Dairy Production and Trade Developments
This update to the Dairy: World Markets and Trade circular is based on reports from 13 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 2000 is estimated at 390.5 million tons, up from the December forecast and more than 1 percent above 1999. Compared to the December forecasts, the United States with a 1.4 million-ton increase had the largest change. The estimate of milk cow numbers for 2000 has been revised to 127.9 million head, slightly lower than in 1999, mainly reflecting continued decline in Russia.
Butter production in selected countries for 2000 is estimated at 5.6 million tons, up from both the December forecast and 1999. Prospects for international butter prices have not improved significantly since December. Total 2000 butter exports are expected to be above 1999 as Oceania boosted its sales, but EU exports have been depressed.
Cheese production is expected to reach 12.8 million tons in 2000, slightly above the December forecast, and 2 percent higher than revised 1999. Compared to 1999, the United States and Oceania account for most of the increase in total production. Export prospects for cheese are unchanged compared to the December forecast but are up significantly from 1999. The EU is forecast to show the largest increase.
Nonfat dry milk (NDM) production in 2000 is estimated at 3.3 million tons, 2 percent above the December forecast. Compared to the December forecast, the export potential for NDM is up significantly as tight market conditions characterize the current situation. International prices have strengthened sufficiently to allow some non-subsidized exports to move from both the United States and the EU.
United States: Milk production in the United States for 2000 is estimated at 76.0 million tons, up 2.9 percent from the revised 1999 estimate of 73.8 million tons. Cow numbers have reversed their long-term decline and are estimated to increase very slightly. The increase is due both to expansion on existing farms and the development of new farms. Most of the expansion is occurring in the western states, particularly California, Idaho, and New Mexico.
Output per cow is expected up about 2.5 percent in 2000 following last years increase of more than 3 percent. For the remainder of 2000 monthly milk production levels are expected to continue to exceed comparable months of 1999, but the rate of increase is expected to decline as current low milk prices curtail expansion plans.
U.S. butter production is forecast to surge to 600,000 tons in 2000, up from last years 578,000 tons. It has been 8 years since production was at or above the 600,000 tons level. Most of both this years and last years production increases are due to the surge in milk production, though it should be noted that despite the strong production growth, demand has kept butter prices above the $1.00/lb level except for two periods. Butter exports in 2000 are expected to be very limited unless prices fall significantly below current levels. With increased production, imports of butter and other forms of butterfat are likely to remain mainly within the 2000 import quota, which is approximately 16,000 tons on a butter equivalent basis.
U.S. cheese production in 2000 is now estimated at 3.7 million tons, roughly 3.5 percent above 1999, which in turn was 6 percent above 1998. Cheese exports are expected to show modest growth in 2000 as the U.S. industry takes advantage of growth in international cheese markets.
Production of NDM during 2000 is estimated at 690,000 tons, 10 percent above the revised 1999 estimate and the largest U.S. production since the early 1970's. NDM prices in the United States are at or near support and significant amounts of the increased production are being sold to CCC as part of USDA price support activities.
In response to the low domestic prices, the Dairy Export Incentive Program (DEIP) was very active in the 1999/2000 DEIP year (July/June), but WTO commitments are limiting contracts in early 2000/2001.
Canada: Milk production in 2000 is estimated at 8.2 million tons, unchanged from 1999. Although milk production has been largely stable in recent years, the mix of dairy product exports has changed with significantly more cheese being exported. On the domestic market, Canadian analysts estimate that domestic butterfat requirements during the first half of the 1999/2000 dairy year (Aug./July) were marginally ahead of the same period last year.
On February 1, 2000, the Canadian Dairy Commission initiated new support (target) prices for butter and NDM. The new support prices were set at $C5.54 per kilogram of butter and $C4.68 per kilogram of NDM. These new prices allowed the target price for industrial milk to be boosted at the same time U.S. farm prices were falling. In addition, the price processors pay for industrial milk was increased sufficiently to both cover the higher target prices and to offset the annual reduction in the direct Federal subsidy.
