU.
For the first half of 2000, market conditions point to a steady or strengthening market. The EU has reduced export restitutions twice during the last quarter of 1999 (from 900 euros/ton to 810 euros/ton) in response to strong export demand. In fact, it was reported in December that restitution commitments for NDM were running at 125 percent of their monthly profile. Reportedly, the EU initially sought to reduce export restitutions by some 10 percent to around 770 euros/ton but due to strong opposition from member countries, a 5-percent cut was adopted.
Intervention stocks have dropped sharply from a peak of 276,000 tons in August to a current level of 187,000 tons with some 56,000 tons having been sold for feed use in the domestic market. For this reason it is expected that the EU will further reduce export restitutions for NDM in the first quarter of 2000.
In the U.S., despite the continuing accumulation of government CCC stocks, exports under the DEIP are rapidly approaching Uruguay Round limits. For example, in 1998/99 (July-June) the U.S. awarded close to 130,000 tons of NDM under the DEIP (this includes rollover tonnages). During 1999/00 the volume limit (including rollover) dropped to 101,000 tons. For the year 2000/01, that limit falls to 68,000 tons, with no rollover permitted. Compared to 1998/99, this represents a "disappearance" of 62,000 tons from the world market at a time when demand is showing solid growth.
Currently, the pace of DEIP awards continues at a surprisingly clip in spite of a drop of bonus levels from a benchmark level of $1,090/ton in July 1999 for sales to Mexico to a current level of around $750/ton. As a result as 1999 draws to a close, less than 30,000 tons of NDM remain available for sales under the DEIP through June 2000.
Another interesting aspect of the world market has been the conspicuous absence of Oceania from such markets as Algeria and Mexico. Reports suggest that despite the increased availability of NDM from Oceania the vigor of the Asian market has been sufficient to keep commitments high and there has been no need to offer aggressively outside of Asia. In fact prices are reported at around $1,475/ton-$1,500/ton FOB Oceania.
In summary, demand for NDM on world markets is recovering while the availability of exportable supplies from some origins remains limited. Australia and New Zealand appear to have committed the majority of their available exportable supplies, while the U.S. has only minimal volumes available for the first half of 2000. In effect, this leaves the EU as the principal supplier to world markets. Currently, EU markets remain exceptionally tight but the availability of the spring flush milk production is expected to soften prices from April onwards. Alternatively, the recent purchases by Algeria of EU NDM -- around 30,000 tons for Feb.- Apr. delivery -- plus the likely reappearance of the Mexican buyers for some 20,000 - 30,000 tons in the first quarter, and continuing Asian demand could keep EU markets well committed. Such a situation would likely boost prices and reduce intervention stock offerings during the prime spring months.
Within the United States, domestic prices for NDM are likely to remain at or near support as the current outlook is for a further build-up in CCC held stocks of NDM.
WHOLE MILK POWDER (WMP):
WMP market prices recovered during the last half of 1999, rising around 10 percent to $1,500-$1,600/ton FOB North European ports. International market prices appear to be trending slowly upward. In the last half of 1999, the EU twice reduced export restitutions to the current level of 1,130 euros/ton - down 6 percent from levels prevailing in September. Nevertheless, prices remain well below the early year high of around $1,800/ton level.
Demand for WMP , like NDM, appears to have strengthened this year following the economic recovery in Asia. However, in contrast to NDM markets, supplies appear to be sufficient to moderate price increases. This may be deceptive since there does seem to be an undercurrent of strength given the weakness of the euro which would normally be expected to translate into lower prices. Also the recent reduction in EU export restitutions seems to have been precipitated by the UR limits. Reportedly the EU Commission was concerned about starting to bump-up against the UR limitations on export subsidies for the "other dairy" category. If the current pace of sales continues, further reductions in EU export restitutions may be possible in early 2000.
In the Oceania, the production of WMP is expected to increase this year. Nevertheless, Australia and New Zealand have not been offering WMP aggressively implying that demand is keeping pace with expected production. For example, in recent Algerian purchases, it appears that all WMP bought (approximately 5,000 tons) will be from the EU.
There have been exceptions, most notably in Mexico, where traditionally New Zealand sells approximately 30,000 tons of WMP annually. This year, New Zealand and EU exporters (principally from the UK) have been battling for the market with prices for this quarter of around $1,560/ton C&F. Mexico is reported to have purchased 5,100 tons from the EU and 9,000 tons from New Zealand.
For the first half of 2000 many factors suggest that the WMP market will be well balanced and prices will remain stable. One key but unknown factor may be Iraq. Trade sources indicate that Iraq has been a substantial purchaser of WMP this year - in the order of 20,000-30,000 tons - which may explain why world markets seems to be well balanced. If, however, the pace of EU prefixations remains high, then it is likely that EU restitutions will be reduced and international prices will increase.
The problem with world butter markets is that price levels are largely dependent on Russian purchases. Consequently, the continuing financial problems that have dogged Russia have led to steep drop in purchases, keeping world butter markets balanced precariously. This year, Russian imports are expected to again decline to approximately 70,000 tons. For this reason, any recovery in butter prices in the next six months is doubtful. Prices on world markets have recently stabilized which does lend some optimism to the situation.
Currently, EU butter stocks stand at around 161,000 tons with 54,000 tons in intervention and 107,000 tons in private storage. This total is the highest recorded December level since 1993. However, the private storage stock number is the highest recorded since 1989, indicating that export flows and domestic consumption has been insufficient to absorb the surplus. Also while the EU has reduced export restitutions for other dairy products, butter restitutions remain unchanged. This may do little to spur exports since Oceania appears to be well stocked and is offering prices to North Africa and Russia in the range of $1,400-$1,450/ton C&F while EU prices range from $1,300-$1,450/ton FOB.
The world cheese market remains virtually unchanged from the July report. The absence of heavy Russian purchases continues to depress prices which declined around $100/ton and appear to have stabilized in the $1,775-$1,850/ton range. The Russian cheese market remains unpredictable and without any recovery, EU export sales are likely to stagnate. In recent weeks restitution rates for cheese destined for the U.S. were reduced with the EU citing UR limitations and the strength of the dollar as the main reasons. Currently, it is reported that export restitution prefixations for cheese are at 93 percent of the monthly profile for the 325,000 tons permitted under the UR limitations for this year (July/June).
For the next six months, prices for cheese are likely to remain stable. The economic recovery in Asia is likely to offer significant opportunities for Oceania exports and lend some support for the international market. Further into the future, if purchases from Russia resume substantially, prices are likely to increase rapidly particularly if EU exports approach UR constraints. (Paul Kiendl 202-720-880)