24 November 2012

14 minute read

The change in trend resulted from a tightening of supplies to the world market. Availabilities are anticipated to be finely balanced until at least the end of the year, as output in the Northern Hemisphere is now trending seasonally downwards and only a limited increase is anticipated during the new production year in the Southern Hemisphere. The absence of substantial growth in milk output in the principal exporting countries is likely to mean a further upward movement in prices.

World milk production in 2012 is forecast to grow by 3.0 percent to 760 million tonnes – a higher rate than the average for recent years. Asia is expected to account for most of the increase, with output also growing in Oceania and South America.

World trade in dairy products is expected to continue expanding in 2012. Demand remains firm, with imports anticipated to reach 52.9 million tonnes of milk equivalent, up 4.6 percent from 2011. Most of the growth in demand will come from Asia, followed by Africa.

Milk and Milk Products

Prices rise in the face of limited availability on the international market

International prices of dairy products began to strengthen in mid-2012, reversing the steady decline that had characterized the previous 12 months. The change in trend resulted from a tightening of supplies to the world market. Availabilities are anticipated to be finely balanced until at least the end of the year, as output in the Northern Hemisphere is now trending seasonally downwards and only limited growth is anticipated during the new production year in the Southern Hemisphere.

The FAO international dairy products price index (2002– 2004=100) stabilized at 173 during June and July but had risen to 194 by October. Prices strengthened for all the products that constitute the index, especially skimmed milk powder (SMP) which registered an increase of USD562 per tonne, or 20 percent, after its mid-year low. In the same period, whole milk powder (WMP) prices also rose, by USD 425 per tonne or 15 percent, as did quotations for butter, which were up USD 400 per tonne or 14 percent, and cheddar cheese, which increased by USD 175 per tonne or 5 percent.

Over the past three years, the dairy index has oscillated around a value of 200, meaning prices for dairy products overall are approaching the average level for this period. With publicly financed inventories at minimal levels in the EU and the United States, the market remains sensitive to sudden changes in milk production and availability of milk products. The absence of substantial growth in milk output in the principal exporting countries is likely to mean a further upwards movement in prices.

Production

World milk production to grow by 3 percent in 2012, sustained by gains in Asia, Oceania and South America

World milk production in 2012 is forecast to grow by 3.0 percent to 760 million tonnes – a higher rate than the average for recent years. Asia is expected to account for most of the increase, with output in India, the world’s largest milk producing country, forecast to rise by 5 million tonnes to 132 million tonnes. Dynamic domestic demand provides the main impetus for growth, as India is largely absent from the international market for dairy products. Unlike many countries, expansion in herd size, rather than rising productivity, is the principal engine behind the rise in India’s milk production. Increased output is also anticipated in China, Pakistan and Turkey, spurred by steady growth in consumer demand. The Republic of Korea is beginning to recover from the 2011 foot-and-mouth disease outbreak which required the slaughter of 8 percent of the dairy herd and led to a corresponding drop in production.

In Africa, a small increase in milk output is anticipated for 2012, even though a number of countries in the region have suffered adverse weather, which has limited growth. For example, a below-average rainy season in northern Kenya led to water shortages and poor pasture conditions, while poor rainfall in south-eastern and coastal areas and flooding in western Kenya resulted in higher prices for feed and fodder. High maize prices are expected to constrain growth in milk production in South Africa in 2012, leaving it only slightly higher. Elsewhere in the region, an outbreak of foot-and- mouth disease in Egypt led to higher calf mortality and may limit growth in milk output.

Rising incomes and firm regional and international demand have favoured dairy production growth in several countries in Latin America and the Caribbean. Even more important, most South American countries had very good pasture conditions during the 2011/2012 production year. Overall, South American milk production expanded by over 5 percent in 2011 and a similar rate of increase is foreseen for 2012, when its output is expected to reach 71 million tonnes. The strongest gains this year are forecast for Argentina, Ecuador and Uruguay, with output in Brazil and Chile also growing. Conditions have been favourable for pasture production, and there is an optimistic perspective on the future international market for dairy products, leading to increased investment in new technology and improved animal genetics. In Central America, milk output in Mexico, the largest producer, is expected to be constrained by drought, which may trigger herd reduction and withdrawal of a number of small-scale producers from the industry. Production in Costa Rica is expected to show a moderate increase.

In North America, milk production in the United States is forecast to rise to 90.3 million tonnes, an increase of almost 2 percent, reflecting dairy herd expansion in response to positive national and international demand. Until July, monthly production was above the same period in the previous year, but an unfavourable milk/feed price ratio since then has led some farmers to cut back. Output in Canada is set to remain stable at 8.3 million tonnes, within the limits set by the milk quota system.

