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David Barrett
World dairy product prices declined sharply in 2008-09 following the global economic downturn, with demand for dairy products falling in many regions. World prices for butter are estimated to decline by 38 per cent to average US$2483 a tonne in 2008-09. World prices for skim milk powder and whole milk powder are estimated to fall by around 45 per cent to US$2329 a tonne and US$2548 a tonne, respectively. World cheese prices are estimated to average US$3271 a tonne, 36 per cent lower than the average price for 2007-08.
In 2009-10, world dairy prices are forecast to remain well below those of the past few years. Key factors driving this forecast are the relatively large supplies of dairy products in the major exporting countries, combined with continuing subdued demand, particularly in developing countries.
World prices for whole milk powder and skim milk powder are forecast to average US$2152 a tonne and US$1992 a tonne, respectively, in 2009-10. This is around 15 per cent lower than the estimated average prices for 2008-09 and nearly half of the 2007-08 average prices. World prices for butter and cheese are forecast to average US$1850 a tonne and US$2621 a tonne, respectively, in 2009-10, around 25 per cent and 20 per cent lower than the average prices in 2008-09.
Forecast lower prices in Australia’s major dairy export markets are expected to result in the Australian farm-gate milk price declining by 17.5 per cent, to average 33 cents a litre in 2009-10. Such an outcome would represent a 33 per cent decline in farm-gate milk prices since 2007-08 and one of the largest declines in milk prices over a consecutive two year period. Farm-gate milk prices averaged around 50 cents a litre in 2007-08.
The contraction in world demand for dairy products in 2008-09, in response to the slowdown in global economic activity, has reduced export demand in major dairy producing countries. This has resulted in increased supplies to the domestic markets of major producing regions, particularly the European Union, the United States and New Zealand, putting additional downward pressure on their domestic prices.
In 2008-09, milk production in the European Union is estimated to fall by 1 per cent. This decline is largely the result of action taken by producers in France and Germany (the two major producing countries in the region), which cut back production sharply in response to lower prices. In 2009-10, feed costs in the European Union are forecast to remain relatively high because of lower feed grain supplies. Industry restructuring and poor profitability of some smaller dairy farms will again prevent some member states from filling their national quotas. Despite a 1 per cent increase in the aggregate milk quota as agreed by the Council of Agricultural Ministers, lower farm-gate prices and higher feed costs are likely to constrain any growth in EU milk production.
In 2007, the European Union’s intervention stocks of butter and skim milk powder were cleared. However, driven by the subsequent contraction of domestic and export demand, the European Union recommenced intervention purchases of butter and skim milk powder on 1 March 2009. By 4 June 2009, intervention stocks of butter and skim milk powder had reached 79 626 tonnes and 183 921 tonnes, respectively. From 1 January 2009, the European Commission recommenced the Private Storage Aid Scheme for butter. The scheme, which subsidies the private storage of butter, is used to remove surplus spring/summer butter from the domestic market and release it during winter when supplies are lower. Storage is usually for the period from 1 March to 15 August. However, for 2009 the scheme has been extended from 1 January 2009 to 28 February 2010. By 4 June 2009, around 89 098 tonnes of butter had been accepted into private storage.
EU export refunds were re-introduced for all dairy products in early 2009 and are likely to lead to higher EU exports in 2009-10 than would otherwise be the case. This is expected to place downward pressure on world dairy product prices.
In the United States, milk production is forecast to decline by 1.1 per cent in the 2009 calendar year and a further 0.9 per cent to 84.8 million tonnes in 2010. The prospect of markedly lower milk prices and relatively high feed costs are expected to lead to the continued contraction of dairy herds throughout 2009 and 2010. The average number of dairy cows is forecast to decline by 2.5 per cent to 8.95 million head in 2010.
US exports of dairy products fell sharply in the first four months of 2009, resulting in increased availability of products on the domestic market. To support domestic prices, the US Commodity Credit Corporation (CCC) purchased butter and skim milk powder. By 1 June 2009, 2090 tonnes of butter and 93 260 tonnes of skim milk powder were held as stock by the CCC. CCC’s purchases of dairy products could ease toward the end of 2009 and through 2010 as the US domestic market for dairy products is expected to tighten. This is because of expected lower US production and a forecast recovery of export demand.
