Dairy: World Markets and Trade - July 2008

This report published by the USDA Foreign Agricultural Service summarises the global market trade and trends in milk and dairy products.
calendar icon 25 July 2008
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USDA Foreign Agricultural Service

During the past four years, U.S. dairy exports have been expanding at a record setting pace and the outlook for FY 2008 looks no different with U.S. dairy exports forecast to increase by 50 percent to hit a new high of $3.7 billion. Driven by rising global demand and tight supplies, the growth in U.S. dairy exports has been particularly evident in shipments of skimmed milk powder, whey, cheese, and butterfat to destinations in North America (particularly Mexico) and Asia.

A further notable milestone associated with this export surge is that the U.S. dairy industry is likely to register an unprecedented net trade surplus of around $500 million. Traditionally, the United States has been a net trade importer of dairy products. However, a decline in imports of such products as cheese – down 5 percent year-to-date, coupled with the surge in exports in both volume and value is expected to result in a significant surplus.

Dairy Production and Trade Developments

Summary

Uncertainty continues to plague dairy markets as fuel and feed costs soar and weather factors disrupt expected production patterns. In late 2007, world dairy prices were for the most part retreating from the breathtaking record levels posted in mid-2007 as forecasts pointed to a resumption of long-term production trends and thus increased milk supplies. In early 2008, however, these assumptions were thrown into doubt as New Zealand experienced a drought that knocked down the original December 2007 milk production forecast for the 2007/08 season by 7 percent. In effect, the widely anticipated growth in New Zealand milk production was now set to shrink by 5 percent from the previous year. This effectively arrested the decline in dairy product prices and kept them well above historical levels.

As the new production season unfolds, the weather situation in Australia remains questionable as May was noted as being the driest month on record and all dairying areas received less than average rainfall. Even with a resumption of normal rainfall, cow numbers are at their lowest level since 1992; consequently, any herd expansion will require several years of investment and plentiful rainfall to resume pre-drought production levels. In New Zealand, the record payout is expected to boost prospects for conversions into dairying and encourage dairies to expand. As a result, milk production during the 2008/09 season is expected to rebound by 7-10 percent. Elsewhere, in the EU-27, quota increases are also forecast to raise milk production but most of the additional output is likely to be channeled towards the domestic market.

In the United States, 2008 milk production continues to expand at a 2 percent clip but the longer- term outlook is clouded by concerns over high feed costs in relation to milk receipts. For this reason, after several years of over 2 percent growth, milk output in 2009 is forecast to grow by less than one percent. Nevertheless, the U.S. dairy industry is currently reaping the benefits of the tight global market and weak currency with fiscal year 2008/09 exports expected to hit a record $3.7 billion.

Despite the high world prices, dairy product demand remains surprisingly robust. Although world growth for 2008 is expected to be below 2007 due to rising energy costs and the financial impact of the U.S. credit crisis, GDP growth in the key East Asian markets – forecast at 4 percent to 5 percent - remains solid. In China, GDP growth has been lowered, but at 9 percent, this still represents a significant pace that will have an impact on trade. Meanwhile, in other markets such as Mexico, North Africa and the Middle East, oil revenues are ensuring that purchases of dairy products for social feed programs continue.

Milk Production: 2008 Forecast Summary

Australian milk production for the 2007/08 season ending in June 2008 is expected to remain stagnant as drought conditions continue to undercut any recovery in milk output. During June 2008, rainfall in the key dairy producing regions was described as being below average and the autumn (July-Sep) outlook for parts of the major producing state of Victoria call for “a shift in the odds favoring drier than average conditions”. This suggests that milk output for the next year will be hard pressed to register any significant gains. In addition, the Goulburn-Murray Water Murray Basin – a key source of irrigation water – remains depleted and will need significant rainfall in the coming months to allow use for agricultural production.

