Dairy Production and Trade Developments

Summary

The world market for dairy products in 2004 was particularly notable for the rapid and extended increase in international prices of major dairy commodities.  This was in large part due to the growth in global demand for dairy products exceeding available exportable supplies and the rapid decline in the U.S. dollar.  The weak U.S. dollar not only added further impetus to rising prices but also cut export revenues in some of the key dairy exporting nations.  For the United States, these high prices have been significant in terms of exports of nonfat dry milk (NDM).  Since international prices of NDM surpassed the CCC support price, the flow of commercial unsubsidized exports has grown significantly.  To this extent, a substantial portion of the 200,000 tons of U.S. NDM projected to be exported in 2004 will probably be sold without the aid of any export subsidies. 

For 2005, dairy prices are likely to remain firm as milk output during the ongoing season in Oceania is forecast to grow modestly and reportedly, the majority of exportable supplies are committed.  In the EU-25, milk production in 2004 declined by nearly 1 percent.  As a result, internal prices for principal dairy products are relatively strong and stocks for such products as NDM are low.  Although milk output in 2005 is expected to recover, production levels will be similar to 2003 and thus unlikely to affect export markets significantly.  In the United States, milk production is forecast to expand by approximately 1.8 percent, with the bulk of the milk flowing into cheese production.  Nevertheless, high world prices will ensure that the majority of NDM exported will probably be non-subsidized.

Dairy Production    

In Oceania, timely rainfall in Australia improved production prospects and milk output in 2004/05 (June-May) is forecast to increase marginally by around 1.0 percent to 10.5 million tons – still 9.5 percent below the pre-drought level reached in 2002.  Significantly, the herd size is nearly 14 percent below 2002.  The ability of Australian dairy farmers to expand remains constrained since many farmers are still recovering from the drought and investment capital remains tight.  In addition, since dairy commodities in the international marketplace are primarily traded in U.S. dollars, the relative strength of the Australian dollar versus the U.S. dollar has offset the global price gains and reduced export returns. 

In New Zealand, milk production for 2004/05 (July-June) is slated to moderate from the 4.5 percent increase posted in 2004 and grow by 2.5 percent to 15.4 million tons.  Cold spring weather and extensive flood damage in the North Island during the past year have been cited as factors reducing milk flows. For 2004/05, Fonterra is anticipating a payout of NZ$4.05/kg (US$2.51/kg) of milk solids - down 5 percent from the previous year.  The strengthening of the New Zealand dollar relative to the U.S. dollar over the prior year has negatively affected export returns.

In the European Union-25 (EU-25), cow milk production (deliveries) in 2004 is projected to decline by 0.6 percent to 131.1 million tons despite a nearly 2 percent increase in milk output within the CEEC-10.  However, since the CEEC-10 accounts for less than 12 percent of EU-25 total milk production this upward swing had little impact.  It appears that EU-15 dairy farmers over-adjusted production in order to avoid exceeding quota levels and facing levies.  Consequently, milk output dropped by nearly 1 percent.  One effect of this cut was particularly evident in the EU-15 production of NDM that fell by nearly 13 percent.  For 2005, EU-25 milk production is forecast to recover by 1 percent but NDM production is anticipated to grow by only 3.6 percent; well below the level attained in 2003.

In the United States, following 2-years during which milk production barely increased by half a percent, U.S. milk production is forecast to rise by nearly 2005 by 2 percent to 78.9 million tons.  Strong product prices coupled with low feed costs are expected to improve returns and output.  These increases will be achieved primarily through increased productivity, as milk per cow gains will more than offset the long-term trend in reduced cow numbers.  A key factor will be the availability of bovine somatotrophin (BST).  In 2004, BST supplies were limited but are projected to be more readily available in 2005. 

