FAO/GIEWS - Food Outlook No.3 - June 2001 p. 10

Milk and Milk Products

Milk production expected to rise in 2001

Global milk output is expected to rise by 2 percent during 2001. In Oceania, milk production for the 2000/01 dairy year in New Zealand is expected to be 6 to 7 percent above the previous year. Production conditions have been particularly favourable in the central section of the North Island, the main milk producing zone, although some southern areas of the country experienced lower than average rainfall. In the case of Australia, production for the dairy year so far is running approximately 4 percent behind the same period last year. This is a result of hot and dry conditions, especially in the states of Victoria and Tasmania. Also, deregulation of the milk industry in Australia has lead to an increase in the number of farmers giving up milk production. In light of the above, milk output for the current dairy year for New Zealand is forecast at 13.6 million tonnes, and that of Australia at 10.8 million tonnes. In both countries, the national dairy herd is in a phase of expansion. Exporters in Oceania have benefited from higher international prices for dairy products and a weakening of national currencies against the United States dollar.

In the United States, following substantial growth in milk production in the previous two years, when it rose by 3 percent per year, indications are that milk output will not increase during 2001 and it will be similar to that of the previous year: 76.4 million tonnes. The expansion in production has been halted by low milk prices and a shortage of good-quality forage. As part of this process, the size of the national milking herd is expected to decline by 1 percent during 2001; against the long-term trend, which is downwards, the US herd size increased in both 1999 and 2000. At the same time, the movement of milk production towards the western States - Arizona, California, Idaho and New Mexico, where production is characterized by large, lower-cost farms - is expected to continue.

In eastern Europe, milk production for 2001 is expected to be greater than in 2000, when dry conditions during the summer reduced output in a number of countries. For some countries in this region, anticipated access into the EC during the coming years may act as an incentive for farmers to increase output, with the aim of increasing their entitlement to production quotas, once membership to the EC is achieved. Already, in the Czech Republic and Hungary, a system of milk quotas has been introduced similar to that in place in the EC. In these two countries, as quotas are higher than current levels of milk production, this may provide an incentive for farmers to increase output. Also in eastern Europe, the impetus of imminent membership to the EC has resulted in dairies raising quality standards for milk and milk products - one result of this is anticipated to be a reduction in the number of small-scale dairy producers, some of whom will not be able to meet the required standards. Production in a number of other developed countries (the EC, Canada, Japan, Switzerland) is subject to policies which restrict output and, consequently, changes little from year to year. An outbreak of foot-and-mouth disease in the EC, centred in the United Kingdom, resulted in a substantial number of dairy cattle being slaughtered. In the United Kingdom, it is estimated that 2 percent of the national dairy herd was culled. Consequently, in that country, milk production may decline somewhat during 2001; however, the size of the cull it not expected to have any longer-term impact on total United Kingdom milk production.

Milk production in the Russian Federation during the first three months of 2001 was up 1 percent, compared with the same period last year. This was despite a drop in the herd size and is believed to have been a result of better feed availability. Russian production continues to move away from the large, former state-run farms to small-scale ownership and production. Should milk output in the Russian Federation increase during 2001, this would be the first time that this has occurred since 1990. Similarly, in the Ukraine, where milk production also declined throughout the 1990's, data for the first two months of 2001 show a moderate rise in output and that country's Ministry of Agriculture estimates an annual milk production increase of 2 to 4 percent for the year as a whole.

Milk Production

In developing countries, growth in milk output is expected to continue in Asia and Latin America. India's milk production during the 2001/2002 (April/March) marketing year could rise to an estimated 81 million tonnes. Production growth in India is increasing through improved yields per animal rather than through growth in animal numbers. Also, in China, where a moderate growth in total milk output is expected, expansion has focused on improved yields rather than expansion of the dairy herd since the start of the 1990's.

In Latin America, milk production is expected to increase in most countries in the region. In southern Latin America, countries have experienced markedly diverse climatic conditions, with associated effects on output. In Argentina, milk production during the first four months of 2001 was estimated to be 5 percent lower than in the same period in 2000, as a result of high summer temperatures and regionalised flooding. Additionally, relatively low prices for milk continue to mean that a substantial number of less-efficient producers are leaving the dairy industry. In contrast, Chile had excellent climatic conditions for pasture development and silage production during the autumn. This led to an increase in milk output and opened up the likelihood that the Chilean dairy herd will expand during 2001. Likewise, Uruguay enjoyed favourable conditions for silage production and milk output is forecast to be higher this year. Both Argentina and Uruguay report a number of outbreaks of foot-and-mouth disease between March and May. In both cases, this led to a large-scale vaccination campaign. Elsewhere in Latin America, dry summer conditions in

Venezuela meant that farmers had to increase their use of feed and dried fodder, as pasture was short, leading to an increase in their production costs. Some parts of Brazil also suffered from dry conditions, which inhibited pasture growth and consequently milk output.

Import demand steady

Outbreaks of foot-and-mouth disease in the EC, Argentina and Uruguay during the first part of 2001 caused some interruption in trade, as several countries imposed bans on imports of some dairy products. However, as most dairy products are heated to a temperature that would eliminate any trace of the disease during their production, this issue was not anticipated to have a significant trade impact. Purchases of milk powder by most countries in South East Asia are expected to increase during 2001, as economic growth in this region sustains import demand. Additionally, for the oil producing countries in the Middle East and North Africa, and Venezuela, revenue from oil exports could lead to growth in import demand for a number of dairy products. Elsewhere, imports by Central American countries could increase. However, imports of milk products by Brazil are anticipated to be reduced this year. For example, Brazilian imports of milk powder, the main item traded, were approximately fifty percent less in the first four months of 2001, compared to the same period in 2000. Also, import demand by the Russian Federation for butter and cheese could remain depressed, as, following the devaluation of the Rouble in mid-1998, the price of imported dairy products has risen substantially in national currency terms.

Indicative Dairy Export Prices 1/

Price outlook

The price outlook for the remainder of 2001 is uncertain. Up to May 2001, the international market was well balanced; however, a crucial factor will be milk production in the second half of the year in Oceania. There, reports of dry weather in most of New Zealand, combined with a longer-standing dry period in Australia, may lead to 2001/2002 output getting off to a slow start, as pastures would be in poor condition.

This, combined with expected lower milk output in Argentina, could possibly lead to some products - in particular milk powder - being in short supply on the world market. Should this happen, prices of milk powder are expected to strengthen somewhat during the second half of the year. Cheese and casein prices are expected to remain stable during 2001, as supply and demand are less volatile. Also international butter prices are expected to remain around current levels, due to the absence of strong demand.