Dairy Production and Trade Developments

Summary

There has been little change in the fundamentals that have led to the strong global demand growth for dairy products in late 2003 and early 2004.  On the economic front, world gross domestic product (GDP) growth for 2004 is expected to moderate from the 6 percent annualized pace experienced in the second half of 2003 to a respectable 4 percent plus rate.  In the key import markets of Asia, GDP growth remains high with forecast GDP increases for 2004 ranging from around 8 percent for China to 5.4 percent for the ASEAN-4 countries.  Consequently, global import demand for dairy products for the second half of 2004 is expected to remain strong and will continue to pressure available exportable supplies.  The production outlook for the upcoming season in Oceania remains mixed.  Although New Zealand will likely follow trend increases in milk output of 3-4 percent, climatic conditions in Australia had not improved sufficiently to completely alliviate the rainfall deficit in key producing areas. Adequate rainfall in the next several months will be critical to mitigate the effects of drought during the past two seasons.  In addition, the rapid appreciation of Oceania currencies relative to the U.S. dollar has substantially offset gains in global prices experienced in the first half of 2004.  A reversal leading to the depprecition of the Australian dollar vis-à-vis the U.S. dollar will boost farmer’s income and aid substantially in restoring output to pre-drought levels.

In the EU-15, output is virtually unchanged from last year, however, the trade environment has been complicated due to the implementation of reforms to the Common Agricultural Policy (CAP) and the accession of 10 new countries to the EU.  These factors plus the rapid rise in the value of the Euro have led to frequent changes in the terms governing subsidized exports of dairy products.  In the United States, milk production lags previous year rates and the current forecast is for a marginal decline in CY 2004 output.  Domestic demand has been a key driver leading to record high milk prices but it appears that these elevated prices may also be starting to impact demand negatively.  Prices for cheese have recently tumbled and coupled with a slide in butter prices this suggests that milk prices for the next half of the year will be lower than first half prices.

At present, global prices of major dairy commodities are likely to remain strong but past price cycles suggest that once above $2,000/ton, import demand for dairy products starts to wane.  The weakness of the dollar also will raise import costs, although in many key Asian import markets, Governments have intervened to the extent that domestic currencies have been effectively depreciated.  Consequently, global prices are probably at their peak and will likely moderate for the rest of the year. 

Milk Production

There have been no major changes in the milk production forecast for all selected countries.  In Oceania, New Zealand’s milk output has been revised upwards slightly to 14.88 million tons – a gain of 3.7 percent over the 2002/03 (June-May) season - due to favorable pasture conditions, a 2 percent increase in cow numbers, and greater per cow productivity.  Although there were some flood-affected areas in North Island that impacted dairy production, good pasture conditions prevailed in most of the region.  During the period 1999-2004, Australia’s dairy herd grew by an average of 3.6 percent annually, however, there are indications that this rate will decline in the future. The rate of dairy farm conversions has decreased and farmers are consolidating existing dairy operations to improve efficiency in response to lower returns.   Consequently, for the 2004/05 season, although there are no forecast figures, milk production growth will probably moderate.  Nevertheless, given current firm world market prices, any change in exchange rates that would lead to a depreciation of the New Zealand dollar (versus the U.S. dollar) will likely boost milk production and profits. 

In contrast, the Australian milk production forecast for 2003/04 (July/June) year has been revised down by 2.3 percent to 10.5 million metric tons.  Although there has been a late season recovery in milk production due to improved moisture conditions it is estimated that cumulative milk production from July 2003 through April 2004 was lagging the year earlier pace by 3 percent.  However, production in the key state of Victoria – accounting for about two thirds of total Australian milk production – registered a 7 percent increase in milk output from January through April 2004 in comparison to the same period the previous year.  Further, some major cooperatives have already announced increases of 5 percent in the price of milk for the new season.  However, climatic conditions will play a pivotal role in shaping the outlook for the new season.  Although there has been a marked improvement in moisture conditions, large areas of Victoria continue to endure deficit conditions.  In the latest outlook (dated 06-17-04) for the July-September period, the Australian Bureau of Meteorology issued a neutral report for Victoria and most of Australia noting that “the shifts in the odds are too weak to offer any firm guidance as to the most likely outcome of September quarter rainfall.”

In the EU-15, the milk production estimate for 2003  has been adjusted upwards from the prior estimate by nearly 1 percent since farmers in many of the drought-impacted countries were able to use high quality feed to raise milk output.  However, many dairy producers have exceeded their milk quota limits and face significant super levy payments.  In Germany, farmers surpassed quota limits by 362,000 tons and now face an estimated super levy fine of $158 million (€129 million).  As farmers adjust to quota levels, milk production is anticipated to decline marginally in 2004.  Cow numbers in 2004 are expected to have declined by 1.5 percent continuing the long-term trend of increasing productivity and consolidation within the dairy sector.

In the United States, the milk production forecast for 2004 has been lowered by 1.1 percent from the previous 2004 forecast to levels slightly below 2002 and 2003.  Despite high domestic prices generated as a result of strong product demand, significant milk production increases are not anticipated.  Dairy producers have been constrained in their ability to expand herds or raise milk production due to tight heifer supplies (both domestically and from Canada), the rationing of Recombinant Bovine Somatotropin, high feed prices (specifically unfavorable milk feed ratios), and uncertainty over future dairy prices.  Note that for the years 1999 through 2003, the cow number and milk production figures were adjusted to reflect revision made by the National Agricultural Statistics Service as a result of the 2002 census.    

Dairy Trade

There have been no significant revisions in trade forecasts.  Given the high prices of dairy commodities prevailing on world markets, major exporting countries have drawn down ending stocks in order to meet import demand.  In the United States, the NDM export forecast for 2004 has been raised by 17 percent from the previous report to 175,000 tons.  Trade reports indicate that some 35,000 to 45,000 tons of NDM have been already sold for export without the aid of subsidies and there is speculation of further substantial orders pending.   

There are, however, some indications that the strength in commodity prices is starting to impact import demand.  In the butterfat sector, Russian purchases have frequently been cited as a critical factor in influencing global butter prices.  In the first quarter of 2004 imports of butterfat are down by 24 percent compared to the same quarter in 2003.   Russia is expected to import a total of 135,000 tons of butterfat in 2004 – unchanged from 2003.

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/

Last modified: Thursday, April 06, 2000