Dairy Trade

Exports of cheese in selected countries is forecast to increase moderately by less than 1 percent in 2005 following several years of relatively strong growth ranging from 5 to 6 percent annually.  This reflects the slowdown in milk production in Oceania while in the EU-25 a large proportion of the production increases are being absorbed by the rapid growth in domestic cheese consumption.  With the integration of CEEC-10, it is likely that with rising incomes, the per capita consumption of cheese will increase and account for a share of the increases in milk production.

Cheese imports in selected countries are also expected to only grow marginally with Japan expected to take the lead as the single largest market for imported cheese.  Traditionally, the primary import market for cheese has been the United States.  However, for 2005 U.S. imports of cheese are expected to remain stagnant at 215,000 tons while Japan is forecast to increase imports by some 2 percent to 220,000 tons.  Russian imports of cheese are set to decline slightly but at a forecast level of 185,000 tons will remain a key market for EU-25 cheese.

Butter exports in selected countries are expected to expand 2.1 percent in 2005 with most of the increase occurring in the Ukraine and the EU-25 countries.  Although India is not a significant exporter of butter, India’s exports in 2005 are likely to jump to some 10,000 tons largely due to a sharp rise in domestic butter production.  For 2005, butter production in India is anticipated to grow by nearly 10 percent.  In contrast, butter exports from Oceania have been steadily declining since 2000 largely due to the increasing emphasis on promoting whole milk powder (WMP) and cheese in the fast expanding Asian markets.  On the import side of butter trade, there are no significant developments.  Given current world butter prices, Russian import demand for 2005 is currently forecast to remain stable at 170,000 tons.

NDM exports for selected countries are projected to rise by around 5 percent in 2004, but largely at the expense of a sharp 37 percent drawdown in ending stocks.  This drop is particularly evident in the EU-25 as intervention stocks of NDM are expected to fall dramatically from 225,000 tons in 2003 to 10,000 tons in 2005.  There are two principal reasons for this, a) NDM exports for the EU-25 in 2004 were up nearly 5 percent to 352,000 tons despite fairly steep reductions in export restitution levels, and b) a sharp cut in production reduced available exportable supplies.  In the United States, ending stocks for 2004 are projected to drop by 43 percent to 250,000 tons and are forecast to stand at only 100,000 tons by end-2005.  U.S. exports of milk powder for the January-September 2004 period are running at 179,825 tons – up an impressive 77 percent over year-ago comparable period.  NDM exports for 2004 are projected to reach 200,000 tons but then are expected to decline by 25 percent in 2005.  However, given the high level of global NDM prices, it is likely that a substantial portion of the powder will be exported without any export subsidies.

Oceania exports of NDM are set to remain stagnant for 2005, as the focus is to use manufacturing milk for processing into high export earning products such as cheese and whole milk powder.  For 2004, Oceania exports of NDM are projected to decline marginally by some 4 percent and forecast to drop slightly in 2005 to 481,000 tons.

Import demand for NDM remains robust led by strong economic growth in the Asian region and increased oil revenues in North African and Middle-Eastern countries.  In Asia, imports of NDM among the selected countries are expected to grow by almost 9 percent in 2004 with virtually all the nations registering gains.  These increases are expected to be more subdued in 2005 as higher global prices are likely to temper consumer demand.  In North America, Mexico, the most prominent global import market for NDM at around 170,000 tons, is not expected to expand significantly.  Nevertheless, assuming international prices of NDM hold at current levels, it will represent a key market for exports of U.S. NDM.

