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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. Continuing the format introduced in the December 2000 issue, this report continues to minimize details from the individual reports since they can be obtained from the following website: 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/publications/so/view.asp?f=livestock/ldp-mbb/
The major feature affecting international dairy trade at the current time is the continuing strength in international prices, particularly for nonfat dry milk (NDM). Cheese and whole milk powder prices are also generally strong. Current international butter prices are well below the average of recent years, but even here the situation is tighter than one might expect due to a relatively short supply situation in the United States and a relatively balanced situation in the EU.
Cow milk production in selected countries for 2001 is estimated at 376.3 million tons, marginally above 2000. The United States and the EU, primarily the UK and the Netherlands, show the largest declines, while Oceania shows most of the growth. Milk cow numbers for 2001 are now estimated at 122.8 million head, more than 1 percent below 2000. Numbers in the EU are down due to foot and mouth disease (FMD).
Cheese production is expected to reach 12.4 million tons in 2001, approximately 2 percent higher than revised 2000. Despite lower milk production, the United States and most EU countries are expected to maintain or increase cheese production at the expense of other products. Oceania accounts for the fastest growth in percentage terms. Export prospects for cheese in 2001 are unchanged from 2000 as the Oceania increase is offset by the expected decline in the EU as more is used domestically.
Butter production in the United States and the EU are estimated to decline in 2001, mainly in response to the production decline for milk. Probably reflecting the lower international prices, production is also off slightly in Oceania. Prospects for international butter prices have improved somewhat in recent months, but butter is still significantly less expensive than other bulk dairy products.
Total 2001 butter exports are expected to be about the same as in 2000. End-of-year butter stocks are expected to be down.
Nonfat dry milk (NDM) production in 2001 is estimated at 2.9 million tons, 5 percent below 2000. Most of decline reflects the lower milk production and stable cheese production in both the United States and the EU. Production is also lower in Oceania, probably as a result of low international butter prices and the perception that long term prospects for NDM are not as good as those of cheese and other products. NDM exports in aggregate are estimated to fall below the one-million-ton level as the EU and Oceania reduce their shipments. International prices have strengthened sufficiently to allow some non-subsidized exports to move from both the United States and the EU.
Trade and Other Issues
Milk production during the first six months of calendar 2001 was approximately 2 percent below year earlier levels. With continuing demand growth, lower production has led to generally higher prices particularly for cheese and butter. Despite the reduced milk flow, NDM continues to be in surplus as evidenced by continued government purchases under the price support system. The June reduction of the support price for NDM in conjunction with an increase for butter resulted in a slower rate of NDM purchases but did not eliminate them entirely. With the build-up of government stocks of NDM, imports, particularly imports of high protein powders such as milk protein concentrate and casein have become major concerns of various sectors of the US dairy industry.
In response to high international prices for NDM, the Dairy Export Incentive Program (DEIP) is expected to show little activity until international prices move near or below the U.S. support price which is now equivalent to $1984 per ton. The bulk of 2000/2001 (July/June) program activity under DEIP was concentrated in the first half of that year with the result that DEIP related exports in the first half of calendar 2001 have been quite small.
Cheese exports in 2001 are forecast at 25,000 tons, up from 18,000 tons in 2000 and a full recovery to the 1999 export level as milk producers and processors become more familiar with the provincial export programs introduced at the start of the 2000/2001 (Aug./July) dairy year. Exports of butter and NDM are also expected to be higher. For much of the export side of the Canadian dairy industry, calendar 2000 was a transitional year as old export programs were ended and new programs were put in place.
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. In 2000 that trade dropped back to 4,603 tons, but for the first 5 months of 2001, exports are running nearly 50 percent ahead of the same months of 2000. Much of the trade is reported to be exports of ultra high temperature (UHT) milk moving from the province of Quebec to Puerto Rico.
On July 11, 2001, it was announced that the United States and New Zealand had won an important agriculture case before the World Trade Organization (WTO) that challenged Canadian dairy export subsidies as a violation of WTO rules. In the ruling, a WTO dispute settlement panel found that the steps Canada took to address an earlier adverse ruling regarding its dairy export practices were insufficient. The panel ruled that Canada's dairy export subsidies are inconsistent with its WTO commitments.
Besides the direct economic impact on dairy, the WTO ruling sets an important precedent which should help prevent other countries from adopting similar export subsidy programs.
By way of background, in 1997, the National Milk Producers Federation, the U.S. Dairy Export Council and the International Dairy Foods Association petitioned the Office of the U.S. Trade Representative to challenge Canada's dairy trade practices as inconsistent with its WTO obligations on export subsidies and market access. After bilateral consultations, the U.S. referred its complaint to a WTO dispute settlement panel in February 1998. At the same time, New Zealand filed a similar challenge to Canada's export subsidies and the two challenges were combined in early 1998.
In 1999, a WTO dispute settlement panel found that Canada's special milk class system and import restrictions on dairy products violated WTO obligations. The WTO Appellate Body affirmed the panel's finding on export subsidies.
In response to the panel and Appellate Body reports, Canada replaced its special milk class system with a new dairy export program in each province. However, Canada's new measures left unchanged the fundamental aspects of the special class programs found by the WTO to constitute export subsidies. As a result, the United States and New Zealand requested that the WTO review the new provincial programs. The United States argued, and the panel agreed, that the continued involvement of Canadian federal and provincial governments in the provision of low-cost milk to processors for export constituted an export subsidy and that Canada had already exceeded its commitment under the WTO Agriculture Agreement on subsidized cheese exports. Canada has 60 days to appeal the report to the WTO Appellate Body and that Body has 90 days to reach a decision after the appeal is filed.
