Dairy Production and Trade Developments

This edition of the "Dairy: World Markets and Trade" circular is based on post reports submitted since August 2003 and on available secondary information.  U.S. information is from USDA sources.  Reflecting the greater availability of information electronically, production and trade data for some countries is only shown in aggregate.  Scheduled reports were received from the following countries: 

Detailed data for both listed and non-listed countries can be found on the following website:
http://www.fas.usda.gov/psdonline/psdHome.aspx

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/

Summary

The situation for world dairy markets brightened considerably in the second half of 2003 as international dairy prices resumed their upward swing in response to three main factors. First, the economic recovery in the United States gathered momentum and rippled-out to the Asian economies thus improving prospects for higher import demand.   Second, although Australian milk production for the current season has recovered modestly from last year’s (2002/03 July-June) drought impacted shortfall, production continues to lag well below 2001/02 levels.  This has lowered Australian export volumes and reduced the inventory of exportable dairy products available to world markets.  Lastly, the dollar value against major currencies, particularly the Euro, has tumbled significantly accelerating the increase in global prices.

The dairy outlook for 2004 is positive as the stream of economic news continues to paint a picture of economic gains in the United States and in such critical regional markets as Asia.  For 2004 and 2005, the OECD projects a likely scenario of  “sustained growth in the United States and progressive recovery in Europe and Japan” with member real GDP forecast to grow by 3 percent and 3.1 percent in 2004 and 2005, respectively.  For Asia, the U.S. economic recovery has led to an upturn in exports, and economic growth in the region for 2004 is forecast to hit 6.3 percent – up from 5.6 percent in 2003.  Against this positive economic backdrop, demand for dairy products is likely to strengthen and world dairy prices seem set to remain at their present relatively high levels.  This is particularly true for nonfat dry milk (NDM) since the United States, with it’s vast stocks of NDM, remains poised to supply world markets should prices climb much further above the internal CCC NDM support price ($1,764/MT).  In fact, USDA’s Agricultural Marketing Service reports that U.S. NDM is already being exported without any subsidies. 

Milk Production

Among major dairy producing countries, milk production for 2004 is forecast to register modest increases. In terms of trade, however, the lingering effects of a severe drought on  Australian milk production during the 2002/03 (July/June) season continue to have a significant impact.  For 2003/04, Australian milk production is forecast to recover by only 1.1 percent – this is 7.4 percent below the pre-drought level attained in 2001/02.  Given that the shortage of Australian exportable products has already been a factor in the rise of international dairy prices, it is likely that for 2004 the continued absence of any substantial increase in global dairy supplies will keep prices relatively strong.  In addition, the growing pace of economic activity is likely to stimulate import demand that will provide a firm undertone for world prices of major dairy commodities.

In contrast to Australia, New Zealand milk production has relentlessly registered annual gains of around 4-5 percent in recent years, although low returns to dairy farmers during the current production season (2003/04) are expected to limit milk output to 2.5 percent.  Nevertheless, New Zealand milk production continues to pull-ahead as Australian milk production stagnates.  In fact, during the period 1999/00 (June/May) through 2002/03, New Zealand milk production surged on average 5.5 percent annually.  Given that Fonterra’s forecast (final) payout to the majority of New Zealand dairy farmers has been raised to NZ$4.15/kg (US$1.22/lb) milk solids  – in comparison to NZ$3.63/kg (US$ .91/lb) last season – there is every reason to expect current growth trends to continue for the next 2-3 years.

In the EU, milk production remains fairly static although there were fears that the hot dry summer conditions would reduce deliveries significantly during the 2003 season.  Since milk production in the EU is largely governed by quotas, little change is expected in 2004.  Following the Mid-Term Review concluded in July 2003, the quota regime has been extended until 2014/15.  Most member states will benefit from  three annual quota increases of 0.5 percent each starting in 2006 through 2008.   This means that the milk reference quantities will rise from 118.9 million tons in 2003/04 to 120.5 million tons in 2008/09.  

U.S. milk production remained largely flat in 2003 as dairy farmers adjusted to sharply lower milk prices.  For 2004, milk output is tentatively forecast to increase by nearly 1 percent, although the current weak milk/feed ratios remain a concern.

