7 January 2010

8 minute read

Summary

The recovery in international dairy prices that was initially viewed as a short term phenomenon appears to have solidified with prices for NDM holding above $3,000 per ton FOB EU port, while butter has been trading at well above $4,000 per ton FOB EU port. This in contrast to six months ago when NDM and butter export prices were both trading at below $2,500 per ton. This sharp recovery appears to suggest that import demand is staging a comeback and was probably not as negatively affected by the global recession as initially anticipated. In addition, available exportable supplies are likely to remain limited as domestic milk output in the US and the EU is forecast to decline in 2010, while the 2009/2010 milk production outlook in Oceania is mixed.

For the first half of 2010, there is some unease regarding the international price outlook. While producers welcome these higher prices, there is concern that the sharp run-up in prices will choke demand leading to a significant correction. There is also the question of how the EU will dispose of the substantial intervention stocks which stood at 76,400 tons of butter and 259,300 tons of NDM on December 10, 2009. In the United States, uncommitted CCC Government stocks of NDM currently total around 27,000 tons, while some 90,000 tons has been committed to domestic programs. However, further surplus purchases under the CCC price support program are not anticipated for 2010 as lower milk production is expected to result in relatively tight markets for dairy products.

In any event, a price correction could be modest since the economic outlook for 2010 suggests that import demand for dairy products should improve. The GDP growth rate for developed economies is expected to grow by 1.7 per cent annually while growth in developing economies is forecast to rise by 5.5 per cent. In the key Asian market, China is forecast to grow by 9.3 per cent while GDP growth for the region is slated at about 7 per cent. While these rates are relatively subdued compared to the heady pace of growth in 2008, they nevertheless represent a welcome turnaround from 2009 when global GDP shrank by 2.2 per cent.

The 2010 outlook for the US dairy exports is relatively bright with NDM and cheese exports expected to expand by 16 per cent and 7 per cent, respectively. In 2009, although US cheese exports dropped by 21 per cent from the record setting levels of 2008, they were surprisingly robust and well above the 2005-2007 average. NDM exports are expected to be competitive on world markets; however, a decrease in US production may lead to some rationing of NDM if domestic demand is sufficiently strong.

Milk Production: 2010 Forecast Summary

Australian milk production is forecast to decline primarily due to lower cow numbers – down 2 per cent - following severe drought and a cost squeeze between high input costs and lower milk prices. The situation is improving as pastures are reported to be in good condition and increased rainfall has led to a modest improvement in irrigation water. Nevertheless, there is considerable uncertainty over Australia’s longer term ability to resume consistent growth and even return to levels of production attained in early 2000. In contrast, New Zealand milk production is expected to reach a record high as the herd is forecast to expand by 2.5 per cent. This is very much in line with the 5-year (2003-2008) annual average growth rate of around 2 per cent annually.

In the EU-27, milk output is forecast to rise marginally in 2010 as producers recover from the low prices experienced in 2009. The EU has supported dairy prices by extending the period of intervention to bridge the gap between August 2009 and March 2010 and heavy use of export subsidies to move surplus dairy products onto world markets.

For 2010, US milk production is forecast to decline by less than 1 per cent following an expected half per cent drop in 2009. Although higher prices are anticipated in 2010, the liquidation of dairy cows – although lower than initially expected – will still lower the herd drop by a significant 2.4 per cent.

Cheese:

After a forecast decline of nearly 3 per cent in 2009, cheese production in Oceania is expected to grow by about 2 per cent with all the increase forecast to occur in New Zealand. Cheese exports for Australia and New Zealand in 2010 are forecast to grow significantly, 28 per cent and 6 per cent, largely as stocks are drawn down.

In the EU-27, cheese production is forecast to grow by 1 per cent with approximately 93 per cent of this increase being absorbed by domestic consumption and 7 per cent being channeled to the export markets. Exports are expected to grow modestly by 1 per cent and based on current trends for 2009 the majority of this cheese is destined to Russia, the United States, Switzerland, and Japan.

