abare.gov.au - Australian commodities – December quarter . volume 15 . number 4 2008

Dairy

Peter Berry

Increasing global dairy supplies and slowing growth in consumer and manufacturing demand is forecast to result in significantly lower world dairy prices in 2008-09. However, for Australian dairy farmers, declines in world dairy prices will be partly offset by a sharply lower Australian dollar. Australian farm-gate milk prices are forecast to fall by 5 per cent to 47 cents a litre in 2008-09.

Growth in global demand for dairy products slowing…

Slowing world economic growth will limit growth in demand for dairy products in 2008-09. While final consumer demand continues to grow in developed economies, there are indications purchases by food processors have slowed. In addition, some food processors have taken shorter term supply contracts in expectation of lower dairy prices. In less developed economies, demand for dairy products is also expected to grow more slowly in response to slower economic growth in the coming year. Consumers in these countries may be expected to limit discretionary purchases of dairy products, given these foods tend to account for a higher proportion of their household incomes.

…while global dairy production continues to rise

Despite lower world dairy prices, continued growth in global milk production is expected in 2008-09. However, across the main dairy-exporting regions, rates of growth in milk production are expected to be mixed.

In the European Union, milk production is forecast to increase by around 1 per cent in 2008-09 despite a recent 2.5 per cent increase in milk production quotas. The enforcement of milk production quotas continues to restrict production growth of some of the European Union’s larger and more efficient producers. However, some member states with less productive dairy industries will be unable to fill their national quotas. Production in the United Kingdom, in particular, will be well below its quota this year as low investment and low profitability have driven some dairy farmers to leave the industry. Also affecting EU milk production are slowing domestic demand and lower domestic milk prices (although prices still remain above long-term averages) and the relatively high cost of feed.

Trends in domestic dairy product consumption in the European Union will affect EU export volumes in 2008-09. While an increasing proportion of EU dairy production is expected to be consumed domestically (particularly in new member states where income growth has been strongest), consumption growth has slowed. This has resulted in an increase in stocks available for export. However, this is not expected to reverse the trend of declining EU dairy export volumes given limited growth in production in 2008-09.

In New Zealand, the world’s largest exporter of dairy products, milk production is forecast to increase by around 8 per cent in 2008-09. The strong growth reflects a projected recovery in milk yields (assuming improved seasonal conditions) after drought conditions reduced production by more than 4 per cent last year. As a result of strong growth in production, New Zealand is expected to be the major contributor to growth in global dairy products trade in 2008-09.

In the United States, milk production increased strongly in 2007-08 in response to relatively high domestic milk prices. Increased dairy production, strong export demand and a lower US dollar relative to the currencies of major trading partners promoted strong growth in exports, particularly of skim milk powder and cheese. In 2008-09, growth in US milk and dairy product output is projected to slow, to be around 2 per cent for the year, as relatively high feed costs and lower milk and dairy product prices reduce production incentives. This will reduce supplies available for export, while an assumed appreciation of the US dollar will reduce the price competitiveness of US dairy exports and dampen export demand.

In Argentina, dairy exports are forecast to grow moderately in 2008-09 as a result of an expected improvement in seasonal conditions. However, growth in Argentina’s dairy exports is expected to remain constrained in the short to medium term by extensive government intervention in the sector.

In China, growth in domestic production of milk and dairy products is expected to slow in 2008-09. The effects of the recent melamine substitution scandal are expected to result in Chinese consumers preferring imported dairy products to domestic products. As a result, China is likely to import more dairy products in the short term, while exports of dairy products from China are expected to decline in line with more stringent food safety testing and import bans in some countries.

