Dairy Production and Trade Developments

This update to the "Dairy: World Markets and Trade" circular is based on post reports submitted since December 2001 and on available secondary information.  New reports include Mexico, European Union, Algeria, Japan, Australia, and New Zealand.  New PS&D’s were received from Canada and Russia.  No changes were made in the data for countries not reviewed.  The individual country reports 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/

EU:  As is being done for other major commodities, this circular initiates consolidated reporting for the EU.  In addition, to improve statistical accuracy, for the EU the definition of cow milk production was changed to reported deliveries, eliminating the need to estimate small amounts of on-farm feeding and direct sales activities.  Data for 2001 and 2002 are mainly post supplied estimates.  For 1997-2000, cow numbers and milk deliveries were taken directly from Eurostat and other European sources, trade data is from the World Trade Atlas.  Production, disappearance, and stocks estimates are based on previously published USDA data for the EU.

The major feature affecting international dairy trade at the current time is the continuing weakness in international prices, particularly for nonfat dry milk (NDM). Butter and whole milk powder (WMP) prices are also generally very weak. Current international cheese prices are well below the average of recent years, but have not fallen as much as NDM. Further confounding the outlook for future prices is movement of exchange rates since early spring when the tendency for the U.S. dollar to strengthen against other currencies suddenly reversed. Now a tendency for the U.S. dollar to weaken vis-à-vis other currencies seems to be the pattern. (Note the cover graph showing the comparative pattern of NDM price movements in national currency terms for selected exporters.)

Using revised data for the EU (see note in box) aggregate cow milk production in selected countries for 2002 is estimated near 390 million tons, one percent above 2001. The United States and Oceania account for most of the increase in the year-to-year total. Milk cow numbers for 2002 are now estimated at 125.6 million head, slightly below 2001. Revised cow numbers in New Zealand reflecting herd expansion during the past 2 years accounts for most of the change since the December report.

Cheese production is expected to reach 13.1 million tons in 2002, approximately 2 percent higher than revised 2001. With increased milk production, the United States, Russia, and Oceania are expected to increase cheese production. Export prospects for cheese in 2002 are up approximately 5 percent mainly due to the increase from New Zealand. Prospects for most other exporters are either stable or down slightly.

Butter production in the United States and the EU is estimated to rise in 2002, mainly in response to governmental actions to support milk prices. International butter prices are expected to remain depressed as supplies in the Northern Hemisphere are well above needs as indicated by the forecast buildup in stocks.

Nonfat dry milk (NDM) production in 2002 is estimated at 3.4 million tons, 5 percent above 2001.  Most of increase reflects price support activities in the United States and the EU.  Aggregate exports are expected to increase in 2002 with some of the increase due to rising shipments of food aid. 

Trade and Other Issues

United States

Milk production during the first six months of calendar 2002 was approximately 2.7 percent above year earlier levels. With continuing but slower demand growth, increased milk production has led to generally lower dairy product prices particularly for cheese and butter. With surplus supplies of NDM, prices stay very close to the 90-cent-per-pound support level, now in effect for more than a year. Government purchases of NDM have been quite heavy with the result that end of June government stocks were reported at 1.169 billion pounds (530,000 tons), approximately double the level of holdings at the end of June 2001. 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 U.S. dairy industry.

As has been publicized, in May the United States adopted new farm legislation, which generally runs for 6 years. Important provisions for the dairy sector include: (a) Extension of the milk price support program at $9.90 per hundred pounds of 3.7 percent fat milk through 2007. (b) Extension of the Dairy Export Incentive Program (DEIP) to 2007. (c) Extension of the National Dairy Promotion and Research assessment (equivalent to $0.15/cwt of milk) to imported dairy products. (d) Sets up a system of direct payments based on the Boston area Class I milk price of $16.94/ cwt. The payments are to be monthly and are to be 45 percent of the difference between $16.94 and the Boston Class I price. Payments to individual operations are capped at 2.4 million pounds of annual marketings of milk. This provision covers the period December 2001 though September 2005.

Canada

Cheese exports in 2002 are forecast at 15,000 tons, down from 19,000 tons in 2001. Some of the downturn is likely due to reduced contracting under the Provincial export programs which are outside the domestic supply-management system. Low international prices have reduced the incentive to use that system.

Another factor that has affected exports during the past 3 or 4 years, is that Canadian processors have greatly expanded their use of Canada’s Import for Re-Export Program. This explains some of the higher import and export statistics that are being reported.

In addition to major dairy products, Canadian exporters have also done well with some other products. Canadian exports of milk and cream to the United States increased from 102 tons in 1995 to 5,666 tons in 1997 and 6,088 tons in 2001. This trade started as exports of ultra high temperature (UHT) milk moving from the province of Quebec to Puerto Rico, however, in the last couple of years a larger proportion –over a third in 2001-- has been cream (for trade purposes defined as milk with more than 6 percent fat content).

A second product where Canada is doing very well is in what is generally described as a light butter spread, which for trade purposes is described as butter with less than 45 percent butterfat content. U.S./Canada trade in this product essentially started in 1997 when 114 tons were sent to the United States. Growth has been rapid with 15,000 tons shipped in 2001. Canadian exports were up another 50 percent during the first 5 months of 2002. The United States is Canada’s only significant market and Canada is the only significant supplier to the U.S. market. Trade in this product is neither limited by U.S. tariff rate quotas nor by Canada’s export subsidy commitments.