In the US, although cheese shipments in 2009 will likely decline significantly from the record setting pace of 2008; nevertheless, they are surprisingly strong given the poor state of the world economy. More impressively, cheese exports to Mexico – the principal market for US cheese – from January 2009 through October were up 10 per cent in comparison to the same period last year. For 2010, US cheese production is expected to be fractionally lower due to an expected drop in milk production which will likely keep markets tight. However, exports are expected to grow by 7 per cent which while lower than the annual average growth rate of 22 per cent registered between 2004 and 2008, will likely account for about 2.4 per cent of domestic production. In 2005, exports accounted for around 1.4 per cent of domestic cheese production.

Butter:

In the second half of 2009, global butterfat markets staged an impressive comeback which appears to have been due to two events. First, India after being largely absent from markets in 2008 purchased substantial quantities of butteroil from New Zealand effectively reducing stocks significantly. Trade data indicates that India from January 2009 through October purchased 18,000 tons of butteroil. Second, anticipating low prices, global purchasers allowed pipeline stocks to decline and then were caught in short positions as buyers collectively attempted to secure supplies. This rush to markets is believed to have also been a precipitating factor leading to sharp price rises.

For 2010, butter production in Oceania is expected to drop by 4 per cent and while exports from Australia are expected to grow modestly, shipments for New Zealand are forecast to drop marginally. For the EU, production is also expected to be slightly lower as milk supplies will likely be channeled into the production of cheese. EU exports in 2009 were significantly aided by the subsidization of around 68,000 tons (butter equivalent) of butterfat under the tender system and while export subsidies have been suspended, the EU still has some 76,000 tons of butter in intervention. While no further accumulation of butter intervention stocks are forecast, if global prices decline the EU can easily ramp-up export subsidies.

NDM:

NDM production for selected countries in 2010 is expected to decline by more that 3 per cent with significant reductions forecast for New Zealand – down 15 per cent – and the US – down 9 per cent. Nevertheless, expectations are that global NDM prices in 2010 will be relatively strong and exports are expected to rebound in the US and the EU and to a lesser extent in Oceania. After an expected drop of 34 per cent in 2009, US exports of NDM are anticipated to increase by 16 per cent to reach 300,000 tons, while in the EU shipments are forecast to grow by 36 per cent to 225,000 tons. In 2009, despite the subsidization of 183,000 tons of NDM, the EU accumulated substantial intervention stocks currently standing at around 259,000 tons. For 2010, prices are forecast to remain above intervention support levels and thus intervention purchases of surplus powder are not expected. Although the EU recently suspended export subsidies for NDM (and all other dairy products) the EU retains the ability to activate their export subsidy program at any time and under World Trade Organization disciplines, can subsidize the annual (July-June) export of 323,000 tons of NDM.

Whole Milk Powder (WMP):

Global trade in WMP is dominated by New Zealand which is expected to account for nearly 50 per cent of exports in 2010 among selected countries. Exports of WMP from New Zealand have expanded at a rapid clip growing at annual average of around 7 per cent since 2005. For 2010, exports of WMP are anticipated to grow by 8 per cent to reach a record 810,000 tons. The other major suppliers to world markets are the EU and Argentina; EU WMP exports are forecast to remain flat while Argentina is expected to increase by 6 per cent.

On the import side, China has emerged as a major market of WMP with imports growing explosively by over 3 and half times to reach an estimated 165,000 tons in 2009. The Chinese melamine scandal that undermined confidence in domestically produced dairy products was likely a major factor in explaining this sharp increase. Further, this strong demand likely explains why WMP prices in August started to exhibit such a bullish sentiment under Fonterra’s global trade auctions. By October 2009, New Zealand had already shipped 146,000 tons of WMP to China. For 2010, although WMP imports are expected to decline by 9 per cent more than likely, China will remain a key purchaser of WMP on global markets.

Further Reading

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