Current forecasts call for calendar 2000 butter production and exports to be about the same as in 1999. In contrast, production and exports of nonfat dry milk appear likely to decline in 2000. Success in exporting cheese and some selected non-traditional dairy products, such as condensed milk, has taken some of the pressure off butter and NDM, traditionally the major products used to dispose of surplus milk production.
Canadian trade statistics report cheese exports reached 29,000 tons in the first 4 months of calendar 2000 as exporters moved to take advantage of favorable conditions. Shipments to the United States and the United Kingdom, each accounted for more than a third of the total. Potential policy and program changes may be responsible for the sharp increase in export activity.
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 5,666 tons in 1997 and 10,438 tons in 1999. Much of the trade is reported to be exports of ultra high temperature (UHT) milk moving from the province of Quebec to Puerto Rico.
In 1999, in response to a World Trade Organization (WTO) challenge initiated by the United States and New Zealand, a WTO panel determined that Canada's dairy pricing system for certain exports operates as an export subsidy. In December 1999, the three parties agreed to a schedule in which Canada detailed when it would achieve full compliance with its WTO commitments relative to dairy. The plan gave Canada until December 31, 2000, to fully implement the recommendations of the WTO dispute settlement body. In the two quarterly reviews and other meetings since December, the United States and New Zealand have expressed serious reservations about Canadas plans to introduce new programs to replace the export subsidies that resulted in a violation of Canadas WTO obligations. As of mid-July 2000, Canada was proposing that each individual province set up its own export program with most provincial plans being implemented on or before August 1, the beginning of the new dairy year. Insufficient information is available at this time to analyze what might be the economic impact of these programs.
Mexico: Milk output in 2000 is forecast to increase to 9.2 million tons compared to 8.8 million in 1999. The 1999 estimate has been revised downward since the December release. Though margins are reported to be tight, some large dairies are adding to their herds as more productive cows plus improved management facilitate profitable production. Much of the increased milk output is moving to the domestic fluid market.
Mexicos 2000 output of NDM is expected to remain stable as limited milk supplies are utilized in the more profitable products. Imports of NDM and WMP are expected to be near the 1999 level as the growing general economy keeps demand strong.
Cheese consumption during 2000 is forecast to increase compared to the revised estimate for 1999 as a result of population growth, ant the improving economic situation.
On the import side, demand focuses on high-quality cheeses, which generally are not produced domestically. That demand niche is expected to remain stable since these cheeses are consumed mainly by families with incomes above the national average.
Fluid milk is an exception to the general pattern of growth for exports of most U.S. dairy products. As more of Mexicos domestic milk production has gone into the fluid market, U.S. fluid milk exports to Mexico dropped from 36 million liters in 1997 to 12 million in 1999. These figures compare with the pre-devaluation level of more than 61 million liters.
Europe, Asia, Africa
European Union (EU): Based on new reports from 6 countries, EU milk production in 2000 is now estimated at 119.9 million tons, unchanged from 1999. The EU quota system, with its large penalties for over-quota production is largely responsible for this stability. Of course, slow exports and falling farm milk prices provided some additional incentive to stay within quota especially early in the year. 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.
EU butter production for 2000 is now estimated at 1.70 million tons, down slightly from 1999 as processors switch into cheese and WMP. Within the EU, this summers domestic butter prices have shown some improvement and, as a result, only limited quantities are currently being sold to intervention agencies.
EU cheese production in 2000 is now estimated at just under 6.0 million tons, essentially the same as in 1999. EU cheese exports are forecast to rise to 409,000 tons, a healthy increase over the reduced level of 1999 when reduced Russian imports impacted the EU cheese sector.
The EUs WTO commitments call for annual reductions in subsidized cheese exports of just more than 20,000 tons. To meet those commitments and to meet internal budgetary constraints, the EU reduced both the regional availability and the size of the awards during 1999 and early 2000.
French cheese production in 2000 is forecast at nearly 1.7 million tons, essentially the same as in 1999. Consumption of cheese in France is expected to show some further growth in 2000. In Germany, cheese production is expected to show growth compared to the 1999 level. Further growth in domestic consumption is also likely in 2000.