On June 24, a WTO Panel released a judgment reaffirming that Canada’s system of subsidizing exports of dairy products violated its WTO commitments. This action follows an April hearing where the Panel heard arguments for and against Canada’s Provincial system of subsidizing dairy exports. Much of this Panel’s work repeated that of last year, when the Panel concluded that the Provincial export systems were providing export subsidies in the form of payment-in-kind and it was through government action that these subsidies were being provided. Canada appealed that conclusion and the Appellate Body ruled that the Panel, in using the domestic price as a benchmark, had used the wrong criteria to value the milk. Rather for this case, the Appellate Body said that cost of production of the milk was the proper way to value milk. Immediately following the June 24 decision, Canada announced that this latest decision would also be appealed.

Mexico

Mexico’s 2002 output of milk is rising and the increase may be almost sufficient to keep up with increasing demand. Imports of NDM and WMP are both expected to drop below the 2001 level. Cheese consumption during 2002 is forecast to increase as 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.

After reaching a post-devaluation peak of 36 million liters in 1997, U.S. fluid milk exports to Mexico have tended to decline as more of Mexico’s domestic milk production is diverted to the fluid market Census reports that U.S. milk shipments to Mexico were 21 million liters in 2001.

January-March Mexican import data for NDM and cheese are shown below: 

European Union (EU)

EU milk production is subject to an annual quota system with relatively steep penalties for over-quota production with the result that milk production tends to change little from year to year, rather, the mix of products varies depending on market prospects for each. A second important factor is that preliminary changes are being introduced to facilitate membership for many former Eastern European countries. One of the important impacts of those changes is increased import access for dairy products from likely new members.

During 2002, the EU dairy sector has been significantly affected by the decline in international prices and the reduced prospects for profitable exports. As a result, intervention buying of NDM and butter is quite active and stocks of both are rising. End of year stock estimates for butter and NDM are up sharply to reflect this summer’s large buildup in intervention stocks and the view that its unlikely that international markets will improve sufficiently to allow a significant drawdown before the end of the year.

Early 2002 price and subsidy adjustments have been almost the exact opposite of those of 2001 when 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. Thus far in 2002, multiple subsidy adjustments have taken place, putting mid-July rates at 850 euros per ton for NDM and butter at 1850 euros per ton. In late July 2002, the euro and the dollar are essentially at parity.

Russia

The Russian dairy sector has largely stabilized and with better feed supplies milk production is forecast to increase slightly in 2002. Demand for dairy products is growing which is expected to induce more imports of butter cheese and milk powder in 2002.

The following tables show year-to-date Russian import data for butter and cheese:

Japan

Reduced culling of the dairy herd, largely as a result of government subsidies to offset the impact of the presence of BSE (Bovine Spongiform Encephalopathy) within Japan, is expected to facilitate a small increase in 2002 milk production. Most of that increase is likely to go for butter and NDM production. Cheese consumption continues to grow and the increased demand is expected to be met by imports.

Australia

Milk output in 2002 (July/June 2001/2002 marketing year) is estimated at 11.4 million tons, nearly 5 percent above 2001’s reduced level. Very good pasture conditions during the second half of the season accounted for much of the year-to-year increase. Most of the increased milk production was utilized for cheese production. The output level for butter and WMP were essentially unchanged while nonfat milk powder was lower.

As the new season gets underway, much of eastern Australia is reported to be quite dry, which may mean a less than favorable start to the 2002/03 season. 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.

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. Some farmers have campaigned for re-regulation in their respective states. Some political support has been generated but re-regulation of the industry appears very unlikely.  

New Zealand

Fluid milk production in the 2001/2002 season (June/May) increased approximately 5 percent to 13.8 million tons. On total milk solids basis (butterfat plus protein) production increased from 1.078 million tons in 2000/01 to 1.128 million tons this year. Favorable pasture conditions, particularly in the second half of the season plus an expanded milking herd due to farm conversions provided the increase. Following the pattern of recent years, most of the milk production increase was used for production of cheese and whole milk powder.

Fonterra, the successor to the New Zealand Dairy Board (NZDB) recently announced that the final payout for the 2001/02 season would be NZ$5.35 per kilogram of milksolids, slightly exceeding the earlier estimate of $5.30. In the two prior years, the NZDB had payouts of $4.49 in 2000/01 and $3.35 in 1999/00. Typically, individual cooperatives added an additional $0.40 to $0.60/kg to the NZDB payout. A major factor behind this year’s high payout was high international dairy prices at the start of the year and Fonterra’s practice of forward contracting a major portion of expected production.

Fonterra recently announced that its estimated payout for the 2002/03 season is NZ$3.70 /kg of milksolids, which for the typical producer means returns at or below those of 1999/00 since the additional amount from individual cooperatives is no longer applicable. The Fonterra estimate is based on current low international prices plus the expectation that there is unlikely to be much improvement, particularly during the first half of the season.

New Zealand NDM Exports (MT)
Destination	2000	2001	Jan-May 01	Jan-May 02
Philippines	20,271	29,394	10,743	8,139
Malaysia	20,749	24,729	10,766	7,298
Taiwan	16,801	19,792	8,979	6,908
Indonesia	14,004	18,688	8,584	9,241
Thailand	13,797	18,513	6,269	9,863
Other	80,311	113,950	57,599	84,405
Total	165,933	225,066	102,940	125,854
Source:  World Trade Atlas

Last modified: Thursday, April 06, 2000