FAO/GIEWS - Food Outlook No. 5 - Rome, December 2001 p. 12

Milk production expected to rise in 2001

Import Demand

Price outlook

Milk and Milk Products

International prices for dairy products during 2001 were on average higher than in 2000: for the year to October, the FAO dairy price index was 6 percent higher in 2001. This reflected generally favourable international demand and limited export availability. However, towards the end of the year, prices weakened somewhat as a result of a prevailing sense of uncertainty in world markets, which lead to a softening of international demand.

Milk production expected to rise in 2001

Global milk output is expected to rise by some 2 percent during 2001. In Oceania, milk production for the 2001/02 dairy year in New Zealand is anticipated to be slightly above the previous year - which was a record. In the case of Australia, the main producing State, Victoria, has experienced above average rainfall during the 2001/02 production season so far, providing good grass growth. Consequently, output is expected to be 3 percent higher during the current season compared to the previous one. In light of the above, milk output for the end of the current dairy year for New Zealand is forecast at 13.8 million tonnes, and that of Australia at 11.5 million tonnes. In both countries, the national dairy herd is in a phase of expansion. In the case of New Zealand, herd growth is taking place mainly in the dryer South Island and is largely dependent on irrigated pastures. Exporters in Oceania benefited during 2001 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, milk output, at 75 million tons, is expected to be one percent less in 2001. The expansion in production has been halted by a shortage of good-quality forage and the follow-on effect of a reduction in producer prices during the previous year. As imports to the United States are limited by high out-of-quota tariffs and domestic prices are on average above those prevailing on the world market, internal prices at times move in a different direction from international prices.

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 accession to the European Union 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, for example in Poland, 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. Despite a substantial cull of dairy cows in the UK, as a result of an outbreak of foot-and-mouth disease, milk production for the 2001/02 quota year is expected to be near the quota ceiling, as unaffected farms have increased output to make up the potential short-fall. Elsewhere in the European Union, cases of foot-and-mouth disease were not wide-spread and did not result in the large-scale culling of dairy cows.

Milk Production

Source: FAO

Milk production in the Russian Federation stabilized in 2000, following a decade of continuous decline, and could increase slightly during 2001; although the size of the milking herd in the Russian Federation continues to fall, feed availability has improved, raising yields per cow. Russian production continues to move away from the large, former state-run farms to small-scale ownership and production. Similarly, in the Ukraine, where milk production also declined throughout the 1990's, the Ministry of Agriculture estimates a small increase in milk production during 2001.

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 82 million tonnes. Production growth in India is increasing through improved yields per animal rather than through growth in animal numbers. In China, milk production rose substantially during the first part of the year as a result strong consumer demand and the profitability of dairying relative to other types of agricultural production, such as grains.
In southern Latin America, countries have experienced markedly diverse climatic conditions, with associated effects on milk production. In Argentina, milk production in 2001 has suffered from regionalised flooding and is estimated to finish the year 5 percent lower than in 2000. Furthermore, relatively low prices for milk, as a result of falling domestic demand, continue to mean that a substantial number of less efficient producers are leaving the dairy industry. In contrast, Chile has had excellent climatic conditions for pasture development and silage production during the year and, as a result, milk production is expected to rise by 10 percent. Uruguay also enjoyed favourable conditions for silage production, and milk output is forecast to be higher this year. 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. Most of Costa Rica received a good spread of rainfall throughout the year, promoting pasture growth; however, milk production is only expected to increase marginally, as high meat prices have meant that calves in dual purpose herds are being given more milk to encourage their development.

Import Demand

Purchases of milk powder by most countries in South East Asia, and China, increased during 2001, as economic growth in this region sustained import demand. Elsewhere, imports by Central American countries increased, while the important markets of Mexico and Algeria maintained their levels of purchases. Conversely, imports of milk products by Brazil were sharply lower, as a result of a substantial devaluation of the Real during the year making domestic products more competitive. Indeed, during the second half of the year, Brazilian companies began making some exports of milk powder, something that has rarely occurred in the past. Import demand by the Russian Federation for butter and cheese remained depressed as, following the devaluation of the Rouble in mid-1998, the price of imported dairy products has risen substantially in national currency terms. This has had a continued depressing effect on the world market for butter where, prior to 1998, the Russian Federation accounted for a quarter of international purchases.

Indicative Dairy Export Prices^1/

1/ Mid-point of price ranges reported by the New Zealand Dairy Board.

Price outlook

The price outlook for the remainder of 2001 and for 2002 is uncertain. Up until mid-2001, the international market was well-balanced. Since then, as Oceania has entered a new production season with a positive outlook for production, and South American supplies which have traditionally gone to Brazil have had to be sold elsewhere on the world market, prices of dairy products have weakened somewhat. Additionally, falling oil prices could reduce import demand in OPEC member countries and some other oil exporting nations. However, as no substantial increase in export supplies is expected on the international market, it is not anticipated that prices will fall sharply; rather that they could decline moderately over the coming months. The main product to be affected is expected to be milk powder; prices of cheese should be more stable, reflecting import demand being concentrated in the richer countries and much of the trade being regulated by WTO agreed in-quota access. International butter prices are expected to remain depressed, due to the absence of strong demand.