Prospects for Dairy Markets and Income in the EU 2012-202207 March 2013
Medium term prospects for milk and dairy products appear favourable due to the continuing expansion of world demand, the European Commission has concluded in their latest market forecast.
Milk and Dairy Products
The most important driver for long term market prospects remains the expectation of continued demand growth in emerging economies, facilitated by economic growth, increasing population and preference for dairy products.
Recent Market Developments
After two consecutive years of favourable price developments, dairy commodity markets witnessed decreasing prices over the first five months of 2012 due to greater supplies, both at EU and world level. During the second part of 2012 this trend started to revert and prices to recover. Strong market turbulence characterised previous years: unprecedented high prices in 2007 and a sharp drop in 2008 and early 2009 that led to the milk crisis in the EU and worldwide when, due to low output prices and high costs, farmers saw their margins shrink and turn negative. Price variations on the commodity markets were reflected in the farm gate price paid to milk producers, albeit with a certain delay and only partially, among others, prompting the European Commission to reflect on the functioning of the supply chain through a High Level Expert Group on Milk.
After an estimated increase of 2% in 2011, EU cow's milk deliveries to dairies are expected to further expand by 1.1% in 2012. Total EU milk production would reach 153.1 million tons in 2012, thanks to a continuous increase in milk yields both in the EU-15 group and in the EU-N12 (new Member States) which compensates for the contraction in the herd. The 2012 milk production figure incorporates the impact of the severe drought in the US and in certain EU Member States, which heavily limited coarse grain production and led to a sharp increase in feed prices in summer months.
Various EU regions have been distressed by the drought. The impact has been felt both by farms highly dependent on purchased feed that would be affected because of increased feed costs and by farms with a larger source of own feed which also faced difficulties due to the impact of the drought on the growing of grass for immediate grazing, on future availability of grass silage for the winter months, as well as on home-grown grains. These farms are likely to have to turn to purchased grains and concentrates, increasing the share of feed in their operating costs, especially in a year of high grain prices.
Despite a rather favourable global market situation over 2011 and the first 9 months of 2012 expectations for the short term very much depend on the extent of increased milk production both in the EU and in the main supplying countries (New Zealand, Australia, US, etc.) and the sustainability of strong demand on the world market. Factors contributing to the price recovery of the second part of 2012 have been linked to adverse weather conditions in the US and strong import demand on the world market led by China and other countries in South–East Asia as well as by the Near and Middle East. World import demand expansion is expected to result in increasing prices for cheese, SMP and WMP. As a consequence producers’ gross margins may improve, although this is conditional upon a stable relationship between milk prices and commodity prices, and stable cereal prices.
Excellent export performance, world demand the key driver
Medium term prospects for milk and dairy products appear favourable. The continued expansion of world demand, resulting from global population and economic growth, and increasing preference for dairy products are expected to be the main drivers, fuelling EU exports and sustaining commodity prices. The best export performance is shown by cheese and SMP, whose exports over the outlook period would expand by two thirds and triple respectively (Graph 4.1). Their market share (percentage of EU exports on total world exports) will improve, reaching 32% in both cases. Butter and WMP products' market shares are projected to deteriorate, partly due to greater dynamicity of other exporting countries.
Favourable exchange rates foster exports, macro-economic uncertainties in the short term
This outlook has been built under the assumption of a weak Euro against the US dollar in the near future, although the Euro is assumed to strengthen again, albeit slowly, from 2015 onwards. The assumed exchange rate developments may foster commodity price prospects when expressed in Euro. This suggests potential for improved EU exports, particularly during the early years of the projections. The path of economic recovery in the EU and worldwide constitutes a considerable risk and increases the level of uncertainty regarding the outlook projections. A slowdown in global economic development for 2012 and 2013, not just in the developed world but also in large emerging economies, would negatively impact the demand for EU exports. An expected fragile economic growth in the EU, mainly in certain Member States, would generally translate into modest consumption development for dairy products.
Policy settings create opportunities for milk production
The status quo policy assumptions for the outlook imply an increased potential for milk production through the phasing out and abolition of the milk quota system by 2015. Available market intervention mechanisms following the CAP Health Check, notably intervention buying-in for SMP and butter, as well as the possible use of export refunds do not play a role in the baseline projections, as commodity prices remain above intervention levels throughout the outlook. Intervention stocks have been depleted for butter and the remaining SMP intervention stocks are assumed to be placed on the market over the near term, under the food programme for the most deprived people.
