Dairy Production and Trade Developments

In an effort to take advantage of advances in communication technology and to minimize repeating details of interest to a only a few readers, the textual portion of this circular has been shortened significantly. For this issue the text that is presented is mainly designed to provide an overview. Readers who want more country/commodity detail are invited to view the attache reports which form the basis for this circular series. Those reports can be viewed and printed from: http://www.fas.usda.gov/scriptsw/attacherep/default.asp

Situation and outlook information on the U.S. dairy industry can be obtained from: http://www.ers.usda.gov/prodsrvs/rept-ldp.htm#monthly

A second change is that the Dairy, Livestock and Poultry Division is making an effort to make more current information and analysis available. Trade information, in particular imports and exports of dairy products in various formats is also available from the FAS website with that information being released immediately after it is available to FAS. As issues arise, or events occur, analytical information will be prepared and released as International Agricultural Trade Reports (IATR) on the Division’s homepage. Two current topics under consideration are 1. Impact of the Uruguay Round on trade of nonfat dry milk, and 2. U.S. dairy exports to Mexico. The Division’s homepage is located at: http://www.fas.usda.gov/dlp/dairy/dairypag.htm.

As the year 2000 changes into 2001, the international dairy economy is being impacted by a number of strong forces arising from both within and without the sector. Looking first at forces arising outside the sector, widespread favorable economic condition continue to create strong demand for both domestic and imported dairy products. At the same time, exchange rate fluctuations continue to alter the competitive conditions faced by dairy product exporters.

Demand

The phenomenon of good economic conditions creating strong demand is particularly prevalent in Mexico and much of the rest of Latin America, and the Pacific Rim economics. Somewhat surprisingly for countries often considered to have Amature@ domestic markets, major dairy exporters such as the United States, Canada, and the EU are also enjoying growing demand for dairy products. In the case of Canada and the EU, this strong demand likely most affected ending domestic stocks allowing a drawdown when other conditions indicated stock growth was probable. In the United States, growing consumption of cheese appears to have negated some of the impact of the very high growth rates in milk production that characterized 1999 and much of 2000. Without the strong demand growth, U.S. prices likely would have fallen earlier in the cycle and may have fallen further too.

The following table presents a small sample of economic growth rates around the world. As the end of the year approaches, some economists are warning that growth in 2001 may be slower.

Exchange Rate Fluctuations

Exchange rates represent the second major external factor that is having a significant impact on competition on international dairy markets. Recalling that nearly all international transactions in dairy products are done in dollars, it is not hard to see how some relatively large changes in exchange rates have impacted trade. Since the beginning of 1999, the Euro (and associated European currencies to more or less the

same extent) has fallen from a value of $US 1.16/Euro to $US0.88/Euro at the end of 2000. This sharp decline has allowed the EU to maintain or even expand its exports while at the same time reducing the per unit value of its subsidies.

Further, even with the sharp fall in U.S. farm milk prices due to market conditions, changing exchange rates may have nullified that impact so that the price an EU processor/exporter pays for milk may be below what a similar processor/exporter would pay in the U.S. That is, even before the greater availability of subsidies comes into play, European firms may already have the advantage of a lower-priced source of inputs.

The downward slide in the currencies of Australia and New Zealand has also had a major impact on exports from Oceania. Already operating from a low-cost system of production, the depreciation of their currencies has meant that Australia and New Zealand can accept at times rather low (in dollar terms) international prices while at the same time increasing their returns to farmers.

For example, since January 1999 the New Zealand dollar has dropped from a value of $US0.54 to $US0.42 in December 2000. Similarly for the Australian dollar, the value has dropped from $US0.63 to $US0.54.

Production Patterns

Within the dairy sector, regional patterns of production have also had a major impact on trade. In the rapid growth category, Australia and New Zealand had milk production increases of 7 and 16 percent, respectively, in their 2000 dairy marketing years and are forecast to show growth in the 3.5 to 4.0 percent range in 2001. This extra production is being sold on international markets at generally profitable prices as evidenced by further production expansion. In contrast, in the United States, milk production growth of 3.4 percent in 1999 and 3.6 percent in 2000 resulted in a sharp decline in farm milk prices, a major build-up in government owned stocks, and only a modest increase in exports.

Argentina and probably other countries in the southern South America cone represent a third way. Two years ago this area was being viewed as a potential major export area, however the low world prices were not offset by exchange rate adjustments with the result that prices to producers have fallen sharply. These declines have caused many marginal producers to exit the industry resulting in an overall decline in Argentine milk production in 2000 with a further decline likely in 2001.

India, now the largest single milk producing country when buffalo milk is included, may start to play a stronger role in world trade as either an importer or as an exporter. In 1999 imports of nonfat dry milk soared to near 18,000 tons. But with another milk production increase (mostly buffalo milk) net exports are forecast for this year. Trade sources suggest that for the longer term, India would need significant investment to upgrade its production and processing industry and either a more efficient production system or a substantial subsidy program to be a significant exporter of dairy products on a consistent basis.

Commodities

Analysis of trade patterns for the EU and Oceania indicates both seem to share the same objective of exporting relatively more cheese and whole milk powder, thereby avoiding the problem of finding a market for butter or anhydrous milkfat. In part it is the pursuit of that goal that has shorted nonfat dry milk production resulting in the current high prices.

Global cheese exports showed a sharp increase in 2000 with most of the increase accounted for by Oceania. (Note: for the year shown on the tables, Oceania statistics are generally about six months ahead of the calendar year.)

A recovery in EU exports accounts for most of the rest of the change in the aggregate. Imports by the countries covered in this report are up about one percent with further growth forecast for 2001. U.S. imports are down in 2000 as the lower domestic price level reduced the profitability of over-quota imports.

Importers such as Japan, Korea, and likely other economies in the region had significantly greater cheese imports in 2000 with further growth expected in 2001. International cheese prices, though still below the levels that characterized 1998 and 1999, have tended to strengthen throughout most of 2000.

Domestic cheese prices in the United States have been on the low side during most of the year, even dropping significantly below the support level in late fall.

International butter markets have been depressed during much of 2000 with current prices in the $1300 to $1500/ton range, well below the $1600 to $1800/ton prices that prevailed early in 1999. However, at the end of 2000, butter prices are actually a little stronger than they were in December 1999.

At the aggregate level, butterfat exports jumped nearly 80,000 tons in 2000 and further growth is forecast for 2001. Most of the growth is coming from Australia and New Zealand where more milk and processing capacity limitations make it almost inevitable that some of the increase end up as butterfat. Russian butter imports are expected to increase in 2001 but are unlikely to return to the pre-1998 levels.

Prices for nonfat dry milk, often the low-price leader among the major dairy products, shot up sharply during the summer of 2000 and although there are no major production shortfalls, prices remain high at the end of the year. Perhaps the biggest influence on these prices is the reduced levels of production and stocks within the EU, traditionally the largest supplier to world markets. Exports from Oceania are expected to be about the same or may even decline again in 2001.

In contrast, improved prices for whole milk powder (WMP) are expected to bring forth increased exports from both the EU and Oceania in 2001. For the WMP importers covered in this report, 2001 is forecast to bring another year of healthy growth.

Last modified: Thursday, February 05, 2004