Dairy. World Markets and Trade. Dec 2013 April 14, 2014
Global milk production among major exporting nations is set to rebound in 2014 with output forecast to grow by 1.5 percent to 275.8 million tons – up about 4.2 million tons - largely due to higher milk prices, favorable weather, and lower feed costs. This in contrast to 2013, when milk output among the five major countries fell slightly due to a short but severe drought in New Zealand and cold spring weather in the EU which coupled with high feed prices negatively impacted farmers. The most significant percentage increase in production is expected to occur in New Zealand where most of the milk is processed for the export market. High payout prices are expected to spur dairy farmers to increase production by 5 percent or 891,000 tons. This is almost the equivalent volume increase forecast for the EU.
Dairy Production and Trade Developments
U.S. dairy exporters experienced an outstanding year and exceed all expectations with FY 2013 exports hitting a record $6.1 billion. This was partially due to reduced competition from such traditional suppliers as the EU and New Zealand, the growing competitiveness of U.S. dairy products and increased global demand for dairy products which continues to grow despite sharply higher prices. This demand has been particularly impressive since prices for such commodities as WMP have increased from about $3,300 per ton (Oceania FOB) in early January to approximately $5,000 per ton in late November. Although not as dramatic, this has been similarly true for skimmed milk powder (SMP) which over the same time span has increased from around $3,400 per ton to $4,600 per ton. It is interesting to note that although the volume forecast to be supplied by such suppliers as Australia and the EU in 2013 is expected to drop by 121,000 tons this is likely to be offset by increased supplies from New Zealand, India, and the United States which results in a net gain of 97,000 tons. Despite this significant additional volume, prices for SMP have remained extraordinarily resilient signaling that demand particularly from China and other Asian markets remains firm.
For 2014, lower feed prices, favorable weather, and strength in global dairy prices are expected to provide a strong incentive for farmers to produce more milk and milk production among selected countries is set to grow by 2 percent. Despite the expectation of increased volumes, global dairy prices for the main dairy commodities have recently started to trend up signaling that import demand and more critically consumer demand appears to be unfazed by higher prices. The macro-economic outlook supports this view as the income growth rate for Asia and Oceania in 2014 is expected to reach 4.2 percent and in the critical Chinese market, it is forecast at 7.7 percent – slightly higher than in 2013. In addition, dairy supply lines remain finely balanced as there are no Government surplus stocks of dairy commodities overhanging markets and given the high prices of 2013 commercial stocks are likely to be minimal. Consequently, buyers will likely be covering their needs well in advance and any potential interruptions due to adverse weather will undoubtedly ratchet prices up even further.
Milk Production: Forecast Summary
• In 2013, dairy farmers in Argentina faced uneven weather conditions – dry conditions early in the year followed by a delayed spring – which negatively affected milk production mostly in the first half of the year. Production is expected to rebound in the second half of the year and milk output for 2013 is anticipated to be up 1 percent over 2012. For 2014, milk production in Argentina is forecast to expand by 4 percent over 2013 as a result of high international prices for WMP and increased domestic demand for cheese which are expected to improve producer margins. In addition, milk production is being concentrated in medium to large farms which are more efficient. To this extent, although the milk herd in 2014 is expected to remain about the same size as in 2013, milk production per cow is forecast to improve by 4 percent to 5.57 tons per cow.
• For the current year, Australian milk production through October 2013 is down 6 percent over the same period last year but ample rains during the winter and improved fodder availability is expected to boost milk output during the last quarter of the year. Nevertheless, milk production for 2013 the year is forecast to be down over 2012 by 2 percent. Australian milk production in 2014 is set to expand by 3 percent driven by an increase in the size of the herd and improved margins. At present, current domestic milk prices have improved significantly in comparison to last year due in large part to the strength of global dairy markets and a decline in the value of the Australian dollar.
• In the EU, milk production in 2013 is forecast to grow marginally due to a significant lag in output during the first half of the year. During this period, farmers faced high production costs, severe winter conditions, and a delayed spring which resulted in milk production through June lagging by 2 percent in comparison to the same period last year. Milk output in the second half of the year is anticipated to rebound as favorable weather has led to a decline in feed prices, improved pastures and higher farm-gate milk prices which have considerably improved margins. For 2014, the long term contraction of the dairy herd is expected to an end and cow inventories are expected to stabilize at about the same level as in 2013. Milk production, however, is anticipated to grow by 1 percent due to improved milk per cow productivity. Most of the additional milk is expected to flow into the production of cheese. Over the longer term, the EU’s milk production quota is scheduled to be discontinued on April 1, 2015 and this is expected to further encourage farmers to expand dairy herds.