Dairy Product Production  

In the EU, since fluid milk output is controlled by quotas, the trend for the near future is that of continued growth in cheese production absorbing some of the surplus milk supplies thus reducing the production of NDM and butter.  The forecast for 2004 reflects this trend, as cheese production is expected to rise by 0.5 percent underpinned by the steady growth in domestic consumption experienced during the past few years.  In contrast, butter and NDM output are forecast to drop by 1.6 percent and 2.7 percent, respectively. Whole milk powder (WMP) production is expected to remain steady since close to 60 percent of the milk powder is exported via export subsidy programs which are restricted by Uruguay Round (UR) limits.  Domestic consumption of WMP has been flat for the past several years.

In contrast to the EU and the United States, cheese production in Oceania for 2003 is expected to fall sharply by nearly 10 percent.  This in part reflects the drought-impacted season experienced in Australia and the relatively lower export revenues earned from cheese exports.  In 2003, world dairy prices for the major dairy commodities resulted in returns that were relatively higher for exports of milk powder and butterfat compared to cheese.  As a result, milk powder production (WMP and NDM) in New Zealand is set to reach 975,000 tons this year (2003/04) – an increase of 358,000 tons since 2000.  Cheese production in New Zealand, however, is expected to remain stable while Australian cheese production is forecast to decline.  It will not be surprising if cheese production and exports rebound in the next 2004/05 season since current international prices for cheese have gathered momentum and are strong relative to other major dairy products.

In the United States, cheese production grew by less than 1 percent in 2003 but is expected to expand by 2 percent in 2004 as the economic recovery stimulates cheese consumption.  While surplus stocks of NDM remain a burden one positive aspect is that the production of NDM is forecast to fall for the second year in a row.  In 2004, NDM production is expected to decline by 5.2 percent following a near 6 percent drop in 2003.  Further, food aid shipments, exports under the Dairy Export Incentive Program, and internal use is expected to reduce ending stocks (CCC stocks) by nearly a quarter. 

Dairy Trade

Cheese exports from Oceania are expected to be reduced due to the lower relative returns of cheese and lackluster milk output in Australia.  As noted previously, if the present strength of cheese prices persists, then production in the 2004/05 season will likely grow.  EU cheese exports are forecast to expand by only 1 percent since this would represent a slowdown from an annual average growth rate of 6.6 percent from 1999 through 2003.  Although the EU is limited by Uruguay Round limits to subsidizing exports of only 321,300 tons of cheese, there is a growing portion of premium-quality cheeses exported without any aid.  

On the cheese import side there are no significant changes among major importing countries.  Import demand remains fairly strong in such key markets as Japan and Russia.  Russian imports of cheese have expanded at a impressive pace since 2000 and are often cited as one of the factors for the current strength of international cheese prices.  Russian milk production is anticipated to rebound weakly by only 1 percent in 2004 following a 3 percent decline in 2003.  This factor coupled with the growth in disposable income is likely to fuel more imports of cheese in 2004 currently slated to grow by 3 percent.

In terms of butterfat markets among selected importers, Russian imports continue to set the pace as one of the top butter markets in the world.  Although Russian imports of butter are forecast to fall in 2004 relative to 2003, imports are still expected to exceed levels attained in 2002.   Continuing its steady growth, New Zealand exports of butter are expected to increase by 2.3 percent to reach 395,000 tons.  Since 2000 through 2003, exports of butterfat from New Zealand have been climbing at an average rate of nearly 5 percent/annually.  Australian exports of butterfat are also anticipated to increase by close to 5 percent.  However, in contrast to New Zealand, Australian butterfat exports have exhibited virtually no growth since 2000 when export levels hit 139,000 tons. 

NDM exports among major suppliers has been growing consistently since 2001 and is forecast to expand by a further 5 percent in 2004.  The most notable change has been the EU NDM export figure for 2003 that has been sharply revised-up by nearly 40 percent to 240,000 tons.  The forecast for next year calls for continued expansion although since NDM exports are for the most part subsidized they are subject to the Uruguay Round limitation of 272,500 tons.  In Oceania, Australian exports of NDM for 2004 continue to languish as a result of poor fluid milk production prospects constraining supply.  In contrast, New Zealand’s NDM exports for the current season are expected to jump by 11 percent.  For next season, if high cheese prices continue to persist, it is likely that domestic production and thus exports will be re-balanced to favor increased cheese exports. 