NDM production in the EU is expected to decline in 2000 as processors switch out of NDM and into cheese where both domestic and export demand are growing, Renewed interest in calf fattening throughout Europe has resulted in strengthened demand for NDM to be used in calf feed. Stronger international demand for NDM, plus limited availabilities in Oceania due to prior commitments and a slowdown in U.S. sales under the Dairy Export Incentive Program (DEIP) has allowed the EU to draw stocks down to minimum levels. EU exports of NDM in calendar 2000 are forecast at 309,000 tons, more than a tenth above 1999 when the upturn started. Mexico, Algeria, India, Thailand, and Cuba were the EUs major markets for NDM in 1999.
Russia: The Russian dairy sector continues to decline due to problems with inefficiency and high production costs, short supplies of quality feed, and a lack of cold storage facilities. The January 1, 2000 census showed a 4-percent decrease in the dairy herd and an even greater reduction in the availability of feed supplies per cow. In contrast to the overall decline in milk production, processors are increasing their cooperation with private farmers, suppling them with technology, equipment, feed, and other inputs. As a result, domestic production of some types of processed products is on the upswing. Also some Russian processing companies, including multinational firms, say the higher prices for imported dairy products (in ruble terms) has significantly boosted their ability to compete against imported products.
Current forecasts suggest combined imports of butter and cheese will remain relatively near the 1999 levels which were only a fraction of the peak 1997 levels. Forecast imports of NDM at 30,000 tons are only a third of the 1999 level when food aid shipments were common.
Japan: At the time this is being written Japan is going through a crisis as contaminated milk from Japans largest dairy company is reported to have caused more than 13,000 illnesses.
Perhaps more importantly, the crisis has caused some to question the ability of Japans inspection system to ensure the safety of food products. Also, lost sales and closed plants are having a serious impact on the financial health of the company. The analysis and forecasts shown in the tables were made prior to the crisis.
Milk output in 2000 in Japan is forecast at 8.4 million tons, just below 1999. The February 2000 cattle inventory showed further contraction of the dairy herd. Though these declines continued a longer term pattern, some Japanese dairy analysts viewed them as good news in that the declines are smaller than in recent years.
Probably reflecting the long-term industry decline, on the domestic policy front, the Government of Japan started the last year of its dairy deficiency payment scheme which subsidizes farmers for raw milk utilized for NDM and butter production. The new dairy subsidy program, based on direct income payment by the government and emergency measures to protect farmers from unforeseen fluctuation of fluid milk prices, is scheduled to be implemented in April 2001, the start of the Japanese fiscal year.
The outlook for the Japanese cheese market is unchanged. Japans total cheese consumption is forecast to grow modestly in 2000. Japans cheese imports are expected to show further growth in 2000, rising to 190,000 tons. Per capita cheese consumption in Japan is still very low especially when compared to countries with similar income levels.
Australia: Milk output in 2000 (actually July-June 1999/2000) is estimated at 11.1 million tons, 6 percent above 1999. Cow numbers are estimated at 2.2 million head, 3 percent above the revised 1999 level. Favorable milk prices relative to other farm enterprises continue to give producers the incentive to expand their herds. The 1999/00 dairy year started with good seasonal conditions in major production regions, and those conditions continued throughout most of the year. The expansion in milk cow numbers puts Australia in line for another milk production increase in the 2000/2001 dairy year which just started. For the longer term, the Australian Bureau of Agricultural and Resource Economics (ABARE) projects that milk production will continue increasing rapidly before it starts to level off near 12 million tons in about 5 years.
The majority of the increase in milk production was used in the manufacturing sector. The production and export of all four major manufactured products increased during 1999/2000. The largest increases were for cheese and whole milk powder (WMP).
During 1999/2000, the dairy sector took another major step toward being fully deregulated as legislation for that purpose was put in place with the formal process to commence on July 1, 2000. The legislation includes a restructuring package of A$1.78 billion. The restructuring package is funded through a levy of 11 cents per liter on all retail milk sales over the next 8 years.