• Although New Zealand milk production for 2013 through September is down 6 percent relative to the same period last year, milk output in August and September in comparison to the same months in 2012, was up 9 percent and 7 percent, respectively. This end-year boost in output as the main phase of seasonal production ramps up is forecast to increase 2013 production and limit the decline to 4 percent from 2012. For 2014, the outlook is bright as farmers are expecting a significant increase in the 2013/14 milk price payout currently anticipated to be between NZ$ 7.60-8.60 per kilogram of milk solids. Consequently, milk production is forecast to grow by 5 percent as the herd is expected to expand by 68,000 cows and milk per cow output is forecast to increase by 3 percent. The near term climatic outlook is currently neutral between an El Niño and La Niña weather patterns which would likely lead to normal amounts of rainfall.
• In the United States, milk production for 2014 is set to enter into a strong expansionary phase as low feed prices coupled with strong dairy product prices are expected to result in high milk feed ratios. Although the herd is forecast to grow by 30,000 head, the majority of the increase in output will be due to a 1 percent increase in milk per cow.
• In the United States, cheese production is set to grow by almost 2 percent in 2013 and is forecast to keep increasing in 2014 by less than 2 percent to reach 5.1 million MT. The U.S. trade sector has experienced a boom as cheese exports in 2013 through October are up 17 percent over 2012. As a result the 2013 July export forecast is revised up by 7 percent to reach a record 307,000 tons. Exports of fresh cheese have been notable for their explosive growth, rising from 17,000 tons in 2009 to 57,000 tons in 2012. In 2013, exports of fresh cheese through October have nearly reached 83,000 tons far surpassing the pace of 2012. Although fresh cheeses can include a broad range of fresh cheeses (cottage, cream, etc.) it is likely that the majority of cheese being shipped consists of mozzarella cheese. The principal destinations for these fresh cheeses in 2013 have so far been South Korea, Mexico, and China. For 2014, total U.S. cheese exports are forecast to decline slightly to 303,000 tons as increased competition from the EU and Oceania are expected to displace U.S. cheeses. U.S. domestic consumption is expected to remain fairly robust and grow by almost 2 percent; consequently, ending stocks in 2014 are anticipated to hit the lowest level since 2004.
• The EU’s domestic consumption of cheese continues to be the driving force behind the domestic dairy market accounting for nearly 70 percent of the milk supply (factory use milk) used for dairy production. For 2014, EU cheese production is forecast to expand by 1 percent as high global prices and increased availability of fluid milk is expected to stimulate output. As a result, 2014 cheese exports are forecast to grow by 3 percent to 825,000 tons. In 2013, about one third of total cheese exports through September were shipped to Russia and for 2014 Russia and the United States are likely to remain major markets.
• Oceania cheese exports are forecast to decline in 2013 by 2 percent but then are expected to rebound in 2014 by 7 percent largely due to increased exports from New Zealand. In 2013, New Zealand cheese exports are forecast to drop by 8 percent largely due to the lower availability of milk supplies following a drought in the first half of the year. For 2014, increased supplies of milk, improved cheese margins, growing demand for ingredient cheese, and higher prices for whey by-products are expected to promote increased output. Consequently, production – of mostly cheddar - is forecast to grow by 2 percent to 320,000 tons and exports are anticipated to expand by 7 percent.
• Chinese imports of SMP have been growing at an impressive clip averaging 32 percent growth over the 2009-2012 periods and China in 2013 will likely become the largest single import market for SMP. For 2014, Chinese production of SMP relative to 2013 is forecast to slip by 6 percent to 51,000 tons as demand for milk for other uses limits availability for SMP production. Domestic demand, however, remains robust driven by an increasingly affluent population and a continuing distrust of the quality of domestically sourced supplies; consequently, imports are forecast to grow by 16 percent to reach 250,000 tons in 2014.
• Since the lifting of an export ban in June 2012, Indian exports of SMP in 2013 have accelerated and shipments through September are up over six fold in comparison to the same period in the previous year. Consequently, exports in 2013 are expected to reach a record 120,000 tons. The principal destination for this SMP has been Bangladesh, Yemen, and Algeria. For 2014, although the production of SMP is expected to grow by 6 percent, exports are expected to decline but still remain at a relatively high volume of 90,000 tons.
• Limited supplies of milk in the EU during 2013 are expected to lead to a 5 percent decline in the production of SMP which is forecast to result in a sharp 21 percent drop in SMP exports compared to 2012. For 2014, despite strong global prices, the processing of milk into cheese is likely to be financially more attractive than producing SMP and output is forecast to rebound by only 5 percent. Although EU SMP shipments are anticipated to rebound by 15 percent in 2014 they are expected to well below shipment levels reached in 2011 and 2012.