In Europe, EU milk production is forecast to rise by only 1.5 percent to 157.9 million tonnes in 2012, as improved milk yields continue to more than compensate for reduced cow numbers. Weather early in the year was generally favourable for pasture growth, which set the basis for a positive start. However, subsequently some member countries suffered dry conditions or even drought, in particular Romania, Hungary and Bulgaria, while others, such as Ireland, the United Kingdom and northern France, had excessive rain which adversely affected both pasture and forage. As a result, several European countries faced rising feed prices and deteriorating pasture quality. Although EU production limits are being raised by 1 percent per year in preparation for the 2015 abolition of its quota system, it now appears that some producers will not be able to avail themselves of the increase because of the adverse weather conditions described above. Furthermore, milk prices have not increased to reflect higher production costs, which will also act as a brake on growth. Milk production in the Russian Federation is anticipated to show a modest increase in 2012, following two years of decline, supported by an improvement in profitability and a concomitant slowing in dairy herd contraction. In neighbouring Ukraine, milk production also appears to be stabilizing, following a period of prolonged decline, due to government programmes to support the sector.

In Oceania, sustained high prices for dairy products on the international market and associated levels of profitability have stimulated milk production. In New Zealand, output rebounded strongly during the 2011/12 season and closed 10 percent higher at 19.7 million tonnes, due to an increase in herd size combined with above average pasture conditions, especially during the second-half of the season. The new season has begun well and deliveries are running ahead of the same period in 2011/12. However, it is unlikely that the previous season’s exceptional performance will be improved upon, and final output is expected to reach around 19.0 million tonnes. In both New Zealand and Australia, herd health and condition are reported to be the best they have been for a number of years. In Australia, herd rebuilding and favourable weather conditions were behind a 4 percent increase in milk production during the 2011/12 season, to 9.5 million tonnes. The 2012/13 Australian milk year has opened with less than favourable, cool and wet weather. Furthermore, an increase in the price of feed grain, which accounts for approximately 25 percent of total costs, may prompt farmers to feed less, which would result in lower average milk production per cow. For 2012/13, milk output in the country is expected to grow by 2 percent to some 10.2 million tonnes.

Trade

Limited export availability and strong import demand drive up international dairy prices

World trade in dairy products is expected to continue to expand in 2012. Demand remains firm and imports are forecast to reach 52.8 million tonnes of milk equivalent, up 4.8 percent from 2011. Asia will continue to be the main market for dairy products, accounting for some 51 percent of world imports. In 2012, significant additional demand is expected from China, Saudi Arabia, Indonesia, Japan, Singapore, the United Arab Emirates, Malaysia, Vietnam and Sri Lanka. Elsewhere in Asia, the Philippines, Thailand and the Republic of Korea should also remain important markets, but the level of their imports is not expected to rise. Growth is anticipated among a number of significant importing countries in North Africa and Latin America and the Caribbean, including Egypt, Mexico, Venezuela and Brazil. Conversely, Algeria, which was the fourth largest importer in 2011, is expected to cut its purchases due to carry-over stocks of milk powder from the previous year. Supplies from the main exporting countries are foreseen as being finely balanced for the remainder of 2012, and perhaps into the first part of 2013.

Whole milk powder (WMP) – Prices rise from July in the face of supply uncertainties

International WMP prices began increasing in mid-2012, following several months of decline. In June, they had dropped to USD 2 800 per tonne, while by October they stood at USD 3 300 – an increase of 18 percent. Prices during the first part of the year were weakened by a strong closing of the 2011/2012 season in the Southern Hemisphere, resulting in larger than expected export availability. However, a lack of any substantial production increase in the Northern Hemisphere, in part as a result of climatic extremes, and uncertainty over Southern Hemisphere availability for the 2012/2013 season have raised prices since July. World exports of WMP are projected to show continued growth in 2012, rising by 126 000 tonnes to reach 2.4 million tonnes. Sustained demand is forecast for Asia, the main market, as well as for several importers in North Africa and Latin America and the Caribbean. China, Algeria and Venezuela, the major importing countries (in order of volume) make up over 30 percent of world WMP trade. Imports by Venezuela are expected to show a substantial increase, with some growth in imports by China, while purchases by Algeria are anticipated to decline as a result of retained stock from the previous year. Imports of WMP by China levelled off after having substantial growth in 2009 and 2010, although with current annual purchases of around 350 000 tonnes, it remains the largest market. Since 2011, buyer interest has focussed more on SMP, with China also on course to become the largest importer of this product. Purchases by a number of other important WMP importing countries, including (in order of volume) Saudi Arabia, United Arab Emirates, Sri Lanka, Indonesia and Oman, are expected to grow. Demand for WMP is very geographically diverse, stemming from its wide use in both the processing industry and for direct retail sale. As for the exporters, New Zealand, Argentina, Belarus and Uruguay will supply most of the increase in trade, as limited milk supplies and more profitable alternative uses are expected to curb export availability from the EU and Australia. Altogether, the six exporters supply 85 percent of the international WMP market.