The package is mainly designed to help producers outside the States of Victoria and Tasmania. These producers mainly produced for the beverage milk market which was state regulated and tended to have prices well above those for manufacturing milk. Production of manufacturing milk is concentrated in Victoria and Tasmania.
Individual producer entitlements are to be based on 1998-99 milk deliveries at the rate of 46.23 Australian cents a liter for beverage milk and 8.96 Australian cents a liter for manufacturing milk. Payments would be paid quarterly over eight years. Exit payments of up to $A45,000 will also be available for farmers who choose to leave dairying. The Australian Government has allocated A$30 million to the Dairy Exit Program. Also, A$45 million has been allocated to a Regional Assistance Program to assist regions adjusting to the deregulated environment.
Deregulation is expected to result in some farmers leaving the industry and will see others strengthen their business by retiring debt, or investing in new infrastructure or technology. In general, dairy farms are expected to decrease in number but become larger in size.
The previous support system, known as the Domestic Market Support Scheme (DMSS) was implemented in 1995. Under DMSS farmers paid a levy on milk consumed domestically as drinking milk and manufacturers paid a levy on milk used in the production of finished products for domestic sale. The money raised by these two industry levies was placed in the Domestic Market Support Fund, and was used to make payments to farmers who supply milk for manufacturing.
New Zealand: Fluid milk production in the 1999/2000 season (June/May) increased approximately 16 percent to 12.8 million tons. Output in 1998/99 was down due to a severe drought, said to be associated with the end of an El Nino weather pattern. On a total milk solids basis, production increased from 850,000 tons in 1998/99 to 985,000 tons this year. In contrast to other countries, New Zealand only includes butterfat and protein in its calculation of total milk solids.
The 1999/00 final New Zealand Dairy Board (NZDB) payout to farmers was set at NZ$3.35 per kg milk solids, an increase of NZ$0.10, or about 3 percent, compared to the previous season. A major factor behind the higher payout despite low international dairy prices was the further decline of the NZ dollar relative to that of the United States.
With the milk production increase, cheese exports for 1999/00 are estimated at 245,000 tons, 2 percent above last years level which was supported by a drawdown of stocks.
Exports of nonfat dry milk were approximately 205,000 tons in 1999/00, unchanged from 1998/99. With relatively low international prices for butter in late 1999, New Zealand processors tended to shy away from making butter and NDM.
On the New Zealand domestic front, the proposed mega-merger that was to join all seven dairy companies with the Dairy Board in the hope of integrating marketing and manufacturing of New Zealand dairy products, was called off at the end of March 2000. The mega-merger failed because the two largest dairy companies, New Zealand Dairy Group and Kiwi Dairies, failed to agree on their respective valuations to facilitate the exchange of stock necessary to form a single company. Proponents claimed that the mega-merger would provide the dairy industry with gains of up to US$150 million a year.
With the failure of the mega-merger, leaders of the dairy industry are in negotiations to decide the future of the industry. Dairy industry leaders would like to see some of the benefits of the mega-merger captured in any future structure of the industry. The two major dairy companies, which between them control approximately 75 percent of the dairy industry, appear to interested in pursuing options that would allow the companies to become independent players in the international market. The Minister of Agriculture, however, recently announced his decision to reject a call for the industry to be deregulated in light of the failing merger.
Meanwhile, the NZDB is actively seeking alliances and partnerships with international dairy companies. An agreement has been signed between the Board and Bonlac, Australias second largest dairy company. The agreement outlines proposals under which, parts of each organizations operations will be merged and the NZDB will take a minority role. The agreement is still subject to the approval by Bonlacs supplier shareholders and NZDB board of directors. The NZDB has also told European dairy industry leaders that the Board is investigating new partnerships, joint ventures, and acquisitions with Europeans. Further, the NZDB has announced it is forming a joint venture with the largest U.S. dairy cooperative to develop and market new types of cheese.