Dairy. World Markets and Trade Dec. 21, 2012
China’s phenomenal growth as an importer of dry milk products is expected to continue as imports of whole milk powder (WMP) and skimmed milk powder (SMP) are forecast to grow by 12 percent and 18 percent, respectively in 2013. The increase in imports of SMP has been particularly notable with imports in 2012 through October reported at 147,000 tons - up nearly 49 percent in comparison to the same period last year. Import growths of other commodities such as dried whey products, cheese, and butterfat have also been scoring impressive gains. While New Zealand has been the primary beneficiary, the United States has a strong foothold in the SMP, dry whey, and to a lesser extent the cheese import markets. U.S. cheese exports to China in 2012 through October currently total almost 8,000 tons; up 43 percent in comparison to the same time span in 2011.
Dairy Production and Trade Developments
This past year has been a rollercoaster ride for dairy markets with international prices starting at relatively high levels, declining in mid-year, and then staging a modest comeback. Initially, the anticipation of a surge in milk production among major exporters fueled by high milk prices caused dairy product prices to decline sharply. In addition, the health of the global economy added uncertainty particularly as the EU economic crisis lingered as a major unresolved question. The price decline, however, was subsequently arrested as the severity of the developing drought in the United States became evident and concerns over available exportable supplies caused prices to post a cautious recovery.
Currently, global dairy markets are in a stable phase with prices fluctuating within a narrow range but with no discernible direction as importers and exporters evaluate the future. Milk production in Oceania is expected to increase by 6 percent in 2012 over 2011 due to the combination of unusually favorable weather and excellent pasture conditions that prevailed during the season. However, for 2013, the forecast pegs milk production to grow by less than 1 percent. In the United States, milk output which is slated to grow by almost 2 percent in 2012, but is expected to remain virtually flat in 2013 as high feed prices have taken a toll on the financial health of dairy farmers. In the EU, milk production is forecast to grow by less than 1 percent. In sum, it appears that 2012 was an exceptional year but milk output in 2013 will revert back to a more normal pace.
This means that for 2013 the availability of exportable supplies to global markets will likely grow but not by the amounts experienced during the past two years. China will be a key player in
determining the health of global dairy markets given its demand for an ever-growing share of dairy supplies. China’s appetite for imported dairy products shows no sign of abating with imports of milk powder products in 2013 set to jump by 14 percent to about 640,000 tons. Further, there are signs that imports of other dairy products such as cheese and butterfat, although currently relatively minor, are starting to ramp-up.
From an economic perspective the financial situation in the EU will continue to be seen as a having a major bearing on global situation in 2013. Although the Eurozone is expected to experience a mild recovery in 2013 following a recession in 2012, the fiscal situation remains precarious. Nevertheless, the global outlook is fairly positive with global GDP expected to post a growth rate of 2.5 percent compared to the 2.2 percent forecast for 2012. In the key Asian markets, the picture is somewhat mixed but China’s GDP is expected to register a growth rate of 8.1 percent – up from the estimated 7.5 percent in 2012. This suggests that China’s import demand for dairy products will likely continue to strengthen as the middle class expands and concerns about the domestic regulatory system persists. In the America’s, Mexico – a key U.S. dairy market – is forecast to remain relatively strong which bodes well for sales of U.S. SMP and cheese.
Milk Production: 2013 Forecast Summary
• Due to variable weather – drought in summer followed by excessive rain – and increased production costs, Argentina’s milk production forecast is revised down by 8 percent from July but still represents a 3 percent increase over 2011. For 2013, milk output is slated to continue expanding at 4 percent driven by an expanding herd and improved milk-per-cow yields. Farmers, however, continue to be challenged by inflationary pressures particularly with respect to labor and energy. There is some question as to capability of the domestic industry to expand in the future as reportedly expansionary plans by processors have been suspended due to economic uncertainty and the difficulty in importing equipment.
