Dairy Production and Trade Developments

This update to the ‘Dairy: World Markets and Trade’ circular is based on reports from the various countries shown on the tables. The reports themselves 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/briefing/dairy/

Summary

United States:

Milk production during the first 10 months of calendar 2001 was approximately 1.3 percent below year earlier levels. November was the first month that NASS reports showed an increase compared to the same month of 2000. Even then it was an increase of only 0.4 percent for the 20 leading states. With continuing demand growth, lower production led to generally higher prices particularly for cheese and butter during the first two-thirds of the year. Prices were sufficiently high for both butter and cheese to attract significant quantities of imports that paid the high tier (over-quota) tariff rate in order to enter.

In mid-December, the Canadian Dairy Commission announced that as of February 1, 2002 new target or support prices would be in effect for butter and nonfat dry milk. The support price for NDM will increase from C$4.84 to C$4.99 per kilogram, (US$1.47/lb) and for butter, from C$C5.73 to C$5.90 per kilogram. (US$1.74/lb). Comparable U.S. support prices are NDM US$0.90/lb and butter US$0.85/lb. The Canadian Dairy Commission says these higher support prices are expected to provide dairy producers with a revenue increase of C$1.01 per hectoliter (2.2 cwt) (approximately 2 percent) of milk sold.

Mexico:

The 2001 import estimate for NDM at 120,000 tons is marginally above 2000 according to current patterns of demand and use by private processors. Also the Mexican government's social program (LICONSA) continues to supply subsidized re-hydrated milk to low income citizens at the same pace as in 2000. For 2002, imports of NDM are forecast to increase 4 percent due to an expected increase in demand fueled by the general population growth and the rising demand from private processors.

Imports of cheese, butter and butterfat for 2001 are up marginally from 2000. Cheese imports are expected to grow more rapidly in 2002 but there may be some flat spots as the economy struggles to pick up steam from its current status. In addition to economic growth, future import levels will also be helped by reduced barriers to imports. Under the North America Free Trade Agreement, U.S. cheese will enter Mexico duty-free by the year 2003, while other third-country suppliers will face tariff rates of about 20 percent.

The longer-term outlook for butter may be less positive than that of cheese. As the lower income population in Mexico becomes more price and health conscience, a tendency to shift from butter to margarine is likely to develop. Anhydrous milkfat will continue to grow but with only small increases each year as LICONSA imports just enough to satisfy demand for its social programs.

Economic indicators for the first semester (Jan-Jun 2001) suggest a weakening of the Brazilian economy, compared to the same period last year. Two major factors have changed the economic outlook: the impact of economic problems in Argentina, which has affected the economy of Brazil; and electricity rationing, which has hurt production in many industries.

In view of these problems, private analysts suggest real GDP growth of only 2 percent in 2001 and early 2002.

The impact of these new economic realities on the dairy market is mixed: milk production is up, mostly due to increased productivity, while consumption is down for some "frozen" dairy products because of the energy crisis and reduced consumer purchasing power. Imports of powdered milk are significantly lower due to higher import tariffs and the weaker Brazilian currency. Exports of dairy products are higher because of an oversupply of milk in the domestic market and the depreciation of the Real. Producers are complaining about the concentration of fewer and larger dairies in Brazil and their power to manipulate prices.

European Union:

During the first half of 2001, milk production in the EU was impacted by the outbreak of FMD, with the UK was most affected while ripples were felt in all the member states. However, increased production by non-affected farms now appears to have largely offset the damage. Cheese production is up in 2001 with most of the increase to be used domestically.

Similar to the U.S. situation, strong international prices for cheese and NDM and the weakening of the euro relative to the dollar allowed the EU to reduce its export subsidies on a regular basis early in 2001. In fact, during the first part of July, the subsidy for exports of NDM was reduced to zero. However, the sharp fall in international prices necessitated reintroducing the NDM export rebates in early November and increasing them in mid-December. With zero rebates for much of the year, EU exports of NDM are expected to be down sharply in 2001.

Russia:

Japan:

Japan’s fluid milk output is forecast to decline in 2001 and 2002 due to a continued reduction in the number of dairy cows. Tight markets for butter in 2001 were a result of both reduced domestic production and strong demand for domestic butter as a substitute for Australian high-fat cream . Demand for NDM remained weak in 2001. Imports of cheese were forecast down in 2001 due to recessionary conditions, a weak yen, and lethargic market demand. In 2002 cheese import levels are expected to remain unchanged from 2001 levels.