EU Exports of Dairy Commodities ('000 Tons)
Cow's milk production would continue growing
Milk production is projected to continue increasing from 2012 onwards, at a moderate growth rate (Graph 4.2). Aggregate EU production would remain below the potential growth rate provided by the gradual elimination of the quota regime. EU milk production is projected to reach 159.3 million tonnes in 2022, accounting for a cumulative increase of 5% since 2011. This increase comes as a result of a higher growth rate for milk delivered to dairies (+5.9% from 2011) and a continuous decline of production for on-farm use (-4.9% from 2011). Milk deliveries would reach almost 147 million tonnes in 2022, while production for on-farm consumption would decline to 12 million tonnes. The latter is mainly driven by a gradual contraction of subsistence production in the EU-N12.
EU Cow's Milk Supply and Dairy Herd Developments (Million t)
The increase in milk production stems from a continued increase in the average yield per dairy cow, that would reach almost 7 200 kg by 2022 (a cumulative growth of 5% from 2011), while the EU dairy herd is projected to contract by 3% to the level of 22.2 million animals in 2022. Developments would be more pronounced in the EU-N12, where the number of dairy cows is projected to decline by 8% (compared to -1.4% in the EU-15) as a result of continuous restructuring. By contrast, the average yield per cow is projected to grow by 8% in the EU-N12, compared to a 7% increase in the EU-15. Despite the higher growth rate, average EU-N12 cow productivity at 6 000 kg will remain below the EU-15 level of 7 600 kg.
WMP production stable overall
Production fluctuations for whole milk powder (WMP) in past years underline the important role that export potential played for this commodity. WMP markets are envisaged to be in balance with limited export potential. WMP production is expected to stay relatively stable over the projection period, after a partial recovery during the early years, and to reach 700 000 tonnes in 2022 (-2.5% with respect to 2011). EU consumption would stabilise at around 330 000 tonnes during the last years of the outlook. Although WMP world demand led by China and other Asian countries would expand significantly over the projection period, EU exports are projected to stay at 372 000 tonnes in 2022. The EU market share of global exports would decline gradually to 14% by 2022 (from 17% in 2011) as a consequence of lower competitiveness against supplies from Oceania.
Cheese Market Developments (Million t)
SMP exports booming
The SMP market situation in 2011 and 2012 has been favourable due to robust import demand on the world market. China is gradually becoming an important player in world SMP imports; while exports to North African countries have also substantially increased. SMP intervention stocks built up in 2009 are expected to be completely exhausted by the end of 2012 through a combination of sales by open tender and assumed release under the most deprived persons scheme.
The strong global import demand continues to contribute to market balance, driving a favourable outlook for SMP exports. EU production is projected to increase by 23% throughout the outlook to reach around 1.3 million tonnes in 2022 (Graph 4.5). Domestic consumption prospects are expected to stabilise at 638 000 tonnes by 2022 (-0.8% compared to 2011). Feed use would continue to contract, driving a steady decline in EU SMP use to 247 000 tonnes by 2022, which is 6% above the level of 2011.
Exports would reach 678 000 tonnes by the end of the outlook (30% more than in 2011 and almost three times more than 2009). Such positive export prospects are based on sustained demand from China, Algeria and Middle East countries. The EU could see its world market share stabilise at 32% of global exports in 2022, supported by a stronger orientation by competing exporters towards cheese, butter and WMP.
First 10 Importing Countries of SMP, % Increase 2022/2012
SMP Market Developments (Million t)
Butter markets expected to remain balanced
After a year of high prices during 2011 due to a limited butter supply and strong demand, the output recovery in 2012 has put downturn pressure on prices.
EU exports still remain rather uncompetitive given the existing price gap between EU and world quotations, but sustained demand from Russia would allow exports to stay stable and to expand in the near future. Total butter production is expected to remain constant in the short run, and to recover in the years soon after the quota expiry, reaching 2.4 million tonnes in 2022 (+8% with respect to 2011).
Projections (Graph 4.6) point to continued market stability for butter, thanks to positive market conditions over the outlook period, with prices at relatively high levels and firm EU demand (over 2 million tonnes) during the second part of the outlook period. EU consumption is expected to increase over the medium term reaching 4.3 kg/capita by the end of the outlook (compared to 4.2 kg/capita in 2011).
The relative improvement in consumption is supported by a higher increase in the price of vegetable oils vis-à-vis butter. Although the outlook for butter exports appears relatively less favourable than for other dairy commodities, given the assumed better competitiveness of other exporting countries in world markets, exports are projected to grow and stabilise around the level of 185 000 tonnes by the end of the outlook.
Butter Market Developments (Million t)
While the outlook displays continued market stability for butter, it remains conditional on an assumed status quo regarding dietary preferences. The effect of a change towards low(er)-fat dairy commodities would have a direct effect on butter consumption and an indirect effect on butter production, as less milk fat would be used in the production of other dairy commodities (notably cheese and fresh products), increasing residual fat for butter production.
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