• Mexican imports of SMP for 2013 through August are reported down 17 percent in comparison to the same period last year. Consequently, the July 2013 forecast has been revised down to 200,000 tons. For 2014, Mexican imports of SMP are expected to recover, increasing by 5 percent as domestic supplies are unable to meet the growing domestic market for dairy products.
• In Oceania, total exports of SMP for 2013 are forecast to grow marginally by 1 percent over 2012 as the increase in New Zealand exports is likely to be offset by a decline in Australian shipments. For 2014, Oceania exports are forecast to increase by 4 percent or 20,000 tons of SMP. In the case of New Zealand, the vast majority of the increased milk supply will be directed to the production of WMP because of its relative profitability with respect to SMP/butter production.
• U.S. exports of SMP have been booming and are forecast to reach a record 560,000 tons in 2013. U.S. exporters of SMP, based on shipment data through October 2013, appear to have made significant gains over the comparable period in 2012 to such key Asian markets as China, Philippines, Indonesia, and Vietnam and Malaysia. The gains in sales to China have been particularly notable as exports of SMP in 2013 through October are up over 254 percent over the same period in 2012. For 2014, exports are forecast to decline by 4 percent to 540,000 tons as increased competition from the EU and to a lesser extent New Zealand, are expected to displace U.S. sales.
• Global WMP markets continue to be dominated by China’s seemingly insatiable demand for imports of WMP. For 2013, China’s imports of WMP are slated to increase by 32 percent over 2012 to reach 535,000 tons. Demand does not appear to be particularly price sensitive since Oceania FOB prices of WMP increased from about $3,340 per ton in January 2013 to over $6,000 per ton in April 2013 and has averaged approximately $4,670 per ton for most of the year. In fact, the average (Oceania FOB mid-point) price of WMP in 2013 through November is up 44 percent in comparison to the average mid-point price ($3,230 per ton) posted in 2012. China’s imports for 2014 are forecast to grow by 22 percent over 2013 to reach 650,000. This equates to an extra 115,000 tons of imported volume. Although domestic WMP production is expected to increase by 7 percent in 2014, strong demand for use of WMP in the production of processed products such as infant formula, yogurt, beverage drinks, etc., continues to outstrip domestic supply and drive import growth.
• In New Zealand, WMP production remains the most profitable relative to other dairy products given current export prices. This situation is expected to persist in early 2014, and WMP production for 2014 is expected to grow by 2 percent over 2013. In 2013, WMP production is likely to remain stagnant relative to 2012 due to early-year drought conditions. Consequently, exports are forecast to expand by only 1 percent over 2012. China has become New Zealand’s major customer for WMP and in 2012 China accounted for about one third of New Zealand’s total exports of WMP. For 2013, New Zealand’s exports to China through October accounted for about 43 percent of its total exports. For 2014, New Zealand’s exports of WMP are pegged at 1.35 million tons – an increase of 6 percent.
• Although the 2013 WMP production forecast for the EU was revised up by 645,000 tons this still represents a decline of 2 percent from 2012. Cold weather and a delayed spring in the first half of 2013 reduced milk flows and available supplies were channeled primarily into the production of cheese. For 2014, increased milk availability is expected increase WMP output and exports are slated to increase by 1 percent or 5,000 tons over 2013 to reach 375,000 tons.
• New Zealand remains the dominant exporter of butter accounting for about 65 percent of total trade among the major exporters. This share is not expected to change significantly in 2013 or 2014. Butter production in 2013 is forecast to drop by 4 percent from 2012 which is expected to lead a drop of 7 percent in exports. The situation is expected to reverse in 2014, with butter output pegged to grow by 4 percent relative to 2013. Similarly, exports are set to increase by 7 percent to 510,000 tons. Iran, Egypt, and Russia have in the past been the leading destinations for New Zealand butter, however, recently China has rapidly emerged to become a primary destination accounting for 10 percent of total New Zealand butter exports in 2012. For 2013, China remains a leading destination and will likely account for the same proportion of total New Zealand exports as in 2012.
• The 2013 U.S. forecast for U.S. exports of butter has been revised from July to 91,000 tons - up almost double the 2012 level. Saudi Arabia is the leading destination accounting for about 22 percent of total butter exports for the year through October. For 2014, butter exports are expected to drop by 23 percent over 2013 as increased exportable supplies in the EU and New Zealand are expected to sharpen the competitive landscape for U.S. exporters