• The Australian dairy industry continues to benefit from favorable weather which has brought two consecutive years of above average rainfall in key dairy producing areas. This has replenished reservoirs and improved pastures. In addition, strong milk prices promoted the expansion of the domestic herd. As a result, the 2012 forecast for milk production remains little changed from July and total output is expected to grow by about 5 percent over last year. For 2013, the herd is expected to expand by 30,000 cows and milk output is pegged to increase by 1 percent. Although, there were concerns of the dry El Nino weather pattern developing by the end of 2012 year, weather indicators are currently pointing to a neutral situation that is expected to persist through the Southern hemisphere summer. Most of the additional milk production is expected to be channeled into the production of cheese.
• The New Zealand milk production forecast for 2012 is raised by 2 percent from July as a result of excellent pasture growing conditions and expansion of the herd. It is anticipated that the herd in 2012 will expand by some 205,000 cows from 2011. For 2013, milk output is forecast to rise marginally as the higher number of cows in the South Island region is expected to be offset by lower milk per cow yields due to a return to normal pasture growth and quality. Most of the additional milk is likely to be used in the production of WMP at the expense of cheese and SMP/butter.
• Although the dairy herd in the EU-27 is expected to contract by 1 percent in 2012, improved milk per cow yields are forecast to result in a 1 percent increase in milk production for 2012 in comparison to 2011. In the first half of 2012, EU-27 dairy farmers were squeezed by lower milk prices and higher input costs. In the second half of the year, however, the recovery of international prices improved margins which are expected to carry through into 2013. For 2013, the forecast is for a continued decline in cow numbers as less efficient farmers exit the sector. Higher energy and feed costs and the lingering economic crisis are expected to limit output growth despite an increase in milk production quotas. Nevertheless, higher milk per cow yields are anticipated to result in a 1 percent increase of overall milk production. At present, EU-27 farmers are operating under a milk production quota system which is set to be eliminated in April 2015.
• With production in the second half of 2012 forecast lower, the annual milk production forecast for the United States is lowered fractionally from July and is now expected to expand by less than 2 percent to 90,560 tons. Production gains in the first half of 2012 reflected both an extra milking day in 2012 and a continuation of the expansion in cow numbers which began in mid-2010. However, increases in feed costs in 2011 and early 2012 were only partly offset by higher milk prices in 2011 and as milk prices declined in early 2012, the stage was set for a contraction in cow numbers during the second half of 2012. Milk per cow in the second half also suffered from tight supplies of alfalfa hay and high summer temperatures in much of the country which, coupled with the declining cow numbers, resulted in a decline in second-half production. For 2013, milk production is forecast to be virtually unchanged from 2012. Cow numbers are forecast to decline as producers adjust to 2012’s weak returns. However, milk per cow is forecast to improve, especially in the later part of the year as alfalfa availability improves, and the increase in milk per cow is expected to offset the lower cow numbers.
• New Zealand’s cheese export 2012 forecast is revised up 6 percent from July due to the increased milk flows which allowed cheese production to expand. As a result, total 2012 cheese output is expected to register a 15 percent year-over-year increase and in turn cheese exports are forecast to jump by 9 percent to reach 275,000 tons. The principal markets for New Zealand cheese are likely to be Japan, Australia, and South Korea which accounted for 51 percent of New Zealand’s cheese exports in 2011. For 2013, although cheese production is expected to drop by 3 percent, shipments are forecast to grow by 4 percent as stocks are drawn down.
• The Australian cheese production forecast for 2012 is raised 5 percent from July to 385,000 tons – up 14 percent over 2011. The driving force behind this increase is strong domestic consumption. On the trade side, the paces of cheese shipments for this year through September in comparison to the same period year-ago are trailing by 6 percent.
Consequently, the 2012 export forecast is revised down 10 percent from July to 165,000 tons – a decline of 2 percent from 2011. For 2013, cheese production is anticipated to expand marginally but cheese exports are forecast to rebound and grow by 18 percent.
• Cheese production in the EU-27 is expected to expand by 1 percent in 2012 over 2011 as cheese production is expected to absorb much of the additional milk output expected for the 5 year. For 2013, cheese production is forecast to increase again albeit at a slower pace. Domestic consumption remains strong and it is expected that approximately70 percent of the additional output in cheese will be consumed within the EU-27 with the balance directed to export markets. Exports for 2013 are projected to grow by 2 percent with Russia likely to remain the single largest market.