On 22 May 2009, the US Government re-activated its export subsidy program - the Dairy Export Incentive Program (DEIP) - by announcing allocations for the July 2008 to 30 June 2009 period. Under the DEIP, the announced allocations for 2008-09 are: 68 201 tonnes of non-fat dry milk; 21 097 tonnes of butterfat; 3030 tonnes of various cheeses; and 34 tonnes of other dairy products. As a proportion of US exports in 2008, these allocations are equivalent to around 20 per cent for butter, 2.4 per cent for cheese and 17 per cent for non-fat dry milk.
Under the Uruguay Round Agreement, the United States established annual export subsidy ceilings for specific dairy products. The ceilings specify the maximum quantities of dairy products the US Government is permitted to subsidise and the maximum budgetary expenditures on export subsidies. The announced allocations for the July 2008 to 30 June 2009 period are equal to the allowable maximum quantity limits on export subsidies.
Reflecting improved seasonal conditions, milk production in New Zealand is estimated to rise by 7.5 per cent in 2008-09 to 16.3 billion litres, the highest production on record. Reflecting an expected increase in the dairy herd and assuming favourable seasonal conditions, milk production in 2009-10 is expected to be close to the record output of 2008-09.
The world economic slowdown curtailed the demand for dairy products in 2008-09, especially in the latter half of the year. In 2009-10, world dairy demand is expected to be under continued downward pressure because of weak world economic activity, in particular in the Russian Federation and Asia, where it is expected to affect import demand, especially in the second half of 2009. In addition, demand for dairy products in some key OECD markets, such as Japan and the Republic of Korea, is also likely to remain subdued. However, an expected strengthening in the global economy during 2010 is expected to underpin a gradual increase in demand for dairy products.
The Russian Federation is a major importer of dairy products, with imports of 135 000 tonnes of butter and 270 000 tonnes of cheese in 2008. Relatively slow growth in Russian milk production in recent years has resulted in a greater dependence on imports. In late 2008 and early 2009, there were reports that Russian importers had difficulty gaining access to credit for import financing. Together with a depreciating currency (the Russian ruble), this contributed to a significant decline in dairy imports during that period.
In 2009-10, Russian demand for dairy imports will be further constrained by two factors. The first is an increase in import duties on specific dairy products implemented by the Russian Government from 31 January 2009. The import duty on butter increased from 0.22 euros a kilogram to 0.35 euros a kilogram and the ad valorem import duty (calculated as a percentage of the value of the imports) on milk and cream, from 15 per cent to 20 per cent. Such increases are expected to reduce the import demand of these products and place upward pressure on domestic prices. The second factor is the effect of continued weak economic growth, which is expected to lead to weaker growth in the disposable incomes of consumers.
In South-East Asia, significantly slower economic growth is also expected to adversely affect the import demand for milk powders in 2009. South-East Asia as a whole imported 380 000 tonnes of skim milk powder and around 90 000 tonnes of whole milk powder in 2008. South-East Asia is Australia’s principle market for skim milk powder and whole milk powder, accounting for around 60 per cent and 40 per cent, respectively, of Australia’s total exports of these products.
Japan is Australia’s largest export market for cheese, accounting for around 50 per cent of total Australian cheese exports in 2007-08. For the first nine months of 2008-09, Australian cheese exports to Japan declined by 25 per cent to 55 300 tonnes. High cheese inventories in Japan, together with an increased utilisation of new Japanese cheese production facilities, are likely to dampen cheese import demand in the first half of 2009-10.
The region encompassing the Middle East and northern Africa is a relatively large importer of dairy products. In 2007, the key importers (Algeria, Egypt, Saudi Arabia and the United Arab Emirates) in this region imported 188 000 tonnes of cheese, 331 000 tonnes of whole milk powder, 151 000 tonnes of skim milk powder and 220 000 tonnes of butter. The economic slowdown in this region is expected to be less severe relative to other parts of the world. Consequently, import demand for dairy products in this region is forecast to remain relatively stable in 2009-10.
Algeria, the largest importer of whole milk powder, has increased its imports in recent years as domestic demand has been strong, supported by domestic subsidies on consumer prices. Algeria imports around 80 per cent of its domestic requirements of dairy products. Given that the Algerian Government maintains domestic consumer prices of dairy products below world prices, consumer demand is expected to remain relatively strong in 2009-10.