Exports of whole milk powder (WMP) by selected exporters continues its fast-paced growth with trade projected to grow by 12 percent in 2004.  In 2005, high global prices are likely to dampen demand, and exports are forecast to post a more modest 4 percent gain.  During the past five years, New Zealand has become the pre-eminent exporter of WMP with its share of the total for the selected countries growing from 30 percent in 2000 to approximately 42 percent in 2004.  In contrast, the EU-25 share over the comparable period has been gradually eroded from 44 percent to 33 percent.  The World Trade Organization (WTO) limitations governing export subsidies have been largely responsible for restricting EU-25 WMP sales.  This trend in market shares is likely to continue given that New Zealand is planning to invest NZ$200 million in additional drying capacity.  In Argentina, WMP production rebounded by 11 percent in 2004 and exports are subsequently projected to expand by 25 percent to reach 125,000 tons.  The combination of a drop in milk production costs after the 2002 devaluation of the currency and high export returns are likely to spur added milk and WMP production.  The forecast for 2005, calls for a 7 percent expansion in milk output and an 18 percent boost in WMP production.  Exports of WMP are anticipated to jump by 28 percent to reach 160,000 tons with Algeria, Venezuela, Mexico cited as major destinations.

The demand for WMP in selected Asian countries is projected to grow by 11 percent in 2004 sustained by the rapid pace of economic growth particularly in countries such as China.  In 2004, imports of WMP by China grew by 24 percent and are forecast to expand by 28 percent in 2005 to reach 145,000 tons.  At this pace, China could eclipse Algeria as the single largest market of WMP by 2006.  In South America, Brazilian imports of WMP continued the declining trend largely due to gains in milk production and rising self-sufficiency.

World Dairy Prices

Prices for dairy commodities during 2004 continued to climb as strong economic growth fueled import demand and available exportable supplies remained tight.  In addition, the prolonged slide in the value of the dollar has been a critical factor in putting upward pressure on EU export prices.  These exchange rate movements have also reduced export returns to major dairy producers tempering any expansionist plans keeping supplies tight.

For the first half of 2005, it is likely that dairy product prices will maintain their current strength.  On the production side, the current 2004/05 season in Oceania has been somewhat disappointing with peak flows registering moderate gains over the prior year.  In Australia, the rebound in milk output has so far been sluggish and in New Zealand, expectations of a 4-5 percent increase in production have been scaled back to less than 3 percent.  Consequently, from a supply perspective, the available exportable volumes from Oceania are likely to remain limited.  In fact, trade reports indicate that a significant portion of exportable products have already been committed.  In principle, the next boost in the supply of global dairy commodities will be in the early spring of 2005, when EU-25 production starts ramping-up.  However, EU quotas will restrict any sharp increases in the milk supply and the WTO disciplines limit subsidized exports of dairy products.

In the United States, milk production is forecast to grow by nearly 2 percent but is likely to have only a limited impact on global supplies.  In terms of NDM, the United States remains a viable supplier since the support price of NDM is pegged at $1,764/MT (ex-plant) and world prices for NDM are ranging from $2,150-2,350/MT FOB allowing the U.S. to compete effectively on world markets.  In principle, with world prices for cheese at over $3,000/MT FOB, if U.S. domestic prices should decline to around $1.30-$1.35/lb, U.S. exports of cheese could increase.  Consequently, from a supply perspective, while the U.S. will temper international prices of NDM, globally the available exportable supplies of cheese, WMP, and butter will continue to be relatively tight.

The demand side of the equation will be a critical element in determining the path of global dairy prices.  In Asia, GDP growth, particularly in China, has been relatively robust during the past year and if sustained throughout 2005 will ensure dairy import levels remain strong.  In the past, however, rapidly rising import prices have often outpaced consumers’ disposable income leading to a drop in demand and a price correction.  In the North Africa-Middle East region, the boost in oil revenues has been a significant factor in offsetting high dairy import prices and maintaining import demand.  A decline in oil prices and further increases in dairy prices increases the probability of a cut in import demand.  Therefore, it appears that dairy markets are well balanced and any further price increases will be undercut by a drop in demand.  In fact, historically, international dairy prices have been cyclical as the 20-year price charts demonstrate.  Therefore, while it appears that prices should be stable in the first half of 2005, it would not be surprising if there is a moderate correction in the second half.

This edition of the "Dairy: World Markets and Trade" circular is based on post reports submitted since October 2004 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