Dairy outlook

2006-07

2007-08

2008-09

% change

Cow numbers

’000

1 796

1 617

1 633

1.0

Milk yields

L/cow

5 336

5 704

5 731

0.5

Production

Total milk

9 583

9 223

9 360

1.5

– market sales

2 162

2 188

2 223

1.6

– manufacturing

7 421

7 035

7 137

1.4

Butter

133

128

130

1.6

Cheese

364

359

365

1.7

Whole milk powder

135

142

144

1.4

Skim milk powder

191

164

167

1.8

Farm-gate milk price

Ac/L

33.2

49.6

47.0

– 5.2

Value of exports

A$m

2 438

2 763

2 485

– 10.1

World prices

Butter

US$/t

2 023

4 027

2 950

– 26.7

Cheese

US$/t

3 004

5 073

3 700

– 27.1

Skim milk powder

US$/t

3 188

4 204

2 500

– 40.5

Whole milk powder

US$/t

3 046

4 562

2 750

– 39.7

f ABARE forecast.

World dairy prices to fall in 2008-09, but remain relatively high

After rising strongly in 2007-08, world dairy prices have declined in 2008-09 in response to an increase in traded supplies (particularly from New Zealand and the United States) and lower income growth in a number of major consuming countries. However, despite significant uncertainties surrounding the world economic outlook, global demand is expected to continue to grow, and world dairy prices are forecast to remain above long-term averages.

World prices for whole milk powder and skim milk powder are forecast to average US$2750 a tonne and US$2500 a tonne respectively in 2008-09, around 40 per cent lower than the averages achieved in 2007-08. Despite indications of slowing economic growth in some major consuming countries, world trade in milk powders is expected to grow steadily. Growth in consumption is expected to continue in developing regions — particularly in emerging Asia and the Middle East where income growth has been high, and also in developed countries for use in food processing and animal feeds.

World cheese prices are forecast to fall by 27 per cent, to average around US$3700 a tonne in 2008-09. Cheese production in the European Union is expected to increase moderately, largely in response to growth in domestic demand, while increased domestic cheese consumption will limit growth in EU cheese exports in 2008-09. Cheese exports from Australia are expected to be up slightly, in line with a forecast modest increase in milk production. Exports from the United States are also expected to increase in the short term.

Butter prices are forecast to average lower in 2008-09, down by almost 27 per cent to US$2950 a tonne. Butter consumption has been rising in line with rising incomes in the Russian Federation, Egypt and parts of the Middle East, while in the United States and the European Union, butter consumption has been growing more slowly. Slowing growth in global demand and increased exports from New Zealand and the United States are the main drivers of lower world prices.

Australian milk production expected to recover

Australian milk production is forecast to rise by 1.5 per cent to almost 9.36 billion litres in 2008-09. The projected increase in Australian milk production reflects relatively high farm-gate prices for milk and an expected small increase in dairy cow numbers.

Dairy farming conditions remain difficult across much of southern Australia, with the cost and availability of irrigation water continuing to be a major concern for many dairy farmers, particularly those in the Murray-Darling Basin. Irrigation water availability and rainfall patterns have a strong influence on farm input costs, affecting the production of on-farm feeds. Assuming an improvement in seasonal conditions, the cost and availability of feeds (from both on-farm and off-farm sources) is expected to improve this year. The prices of fuel and interest rates are also expected to be lower in 2008-09, reflecting developments on world markets.

Farm-gate milk prices to fall, but remain relatively high

In 2008-09, Australian farm-gate milk prices are forecast to fall by 5 per cent, to average around 47 cents a litre. Relatively high farm-gate milk prices reflect competition between dairy processors to maintain milk supplies after recent drought-induced production cuts. For farmers, favourable farm-gate prices provide an incentive to maintain milk production.

Australian dairy export earnings to fall in 2008-09

After increasing by 13 per cent to almost $2.8 billion in 2007-08, the total value of Australian dairy exports is forecast to fall by 10 per cent to around $2.49 billion in 2008-09. A sharply lower Australian dollar is expected to partly offset the effect of forecast lower world dairy prices on export earnings.

In 2008-09, the value of skim milk powder exports is forecast to be down by 18 per cent to $439 million and whole milk powder export earnings down by 17 per cent to $327 million. The value of butter exports is forecast to be down by 4 per cent to $187 million, while export earnings from casein and cheese are expected to be down by 2 per cent and 4 per cent, to $122 million and $929 million respectively.