World imports of NDM are expected to rise in 2004 with the fastest paced growth anticipated in Asian countries where NDM imports in some of the key markets are set to increase by 8 percent to 468,000 tons. Although the levels are well below the Indonesian and Philippine markets, the growth of the NDM market in China and Thailand are forecast to post impressive gains of 30 percent and 15 percent, respectively.  The continuing economic recovery currently underway in Asia and the accelerated economic expansion predicted for next year will play a pivotal role in fulfilling the forecast expectations.

Imports of NDM Among Major Asian Countries
(1,000 Metric Tons) 

Confounding trade expectations, particularly since Iraq is a key importer, WMP trade has been exceptionally strong this year.  This is due to the resumption of delivery contracts to Iraq and the exceptional expansion of the Chinese market.  Chinese imports of WMP have leapt by nearly 70,000 tons in two years to reach an estimated 110,000 tons in 2003.  For 2004, these fast paced gains are expected to continue with imports anticipated to grow by 36 percent.  In Iraq, although there are no forecast statistics, imports of WMP are likely to remain substantial.  In terms of other major markets, Algeria is forecast to reach 120,000 tons in 2004 while Brazilian import demand is contracting as the reliance on domestic supplies grows.  Venezuela is estimated to have reduced import volumes during 2003 due to a severe economic slump, the imposition of currency controls, and the difficulty by importers in obtaining import licenses.  Although imports may recover in 2004, the situation remains unstable.

New Zealand has been the main beneficiary of the expanding world market for WMP since the EU is constrained by the Uruguay Round limits on subsidized exports and Australian production struggles to overcome the effects of a severe drought.  Argentina, which at one point was a growing contender in the WMP market, has experienced a sharp fall in the availability of domestic fluid supplies.  It is estimated that between 1999 and 2003, some 25-30 percent of dairy operations were closed and the Argentinian dairy herd dropped by 15-20 percent.  Although dairying has become profitable and milk production is forecast to rise in 2004, it is competing for resources with the increasingly profitable production of soybeans.

World Dairy Prices

Dairy prices for major dairy commodities have been climbing since mid-2002 due primarily to the accelerating weakness of the U.S. dollar, the Australian drought, and a rebound of major economies.  The initial stages in this price recovery were precipitated by the emerging weakness of the dollar versus the Euro that in early 2002 had been trading in the range of $0.95/€ -$1.00/€.  By year-end 2002, however, the dollar had nearly reached $1.05/€ and more importantly expectations of further dollar weakness were building.  Early in 2003, prices got a further boost as the impact of the Australian drought began to be felt as Australian exporters facing fluid milk shortfalls, rapidly depleted  stocks to cover export sales.  The outlook for the dollar remained dismal as rates surpassed the $1.10/€ mark placing upward pressure on the benchmark EU export prices.  In late 2003,  not only were the weak dollar and prospects for a relatively flat rebound in Australian milk production conspiring to keep dairy prices firm, but positive economic data was now providing evidence of a recovery of GDP growth, and hence dairy product demand, in major economies.

The price outlook for the next six months points to continued strength although further price increases will probably be subdued particularly for milk powder.  Global demand is improving and exportable supplies are limited as Oceania milk production for this season is winding-down.  In the EU,  reports indicate that the pace of subsidized export pre-fixations for all dairy products are exceeding the monthly profile for the July 2003 through November 2003 period.  In effect, if this rate of pre-fixations continues then the EU will be required to scale back exports as it approaches its Uruguay Round limits (based on a July/June year).  In fact, despite the sharp rise in global prices the EU has shown no inclination to increase export subsidy rates for any of the major dairy products. 

The recent price surges, however, have been principally due to exchange rate factors rather than supply/demand imbalances.  Consequently, it appears likely that there will be some price resistance particularly for such products as cheese and butterfat should prices continue to firm solely as a result of a weakening dollar.  In the case of NDM, prices have exceeded $1,800/MT FOB N. Europe; a level that is very nearly the break-even point at which U.S. supplies of NDM become commercially competitive without the aid of subsidies.  This is particularly true for such destinations as Mexico and to a lesser extent Asian countries.  Consequently, prices for NDM are unlikely to rise much further above $1,850/MT.  This may also serve to restrain the price of WMP.   Further, as the 2004 spring flush approaches, the EU may step-up export subsidy rates in order to avoid surplus accumulation of butter and NDM.

Last modified: Thursday, April 06, 2000