New Zealand also experienced adverse conditions as drought cut 2007/08 milk production by nearly 1 million metric tons resulting in a 5-percent drop in milk output compared to the previous year. Nevertheless, dairy farmers benefitted from a record pay-out of NZ$7.30/kg (US$ 5.60/kg) milk solids that is expected to keep dairying profitable relative to other livestock enterprises. This means that conversions of land into dairying will continue and likely lead to further expansion in milk output next year. Reports indicate that for the 2008/09 season, there may be an additional 300 dairies coming into production that may lead to a 10-11 percent jump in milk output increase to around 16.5 million tons.

The EU-27 2008 milk production forecast is revised up slightly driven by strong internal consumption, export demand, and an expansion of the milk production quotas. These production quotas were increased by 0.5 percent for the EU-15 and an additional 2 percent was applied to all EU member countries starting April 2008. This is likely to lead to further growth in output but the EU Commission expects that internal demand primarily for cheese and fresh dairy products – particularly in the new member states - will absorb a significant portion of the increase. This will also leave less available milk for the production of bulk milk products such as butter and NDM.

The U.S. 2008 milk production forecast is lowered marginally but still results in a 2.1 percent increase in milk output over 2007. For 2009, high feed prices are expected to squeeze profit margins and put a damper on expansionary plans; consequently, milk production is anticipated to grow by only half of one percent.

Summary of Major Milk Producer Forecasts for 2008
(Million Metric Tons)
  2006 2007 2008 (Dec forecast) Change 2008 (July forecast)
Australia 10,395 9,870 9,400 -23 9,377
EU-27 132,206 132,600 133,400 +270 133,670
New Zealand 15,200 15,595 15,830 -954 14,876
United States 80,462 84,188 86,410 -463 85,947
Note: Australia July-June, New Zealand June-May year

Cheese:

Cheese exports in 2008 among selected exporters are expected to grow by 4 percent to 1.4 million tons with marginal decreases in the export forecast for New Zealand being offset by increases in the United States, EU and Australia forecast. The most significant change from the December 2007 forecasts has been the U.S. cheese export forecast which is raised by 22 percent to 122,000 tons – a 23 percent increase over 2007. However, U.S. cheese production this year – up only 0.6 percent through May 2008 over the comparable period in 2007 – has been surprisingly low but is anticipated to accelerate during the balance of the year. Nevertheless, as the economy falters cheese consumption is expected to slow and register only a modest gain of 1 percent over the previous year. This is a significant drop from the growth experienced during the 2005-2007 period when consumption grew at an average annual rate of 2.5 percent.

On the import side, the Russian December import forecast is raised by 8 percent to 280,000 tons as the Russian Government has taken steps to facilitate purchases of dairy products from Belarus and the Ukraine in order to dampen domestic price inflation. This import forecast represents a 12 percent increase from the previous year and highlights the growing expansion of this market. In contrast, the U.S. market for imported cheeses continues to contract with imports in 2008 slated to fall by 7 percent.

U.S. Cheese Imports (000 MT)

Butter

The 2008 export forecasts for Australia, New Zealand, and the EU-27 were reduced by a total of 63,000 tons from December but this was partially offset by a sharp rise of 38,000 tons in expected U.S. shipments of butter. The United States has emerged as a major shipper of butter and is expected to almost double the volume of butter exported in 2007. Although in principle returns favor the channeling of manufacturing milk to cheese processors expectations are that U.S. butter production will increase by 6 percent this year.

Skimmed Milk Powder

Summary of Major SMP Exporter Forecasts for 2008
(Million Metric Tons)
  2006 2007 2008 (Dec forecast) Change 2008 (July forecast)
Australia 189 175 168 -48 120
EU-27 88 170 155 +26 181
New Zealand 243 327 312 -55 257
United States 287 255 275 +125 400
TOTAL 807 927 910 +48 958
Note: Australia July-June, New Zealand June-May year

The Australian and New Zealand export forecast was adjusted down due to drought and increased use of fluid milk in the production of cheese and WMP. The U.S. SMP export forecast was revised up sharply by 45 percent from December on the strength of shipments during the January-April 2008 period – up 77 percent over the comparable 2007 period. U.S. production of SMP and NDM has surged and 2008 output through May 2008 is running 36 percent ahead of the same period in 2007.

Further Reading

- You can view the full report, including tables, by clicking here.

July 2008

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