Dairy. World Markets and Trade. Jul 2014 Aug. 1, 2014
China's Imports of Milk Powder Expected to Continue Growing in 2014
Although there has been speculation that China’s volume of dairy imports were set to decline in 2014, the pace of imports of milk powder during the early months of 2014 continue at a breathtaking pace. Imports of skimmed milk powder (SMP) through May are up nearly 89 percent to 131,000 tons and imports of whole milk powder (WMP) are up 70 percent to 487,000 tons. As a result, China’s 2014 import forecast for WMP has been revised up sharply by 54 percent to reach a record 1.0 million tons while the import forecast for SMP is raised by 10 percent to 330,000 tons. There are now signs that China’s dairy market is evolving as imports of other dairy products such as cheese and butterfat through May 2014 are accelerating – up 67 percent and 121 percent, respectively, over the same period last year. So far the United States has benefited primarily from growth in the SMP and whey market. However, prospects for U.S. cheese exports to China appear bright as shipments of U.S. cheese through May have increased by 44 percent in comparison to 2013.
Dairy Production and Trade Developments
Following the high international prices for dairy products in the second half of 2013 and early 2014, milk production in a number of countries has sharply rebounded as farmers responded to the strong margins. This trend has been further accelerated by favorable weather, particularly in New Zealand and the EU-28, where milk production in the first quarter is running well ahead of last year and output in 2014 is expected to expand by 6 percent and 3 percent over 2013, respectively. Despite strong global import demand, the surge of additional product on the markets has put downward pressure on prices particularly for WMP which has declined sharply from around $5,100 per ton (FOB Oceania) in January to around $3,700 per ton (FOB Oceania) in early July – down almost 30 percent from the early part of year.
Other products such as SMP have not fared much better but there are signs of stability. In the United States and the EU-28, recent domestic SMP prices appear to be holding steady while U.S. butter prices have surged to well above international price levels. This will effectively limit U.S. butter sales on world markets. For the balance of 2014, it is likely that markets will be under pressure as there are ample export supplies of dairy products in the EU-28 and Oceania.
When gauging global demand, China’s intentions continue to hold center stage particularly with respect to imports of WMP. While there is much uncertainty, the evidence to date suggest that import demand for a broad range of dairy products shows no sign of flagging being driven by rising incomes, growing urbanization, and an expanding population. Although the Chinese Government has introduced regulatory reforms, confidence in locally sourced supplies of dairy products remains a concern. Consequently, consumers appear motivated to pay premium prices for imported products such as milk powder and fluid milk (primarily UHT).
For U.S. farmers, the boom in U.S. exports continues with total dairy exports in FY 2014 expected to reach a record $6.8 billion. China’s growing consumption bodes well for U.S. dairy farmers as this fiscal year China is on track to surpass Canada to become the second most important market after Mexico for purchases of U.S. dairy products.
Milk Production: Forecast Summary
• The 2014 milk production forecast for Argentina milk is lowered by 1 percent due to unfavorable weather which included excessive heat in January followed by heavy rains in March and April. Nevertheless, total output for the year will be up a modest 1.5 percent over 2013 due to higher milk prices received by producers. This, however, is being somewhat offset by the 15 percent devaluation of the Argentine peso in January and the current high inflation rate which is negatively impacting farmer’s profitability. The additional fluid milk is expected to be used in the manufacture of WMP and cheese.
• In Australia, the forecast remains largely unchanged as the industry continues to benefit from improved milk prices and favorable weather. A return to more normal rainfall patterns is expected to reduce irrigation costs and increase fodder supplies to farms while high international dairy prices are expected to boost returns. Producers are in an expansionary mode as the milk herd is forecast to grow during the year by 3 percent to 1.7 million head. Currently, milk production from January-May 2014 is up 4.3 percent over the same period in 2013 and total milk production for the year is forecast to increase by 5 percent over 2013. The only uncertainty facing farmers is the prospect of an El Niño weather event which is typically associated with drought conditions in the south-eastern part of Australia. At this early stage (July 1, 2014), the Australian Bureau of Meteorology states that the weather variables being tracked indicate a 70 percent chance of an El Niño event developing later in 2014.
• The EU-28 milk production forecast is raised 3 percent to 144.3 million tons as producers are expected to boost milk output and expand the dairy herd in response to high margins resulting from lower feed costs and high milk prices. Many operations may also be expanding in anticipation of the termination of EU-28 milk production quotas in 2015. Milk output in the Jan-March 2014 period is up significantly, running nearly 6 percent ahead of the same period in 2014. Strong export demand coupled with high international prices has been a key driver of this early spurt but a tempering of global prices is expected to moderate milk production growth in the latter half of the year. As in past years, most of the additional milk supply is expected to flow into manufacturing milk particularly for use in the production of cheese and to a lesser extent WMP.