Mexico’s 2001 output of NDM is expected to remain stable as limited milk supplies are utilized in more profitable products. Imports of NDM and WMP are expected to be near or slightly below the 2000 level as the growing general economy keeps usage strong despite the higher prices. Cheese consumption during 2001 is forecast to increase a result of population growth, and the improving economic situation. On the import side, demand focuses on high-quality cheeses, which generally are not produced domestically.
U.S. fluid milk exports to Mexico dropped from 36 million liters in 1997 to 12 million in 1999 as more of Mexico’s domestic milk production was diverted to the fluid market.
In 2000, that pattern reversed with exports of 17.5 million
liters. These figures compare with the pre-devaluation level of
more than 61 million liters.
EU dairy production in 2001 has been significantly impacted by the outbreak of FMD where the main outbreak was in the UK but ripples were felt in all the member states. Based on estimated cow loss, milk production could be down 5 percent in the UK; however, with little chance the UK will exceed its 2001/02 quota, some producers may try to boost their production significantly.
Stronger international prices for cheese and NDM and the weakening of the euro relative to the dollar have allowed the EU to reduce its export subsidies on a regular basis thus far in 2001. During the first part of July, the subsidy for exports of NDM was reduced to zero while that for cheddar cheese to third countries was set at 999 euros/mt ($850/mt). Exports of both NDM and cheese are expected to decline in 2001 as internal demand takes a larger share of production.
The Russian dairy sector has largely stabilized and with better feed supplies milk production is forecast to increase slightly in 2001. Demand for dairy products is growing which is expected to induce more imports of butter cheese and milk powder in 2001.
The following small table showing data taken from the World Trade Atlas is presented to show sources for Russian butter imports.
The same source indicates there has been a significant acceleration in the pace of butter imports in the early months of 2001. Renewed Russian demand would have a major impact on international butter prices.
Japan initiated a new dairy subsidy program, in April 2001-- the start of the Japanese fiscal year, based on direct income payments by the government and emergency measures to protect farmers from unforeseen fluctuation of fluid milk prices. Japan’s dairy sector is striving to remain competitive by increasing the scale of production and efficiency and by consolidating dairy plant and processing facilities.
The Government also extends low interest
loans and credit to farms willing to modernize facilities aimed
at more efficient operation.
However, aging farmers and a lack of young successors plus increased production costs due to mandated environmental measures continue to impact many dairy operations. These problems are likely to limit any prospects of raising national fluid milk output beyond the current level.
Japan’s total cheese consumption is forecast to grow modestly in 2001 and as a consequence so are cheese imports. Per capita cheese consumption in Japan is still very low especially when compared to countries with similar income levels. The following small table shows cheese imports by source.
Milk output in 2001 (actually July/June 2000/2001) is
estimated at 11.4 million tons, 2 percent above 2000. Favorable
milk prices relative to other farm enterprises continue to give
producers the incentive to expand.
For the longer term, the Australian Bureau of Agricultural and Resource Economics (ABARE) projects that milk production will continue to increase for the next 4 or 5 years, before it starts to level off near 12 million tons.
The Australian dairy market was largely
deregulated on July 1, 2000. Prior to that date, Australian
domestic-market milk was regulated by state arrangements while
manufacturing milk was supported by the Domestic Market Support
Fund. In recognition of the fact that deregulation could have
major impacts on producers and communities, the Australian
Commonwealth Government responded with a $A1.78 billion
restructuring package. Recent media reports have focused on
dissatisfaction among dairy farmers following deregulation. These
farmers have unsuccessfully campaigned for re-regulation in their
respective states. Some political support has been generated but
re-regulation of the industry appears unlikely.
Fluid milk production in the 2000/2001 season (June/May) increased approximately 7 percent to 13.7 million tons. On a total milk solids basis, production increased from 985,000 tons in 1999/00 to 1,050,000 tons this year. In contrast to other countries, New Zealand only includes butterfat and protein in its calculation of total milk solids.
The 2000/01 final New Zealand Dairy Board
(NZDB) payout to farmers was set at NZ$4.60 per kg of milk
solids, an increase of NZ$1.25, or about 35 percent, compared to
the previous season. A major factor behind the higher payout was
higher international dairy prices and a further decline of the NZ
dollar relative to that of the United States.
On the New Zealand domestic front, the proposed mega-merger that joins the major processing cooperatives and the New Zealand Dairy Board is on again. On April 9, the proposed dairy mega-merger of New Zealand’s two biggest dairy companies and the New Zealand Dairy Board was given Cabinet approval to by-pass Commerce Commission scrutiny. This action paved the way for New Zealand’s biggest company and the ninth biggest dairy company in the world to be formed. The Global Dairy Company (its working name) is predicted to be a NZ$12.5 billion (US$5 billion) business. The Global Dairy Company claims that the merger will bring benefits of NZ$310 million during its first three years. The New Zealand Dairy Board will lose its statutory single desk export status 12 months after the merger is fully complete.
Meanwhile, the NZDB is actively seeking alliances and
partnerships with international dairy companies. An agreement has
been signed and the relationship is developing between the Board
and Bonlac, Australia’s second largest dairy company.
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 (Dairy Farmers of America or DFA) to develop and market new types of cheese. Additionally, recent information indicates that NZDB will be handling some of the marketing of DFA products.
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