• The U.S. cheese production 2012 forecast is lowered marginally by 20,000 tons from July and cheese output for the year versus 2011 is slated to grow by 2 percent. In 2013, driven largely by favorable prices vis-à-vis butter and SMP, production is set to rise by 3 percent.
On the trade front, exports of cheese for the year through October 2012 are running at 20 percent ahead above the same period last year with shipments to Mexico up an impressive 38 percent. For 2013, exports of cheese are expected to decline by 3 percent to 254,000 tons largely as a result of stagnant milk production which when coupled with growing domestic demand is expected to limit exportable supplies. In addition, U.S. cheese exporters are likely to face strong competition from Oceania particularly during the early part of 2013 as the seasonal spring (southern hemisphere) flush of milk that peaks in October-November of 2012 is processed and shipped. U.S. imports of cheese have been on a downward trajectory over the past several years and this trend is expected to continue with imports projected to drop by 3 percent in 2012 and a further 8 percent in 2012.
• Butter production in New Zealand is estimated to reach nearly 500,000 tons in 2012 but is forecast to subsequently decline by 2 percent in 2013 as additional milk supplies are likely to be focused on the production of higher revenue yielding WMP. Forecast butter exports for 2012 are revised-up by 2 percent from July to 480,000 tons, 7 percent above 2011 but are forecast to decline by 1 percent in 2013. At present, Oceania butter prices are reported at around $3,275/ton FOB ($1.49/lb) while butteroil/anhydrous milk fat (AMF) prices on the Global Trade Platform were reported at around $3,075/ton FOB ($1.39/lb) for nearby (1-3 month) delivery. This deep discount of AMF on a butter equivalent basis suggests that New Zealand has excess butterfat stocks in the form of AMF which may have accumulated during the flush season when butter processing facilities were operating at capacity.
• EU-27 butter consumption during 2012 is expected to grow by 2 percent over the previous year as the relatively higher price of vegetable oils favors the incorporation of butter in the food industry in some of the EU-27 states. Exports have been faring well despite a drop in import demand from Russia and the 2012 export forecast is raised by 13 percent from July to 130,000 tons. Total shipments for the year are therefore projected to increase by 5 percent over 2011. For 2013, exports are forecast to post a 15 percent increase as EU butter prices are expected to be competitive and stocks are withdrawn from the Private Storage Aid program towards the end of 2012 and early 2013. At present, butter Government intervention stocks are minimal.
• Following a strong year of U.S. butter exports, shipments of butter for 2012 are forecast to drop by 28 percent to 47,000 tons. Sales to Japan and Canada have been weak this year through October 2012 although this has been somewhat offset by the strong pace of shipments to Saudi Arabia and Iran. The outlook for 2013 points to a drop in domestic production as price relationships between dairy products are expected to favor cheese production. Nevertheless, exports are forecast to grow by 11 percent.
• Russian import demand for butter strengthened in 2012 as it appears that domestic production is unable to meet fairly robust consumption demand. The 2012 import forecast is revised up by 40,000 tons from July and total butter imports for the year are anticipated to grow by 12 percent compared to last year. Butter production in 2013 is expected to be unchanged despite increased milk production due to its reduced profitability, the availability of cheaper imports, and competition from low cost margarine. For 2013, driven by consumer demand, imports are slated to grow by 4 percent.
Skimmed Milk Powder:
• The 2012 import forecast for China is revised up by 8 percent from July and overall SMP imports are expected to jump by 50 percent in comparison to 2011. Processors are importing higher volumes as they look to switch away from the more expensive WMP and also to meet growing domestic demand for dairy products. For 2013, imports of SMP are forecast to continue growing by 18 percent to 230,000 tons. Exports of U.S. SMP have been growing to China – up 10 percent for this year through October 2012 – but face strong competition from New Zealand and the EU-27.
• U.S. exports of SMP during 2012 are on pace to expand by 4 percent over 2011 and the 2012 forecast has been raised marginally from July to a record 455,000 tons. Although shipments to some key Asian markets were down, exports to Mexico are booming.