• Although some areas of New Zealand experienced dry conditions early in the year, milk production has rebounded sharply from last year’s drought impacted season with January-April milk output up 16 percent in comparison to the same period last year. Due to the high margins, farmers in affected regions were able to offset pasture losses with purchases of feed to maintain production. Milk flows in the second half of the year are expected to moderate and mirror the pace set during the same period in 2013. In addition, the herd is expected to expand by 70,000 head as the dairying industry continues to benefit from the relatively high global prices. As a result, the forecast is revised up 4 percent and total milk output is now expected to grow by 6 percent over last year.
• The estimate for China’s milk output is lowered by 3 percent to 36 million tons as stricter health requirements for milk are expected to lead to reduced supplies from small-scale dairy farmers. In addition, there is a strong incentive for farmers to slaughter low yielding animals due to high beef prices – up by 30 percent in 2013. As a result, the size of the herd is revised down to 8.71 million head which still represents an expansion of 4 percent from 2013.
Due to strong consumer demand and tight domestic supplies, China’s import demand for ultra-high temperature (UHT) and fresh milk has been growing at rapid pace and the milk import forecast at 300,000 tons remains unchanged from the December 2013 estimate. Approximately 40 percent of the UHT and/or fresh milk in the first five months of 2014 were supplied by Germany. U.S. exports of UHT milk to China have been fairly modest, but shipments through May 2014 are up 65 percent over the comparable period in 2013 indicating that U.S. exporters are starting to establish a foothold in this market.
• In the United States, farmers are benefitting from strong returns which are expected to continue for the remainder of the year and provide a strong incentive for the expansion of the dairy herd. Consequently, the 2014 forecast has been revised up by 10,000 head while the milk production forecast is increased by 3 percent to 93.4 million tons.
• Cheese production in the EU-28 is expected to increase sharply and the 2014 forecast is revised up by 2 percent reflecting the greater availability of fluid milk, strong domestic demand, and high world market prices. Most of the additional cheese produced in 2014 will be destined for domestic consumption which continues to be fairly robust. The export forecast is decreased slightly as shipments through May are lagging compared to the same period last year – down 2 percent. This is largely due to a slowdown in exports to Russia which is the major market destination for EU-28 cheese. Russia has been implementing import bans on EU-28 member states or individual processing plants. In addition, the weaker Russian Ruble has reduced the attractiveness of the Russian market.
• New Zealand’s cheese production forecast is raised to 324,000 tons – a 4 percent increase over 2013 – but still below 2012 production levels as milk continues to be channeled into the production of WMP. Export shipments through May have been weak with notable drops to such destinations as Japan and South Korea; consequently, the export forecast has been revised down by 10,000 tons to 290,000 tons, an increase of almost 5 percent from 2013.
• Australia’s cheese production forecast is revised down sharply to 300,000 tons which is only slightly higher than in 2013. In the face of lower forecast production and slow sales to several markets, the export forecast is cut by 23 percent to 147,000 tons which would represent a 10 percent drop from 2013. Shipments of cheese have been lagging particularly to such key markets as Japan – down 11 percent through May 2014 in comparison to last year.
• Russia’s cheese production forecast is raised 8 percent to 460,000 tons as domestic supplier’s step-up production to backfill shortfalls due to restricted trade. Citing various health issues, Russia has limited imports from a number of traditional suppliers in the EU-28 and Ukraine to the benefit of domestic producers. As a result, the import forecast is lowered by 30,000 tons to 355,000 tons – a 2 percent decline from 2013.
• U.S. cheese exports continue to shine brightly as the pace of exports exceeds prior expectations with shipments through May 2014 running ahead by over one-third in comparison to the same period last year. During this period, the major destinations for U.S. cheese have been Mexico, South Korea, and Japan; however, exports to Australia and Saudi Arabia have more than doubled from last year. Fresh cheese (e.g. mozzarella) continues to be the primary type of cheese shipped accounting for nearly one third of exported cheese so far this year. Demand for U.S. cheese is expected to remain strong for the balance of the year; consequently the export forecast is increased by 23 percent to 373,000 tons.
• SMP output in the EU-28 is expected to increase significantly due to 1) an increase in the milk supply, 2) new drying facilities in Germany, and 3) strong demand from export markets. As a result, forecast production for 2014 is raised 130,000 tons and the export forecast is revised up by 60,000 tons to 535,000 tons. EU-28 shipments of have been off to a fast pace early this year with exports through April up 66 percent in comparison to the same period last year. By far the most significant market has been Algeria, followed by China and Indonesia.
• The Oceania production forecast is revised down by 15,000 tons largely due to a steep reduction in Australian output; however, this is offset by an increase in New Zealand’s expected production. Despite these changes, total Oceania SMP exports at 585,000 tons are unchanged from the previous forecast, with New Zealand forecast to export 425,000 tons. In 2013, approximately one third of New Zealand’s SMP exports were shipped to China and is still a major competitor to the United States in a number of Asian markets.