Skim milk powder (SMP) – Prices up on limited export supplies

Trade in SMP is anticipated to rise by 1 percent in 2012, to 1.7 million tonnes. In the face of limited export availability, SMP prices rose from a low of USD 2 838 per tonne in mid- 2012, to reach USD 3 400 in October. Factors behind the increase are similar to those described for WMP. However, supplies of SMP to the world market are expected to be more constrained as manufacturers place emphasis on other products in the context of overall tight milk supplies. SMP is central to the milk processing industry in many countries and, as such, market demand is widespread. The principal markets are (in order of volume) Mexico, China, Indonesia, Algeria, Malaysia and the Philippines, followed by Singapore, Egypt, Saudi Arabia and Thailand. Overall demand is expected to remain firm in these markets. China, in particular, is anticipated to increase its purchases substantially, by 65 000 tonnes, and is on course to become the major importer of SMP by the middle of the decade, after becoming the principal market for WMP in 2010. Higher imports are also anticipated (in order of volume) for Mexico, Indonesia and Malaysia. Conversely, purchases by Algeria, fourth ranked in terms of world imports, are anticipated to decrease as stocks are drawn down to meet domestic demand. Over 85 percent of world exports are supplied by (in order of volume) the EU, the United States, New Zealand and Australia. For 2012, the largest increase in supplies is expected to come from the United States and Australia. In the face of limited export supplies this year, Saudi Arabia’s and Switzerland’s participation in the international market may become more important than in the past. Exports by the EU and New Zealand are anticipated to remain at levels similar to the previous year, as emphasis is placed on the production of other milk products.

Butter – Market is well-balanced, prices may trend higher

Pressure for international prices to rise has been less for butter than for its co-product, SMP. Butter prices reached a low of USD 2 850 per tonne in July, representing a substantial reduction from the peak levels of 2011, when they touched a high of USD 4 880. Since July 2012, prices have risen somewhat, to stand at USD 3 250 in October. Trade in butter is forecast to grow by 6 percent in 2012, to 878 000 tonnes. This is anticipated to be a consequence of increased deliveries by New Zealand, Belarus, Australia, Uruguay and Switzerland compensating for a fall in sales from the EU, the United States and Argentina. In the case of the EU, lower profitability for butter has led to more emphasis on using milk for cheese production. Furthermore, at present, international butter prices are not competitive with those on the EU internal market. New Zealand is the predominant supplier of butter to the world, accounting for over half of trade. Demand for butter imports comes principally from Southeast Asia, the Middle East and the Russian Federation. Additionally, as a result of trading agreements, the EU is both an important butter importer (ranking third) and exporter (ranking second). Purchases by most of the main importing countries – Egypt, the EU, Saudi Arabia and China – are anticipated to increase during 2012, while imports by the Russian Federation may decline as a result of increased domestic production.

Cheese – Prices move upwards from September

Among the dairy commodities, cheese prices traditionally have been more stable – reflecting the wide variety of cheese available, each with its own distinct characteristics. This makes cheese less subject to supply and demand fluctuation than the standardized products. Even in the case of a generic cheese, such as cheddar, differences in taste, consumer preference and the use of branding mean that prices are not as volatile as for milk powder and butter fat which are destined mainly for reconstitution and other processing. Consequently, while cheese prices moved somewhat lower during the first half of 2012, the degree of decline was not as great as for the other milk-based commodities. After remaining at a low of USD 3 600 per tonne from May to August, the price had risen to USD 3 925 by October. Trade in cheese is forecast to grow by 5.3 percent in 2012, to 2.5 million tonnes, sustained by robust import demand. The world cheese market is the most difficult dairy market to classify. One apparent anomaly is that a number of major cheese producing and exporting countries are also important importers, including (in order of volume) the United States, the EU, Australia and Switzerland. Most often, purchases by this group of countries reflect import quotas under trade agreements and also the highly specific nature of some cheeses, including those with restrictions on the use of their names and areas of origin. Elsewhere, several of the most important cheese importers, including the Russian Federation, Japan, Saudi Arabia, Mexico, the Republic of Korea and Egypt, focus more on industrial cheese, both for direct consumption and for use by the processing industry, although each market may have its specific requirements and preferences. Overall, four importers, the Russian Federation, Japan, the United States and Saudi Arabia, account for almost 45 percent of purchases. The EU remains the major cheese exporter, supplying 30 percent of world trade, not including the substantial amount of cheese that is traded among the EU countries themselves. Other important exporters are Saudi Arabia, New Zealand, the United States, Australia, Egypt, Belarus, Argentina, Switzerland, the Ukraine, Uruguay and Turkey.

Further Reading You can view the full report by clicking here.

November 2012