Shipments of U.S. SMP for 2012 through October to Mexico were up 18 percent over the comparable period last year and so far account for 44 percent of the total U.S. SMP exported. For 2013, U.S. shipments of SMP are forecast to decline by 3 percent as lower domestic output - down 4 percent- is expected to reduce available exportable supplies.
Mexico will likely remain an important destination as Mexican imports of SMP are forecast to remain unchanged in 2013.
• The EU-27 2012 export forecast is revised-up significantly by 17 percent from July or 85,000 tons to 585,000 tons due to high global prices and strong import demand from North Africa (particularly Algeria) and Asia. For 2013, a decline in domestic milk production coupled with increased flows of milk to the production of cheese will limit SMP production growth, limiting supplies for exports. Consequently, EU-27 exports for 2013 are expected to drop by 5 percent.
• In Oceania, SMP production for 2012 is expected to expand by 4 percent compared to 2011 but is forecast to contract by 1 percent in 2013 as the focus is expected to be on the production of WMP. Despite this, exports for 2013 are forecast to grow by 7 percent as stocks are pared down.
Whole Milk Powder:
• Despite relatively high WMP prices particularly early in the year, China’s imports of WMP appear to have been largely unaffected. Imports of WMP this year through October 2012 total 327,000 tons – up 17 percent in comparison to the same period last year.
Consequently, the 2012 (July) import forecast is raised by 10 percent to 365,000 tons. For 2013, imports are expected to grow by 12 percent to 410,000 tons driven by an expanding middle class which are demanding an ever increasing amount of quality dairy products.
• In New Zealand the emphasis continues to be on the production and export of WMP which during the 2008 through 2011 period grew at an average annual rate in excess of 20 percent. This year, New Zealand’s exports for 2012 through October are up 15 percent and the July export forecast is revised up by 25,000 tons to 1.225 million tons. Approximately 30 percent of the volume exported has been shipped to China. For 2013, the pace of exports is forecast to grow at a more moderate pace reflecting a slow-down in milk production increases. Nevertheless, WMP exports for the year are forecast to increase by 6 percent to 1.295 million tons.
• Among other major WMP exporters – Argentina and EU-27 – the outlook for 2013 is for a marginal increase in their aggregate WMP exports. In the EU-27, WMP production in 2013 is expected to remain flat as additional milk volumes are likely to be channeled into the production of cheese. With slightly higher domestic demand, exports are forecast down about 1 percent. Typically, the bulk of EU-27 WMP shipments go to North African and Middle East destinations but exports of WMP to such key destinations as Algeria and Nigeria in 2012 have been lagging relative to last year. In Argentina, exports for 2013 are forecast to grow by 3 percent to 239,000 tons. In recent years, approximately 70 percent of Argentine WMP has been shipped to Venezuela, Brazil, and Algeria.
In terms of international dairy prices, the outlook for 2013 points to a period of relative stability in the first half of the year as world markets absorb the substantial volumes generated by Oceania’s increased production during the 2012 southern hemisphere spring flush season. However, there are currently no significant surplus stocks in the United States or the EU to buffer markets.
Consequently, global economic and population growth are expected to keep driving import demand which could put upward pressure on dairy prices particularly towards the second half of 2013.
At present prices have leveled-off and it appears that they will likely remain stable for the nearby future. Early in the year, Oceania WMP traded at a 5-10 percent premium over SMP, however, it is now trading at parity or up to a 5 percent discount. This suggests that there is some relative tightness in the SMP market which may lead importers to switch back to purchases of WMP if this price relationship persists. At present US, EU-27, and Oceania SMP prices are trading within a narrow range with no competitive advantage to any one exporter. In the WMP market, a significant gap between Oceania and EU-27 prices has developed probably reflective of the increased quantities of WMP available in Oceania just past the seasonal peaks.
International butter prices fell sharply early in 2012 but have recovered. Nevertheless, it appears that there are ample supplies as Oceania prices are well below the U.S and EU butter prices. In addition, butteroil/AMF prices are below butter prices which suggest that there is a need to move excess supplies.