Australian milk production is estimated to rise by 1.7 per cent to 9.38 billion litres in 2008-09. However, production in 2009-10 is forecast to decline by 0.9 per cent to 9.3 billion litres as farmers respond to significantly lower farm-gate prices.
Australian milk production in 2009-10 will also be significantly influenced by seasonal conditions, water allocations for irrigation and the cost of supplementary feeds. Widespread and timely rain across south-eastern Australia at the end of April 2009 provided an autumn break, enabling pasture growth in most southern dairying regions. Further follow-up rains will be required to sustain pastures through the winter period.
The average price of feed grains in 2009-10 is forecast to be lower than in 2008-09, but to remain relatively high. Given the weak outlook for milk prices, many farmers are expected to reduce production costs by cutting back on supplementary feeding. However, the extent to which this will occur and the effect of such a response on overall milk production will be highly dependent on seasonal conditions. Assuming improved seasonal conditions, milk yields are expected to be close to those attained in 2008-09.
The adjustments producers are able to make to accommodate lower milk prices – particularly those producers in the irrigation areas of the Murray-Darling Basin – will be critical in determining Australian milk production in 2009-10. In recent years, dairy farmers in the main irrigation regions have been adjusting their management strategies in response to significantly reduced water allocations. To maintain milk production, these farmers have become more reliant on grain and fodder purchases rather than irrigated pastures, with some selling their water allocations to become entirely dependent on purchased feeds. Without sustained, above average rainfall in the main catchment areas, water allocations in 2009-10 are unlikely to return to the relatively high levels of previous years.
| Dairy outlook | ||||||||
2007-08 |
2008-09 |
s |
2009-10 |
f |
% change |
|||
|
||||||||
| Cow numbers | ’000 |
1 640 |
1 645 |
1 620 |
– 1.5 |
|||
| Milk yields | L/cow |
5 624 |
5 702 |
5 741 |
0.7 |
|||
|
||||||||
| Production | ||||||||
| Total milk | ML |
9 223 |
9 380 |
9 300 |
– 0.9 |
|||
| – market sales | ML |
2 188 |
2 240 |
2 276 |
1.6 |
|||
| – manufacturing | ML |
7 035 |
7 140 |
7 024 |
– 1.6 |
|||
| Butter | kt |
128 |
150 |
135 |
– 10.0 |
|||
| Cheese | kt |
359 |
348 |
350 |
0.6 |
|||
| Whole milk powder | kt |
142 |
141 |
147 |
4.3 |
|||
| Skim milk powder | kt |
164 |
208 |
184 |
– 11.5 |
|||
| Farm-gate milk price | Ac/L |
49.6 |
40.0 |
33.0 |
– 17.5 |
|||
| Value of exports | A$m |
2 763 |
2 724 |
2 261 |
– 17.0 |
|||
|
||||||||
| World prices | ||||||||
| Butter | US$/t |
4 027 |
2 483 |
1 850 |
– 25.5 |
|||
| Cheese | US$/t |
5 073 |
3 271 |
2 621 |
– 19.9 |
|||
| Skim milk powder | US$/t |
4 204 |
2 329 |
1 992 |
– 14.5 |
|||
| Whole milk powder | US$/t |
4 562 |
2 548 |
2 152 |
– 15.5 |
|||
Reflecting the lower expected returns for dairy products, Australian dairy manufacturers are expected to shift their product mix away from butter and skim milk powder to cheese and whole milk powder. With world dairy product prices forecast to remain relatively low in 2009-10, the recent significant appreciation of the Australian dollar, if sustained, is likely to place further downward pressure on returns to Australian dairy product exporters.
The total value of dairy product exports is estimated to decline by 1.4 per cent to $2.7 billion in 2008-09. In 2009-10, the value of dairy product exports is forecast to fall further, by 17 per cent to $2.3 billion. As a result of lower export volumes and prices, the value of Australian butter exports is forecast to decline by 40 per cent to $141 million. The values of Australian cheese and whole milk powder exports are forecast to decline by 10 per cent and 17 per cent to $691 million and $411 million, respectively, and the value of skim milk powder exports is forecast to fall by 25 per cent to $450 million.