Demand for dairy products in China is growing rapidly and that has prompted increases in both dairy production and imports. Demand is growing fastest for fluid milk, including yoghurt and flavored dairy drinks. Demand for ice cream is also growing rapidly as the market changes. Ice cream, which used to be consumed mainly during warm weather, is now being consumed in large quantities year-round.

Even with the recent strong growth, China’s per capita milk consumption is still only about 7 kilograms annually, among the lowest in the world. As incomes rise and more consumers, especially the younger generation, develop a taste for dairy products, there is a potential for a large increase in their consumption.

For the future, both dairy cow numbers and milk production are expected to continue to rise, but it is still unclear how large the national herd could become. Several factors may constrain dairy development. Production efficiency has improved rapidly in large cities like Beijing, Shanghai and Tianjin, but for the dairy industry as a whole, it will take a long time to reach the efficiency levels of Western countries. The lack of arable land and water for both farming and good forage development are also problem areas. With more stringent quarantine procedures now in place, the importation of feed and genetics may also be constrained.

Finally, the responsibility to promote China’s dairy production, processing, distribution and trade falls to a number of different government agencies and thus far, effective coordination has been difficult.

During the next few years, imports are expected to increase as domestic production is unlikely to keep pace with soaring demand. Imports of NDM and WMP were largely stable in 2001 but are expected to show steady growth in the coming year.

Imports of whey products are also expected to continue their upward trend in 2002. With WTO membership, lower tariff rates for yoghurt, butter, and cheese go into effect and that should also mean increased imports of these products.

Australia:

Steady growth in milk production in recent years was interrupted with the deterioration of pasture conditions in the latter half of 2000/01 and into 2001/02 (July/June). Australian milk production is estimated at 10.9 million tons in 2000/01, a fall in production of about 3 percent from the previous year. This decline was primarily driven by lower per cow yields due to drier than average conditions in many dairying regions of Australia.

Production was down in all states with Victoria, the largest producing state with around 62 percent of the nation’s output, declining approximately one percent. Production in Queensland was down roughly 10 percent.

Milk production for 2001/02 is forecast at 11.0 million tons, up nearly 2 percent but still below the level achieved in 1999/2000. While drier conditions have persisted into 2001/02, recent rainfalls have improved the feed supply outlook.

New Zealand:

Milk production for the 2001/02 is forecast to increase 2 percent from last season’s record of 13.7 million (1.054 billion kilograms of milksolids) to reach a new record of nearly 14.0 million tons or 1.075 billion kilograms of milksolids. The forecast of a two-percent increase is primarily a result of increased cow numbers, mostly in the South Island. Early calving and excellent grass growing weather particularly in the Waikato (the largest milk producing area) also added to the increase.

Cheese production in 2001/02 is forecast to increase 5 percent to 295,000 tons with higher exports expected as the international cheese market continues grow.

Butter production for the 2001/02 season is forecast to decrease 3 percent to 345,000 MT. Fonterra, which replaced the New Zealand Dairy Board continues to look for ways to diversify away from dependence on relatively weak and/or volatile butter markets such as in Russia and the Middle East and concentrate on producing more cheese and whole milk powders.

Whole milk powder production is forecast to increase 7 percent in the 2001/02 year. Exports for whole milk powder are forecast to increase by about the same percentage. Strong foreign import demand is projected to lead to a continued shift in mix to from NDM to WMP in the long term.

In June 2001, New Zealand dairy farmers voted to merge the dairy cooperatives Kiwi and the New Zealand Dairy Group with the New Zealand Dairy Board to form the world’s ninth biggest dairy company to be know as Fonterra. For the next few years, Fonterra is expected to account for more than 95 percent of the NZ $10 billion (US $4.1 billion) dairy export industry.

Legislation to enable the regulated industry to restructure and avoid Commerce Commission scrutiny of the merger proposal was introduced to parliament in June. Parliament passed the Dairy Industry Restructuring Bill in September and the industry signed off in October, giving Fonterra full legal status. The now deregulated export industry means the Dairy Board’s export monopoly was eliminated in October, but competition is expected to be slow arriving. Fonterra will retain licensing and tariff rate quota rights in certain overseas markets for six years, but these rights will be phased out in the subsequent four years.

Last modified: Thursday, April 06, 2000