• India’s exports of SMP are expected to be lower this year in comparison to 2013 but not as sharply as originally forecast in December 2013. Consequently, the export forecast is raised by 33 percent to 120,000 tons which represents an 8 percent drop from the volume shipped last year. In 2013, most of India’s SMP was exported to Bangladesh and North African markets such as Egypt and Algeria. It is likely that this pattern will be repeated in 2014.
• Despite a sluggish start and the expectation of increased global competition, U.S. exports of SMP have accelerated rapidly in recent months and shipments through May 2014 are running 10 percent above last year’s record setting pace. During this period, exports of U.S. SMP to such major markets as China and the Philippines are up by 124 percent and 56 percent, respectively, in comparison to the same period last year. In addition, Mexico – by far the most important customer for U.S. SMP – appears to be increasing its purchases this year. Although the pace of exports is expected to taper off, the forecast is raised by 37,000 tons to 577,000 tons. Global SMP prices declined during the early part of the year but U.S. prices have recently stabilized and are trading at a premium over Oceania suggesting that the markets are somewhat balanced.
• In China, the WMP 2014 import forecast is raised to 1 million tons as import demand is expected to continue to expand rapidly being driven by limited domestic supplies, stricter regulations, and growing consumer demand.
The domestic production of WMP is expected to be lower than anticipated and the forecast is trimmed by 4 percent to 1.25 million tons as milk output is expected to fall short of earlier forecasts. In addition, the introduction of stricter policies governing the production of infant formula powder is likely to restrict domestic supplies. China’s Food and Drug Administration (CFDA) is instituting new policies requiring all dairy/infant milk powder producers to re-register for a production permit. Recently, it has been reported that more than one third of producers failed to receive production permits which is likely to limit supplies. Further, it has been reported that China’s State Council has issued guidelines to consolidate the industry into 10 large milk powder producer groups by the end of 2015 with further consolidation into 3-5 groups by the end of 2018.
• The New Zealand WMP production forecast is raised by 8 percent to 1.4 million tons as strong demand from China is channeling any additional milk into the production of WMP. The export forecast is also being revised up by 25,000 tons to 1.37 million tons – a year-over- year increase of 6.5 percent – based on shipments to the expanding Chinese market.
New Zealand is likely to continue to be the main beneficiary of China’s rapidly expanding demand for WMP since it supplied over 90 percent of China’s WMP imports in 2013. During the January-May 2014 period, some 90 percent of these imports have also been sourced from New Zealand which benefits from low tariffs due to a China-New Zealand Free Trade Agreement. In addition, in March 2014, China and New Zealand announced a joint currency agreement allowing New Zealand dollars to be directly traded with Chinese Renminbi.
• With an increase in expected EU-28 milk output coupled with strong export demand, WMP production is revised up by 100,000 tons to 750,000 tons. Most of the additional quantity is likely to be destined for shipment overseas; consequently, the export forecast is raised by 55,000 tons to 430,000 tons. Already exports this year through April are up 30 percent in comparison to the same period last year with a substantial jump in shipments to Algeria. In fact, exports to Algeria through April total 30,000 tons which exceeds the total volume shipped in 2013.
• The U.S. production forecast is raised significantly by 57 percent to 55,000 tons as U.S. producers expand capacity to meet export demand. The export forecast has also been increased by 20,000 tons to 32,000 tons as exportable supplies are expected to increase.
• Russian demand for butter remains strong as domestic consumption is forecast to grow by 4 percent in 2014 over last year. This strength is reflected in the early-year pace of imports which through April is up 27 percent relative to the same period last year. There have been notable increases in imports from Argentina and Australia at the expense of New Zealand and Uruguay. Russian import forecast is unchanged at 150,000 tons which is a 10 percent increase over 2013 and represents a fifth year of consecutive growth.
• In the EU-28, butter prices have declined significantly in the first half of the year allowing it to become more competitive in global markets. As a result, exports of butter have ramped up with shipments through April up 21 percent to 51,000 tons in contrast to the same period last year. The most significant increase was in shipments to Russia which are up by nearly one third to 12,000 tons. This strength is expected to persist throughout the balance of the year; consequently, the export forecast was increased by 20,000 tons to 120,000 tons – a 15 percent year-on-year increase.
• The U.S. export forecast is increased by 15,000 tons to 85,000 tons largely on the strength of sales in the first quarter of the year which totaled 38,000 tons on a butterfat equivalent basis. While global butter prices have been sliding to below $4,000 per ton (FOB Oceania) the recent sharp increase in the domestic price of U.S. butter to over $5,250 per ton (CME), means that U.S. butter exporters will be facing stiffer competition