Dairy Industry Trends and Outlook
Because of their high nutritional value, dairy commodities are valued worldwide. The Food and Agriculture Organization (FAO) states that a glass of milk can provide a 5-year-old with: 21% of protein, 8% of calories and key daily nutrients. Additionally, dairy products are a great source of calcium, magnesium, selenium, vitamin B12 and B5. The most traded dairy products include fluid milk, milk powder, cheese, and butter. However, the dairy industry worldwide is still recovering from a production surplus that has lasted for over two years. Similarly, market prices and aggregate demand have fallen in recent years. The milk market has experienced record high and low prices in the course of only four years. This article focuses on milk market trends since 2013.
Dairy Industry Trends and Outlook
The largest importers of milk in 2014 included China, Russia, Mexico, Japan, the United States, Indonesia, Philippines, Saudi Arabia, Algeria, Singapore, Iraq, Malaysia, and Venezuela. In addition, the largest exporters of milk in 2015 included the European Union (149.6 million metric tons), the US (94.6 mmt), New Zealand (21.6 mmt), Argentina (11.6 mmt), and Australia (9.8 mmt). The market for dairy commodities has been volatile since 2013 and prices hit record highs at the beginning of 2014. In the US, milk was valued at US$23.97 per centum weight, while in New Zealand, milk was valued at NZ$8.40 per kilogram.
However, during the period of 2014 to 2015, there was an oversupply of milk worldwide and a drop in demand from major consumers. One such example was Venezuela, which imported an average of 150,000 tons yearly between 2009 and 2014. Nevertheless, Venezuela did not import milk during the second half of 2015 due to its extreme political and economic instability. Because of the oversupply of dairy and the drop in demand from its largest consumers, the price of milk fell and, by 2015, it averaged US$17.08 per centum weight in the US. At the same time, in New Zealand, prices hit a low of NZ$3.90 per kilogram.
New Zealand exports are mainly destined for the Chinese market. However, import demand went down as the country increased its milk production and stocked up in milk powder during 2013. China´s imports of whole milk powder (WMP) accounted for 619,000 tons in 2013 and 671,000 tons in 2014. Despite the fact that Chinese demand went down in 2015, China remained the largest WMP importer with 347,000 tons that year.
Trends in the First Half of 2016
A report published by the United States Department of Agriculture (USDA) highlights production levels of dairy commodities during the first months of 2016. In the EU, fluid milk production grew close to 6% in the period from January to April of 2016, in comparison to the same period last year. Likewise, in certain countries, production grew up to 15% in the first quarter. However, levels of production are expected to slow down as the year ends. Skim Milk Production (SMP) exports are expected to be of 650,000 tons, which represents a 17% decrease from the forecast at the beginning of the year.
In the US, SMP exports are expected to reach 544,000 tons for 2016, as the US faces high competition with Asian markets. However, US exports to Mexico and the Philippines showed gains as of May of 2016. In New Zealand, due to favorable weather conditions, milk production is forecasted at 21.1 million tons for 2016. Likewise, SMP production and exports in New Zealand remain strong so far; production should attain 390,000 tons and exports are expected at a record high of 415,000. These exports are mainly headed to the markets of China and the Philippines.
In Argentina, milk production was negatively affected as a result of weather variations. Thus, production levels in April and May were approximately 20% less than a year ago. Additionally, milk prices fell to US$0.20 per liter from February of 2015 to February of 2016. Meanwhile, in Australia, levels of production were affected by the dry conditions. Soil moisture levels were down throughout the country as rainfall was scarce. Grass was scarce and farmers had to buy feed and water to keep their animals alive. Thus, increasing costs of production. Until May of 2016, milk production levels were down 3% compared to those of January through May of last year. Nonetheless, rainfalls are expected to increase during the second half of the year.
Dairy Trade Outlook
Regarding trade, during the first quarter of 2016, China´s WMP imports were up 24% and SMP imports were up 29% compared to last year. Additionally, Mexico’s SMP imports are forecasted at 265,000 tons because of a stagnation in local production.
Currently, various governments are trying to level the market. The EU approved an aid package of €500 million to foster a reduction in milk production. Farmers would be paid around 14 cents for each liter of milk not produced during a three-month period starting in October. This policy measure hopes that supply will decline and, so far, milk prices seem to have risen slightly. However, the industry worldwide has a long way to go before reaching levels close to those of 2013.
This past week, New Zealand, the US, and farming groups in Europe urged the World Trade Organization to review new Canadian dairy policies. According to these governments, the Canadian policies violate obligations contracted under the NAFTA; as well as, the country’s duties as a member of the WTO. The new protectionist legislation would make it harder for low fat milk from the US and other countries to be imported into Canada. Finally, New Zealand’s dairy processor Fonterra recorded a profit of US$807 million, which accounts for a 65% increase in after-tax profit from the prior year. Back in May, the company decided to cut the price paid to its milk suppliers, which affected Australian suppliers in particular.
The Case of India
India accounted for 18.5% of milk production worldwide with an annual output of 146 million tons in the period from 2014 to 2015. However, India is not a major exporter because the country has an extremely high demand for this commodity. In addition, the majority of India’s milk production comes from buffalos not cows. Studies claim that India needs to invest in infrastructure and change its trade policies in order to become a milk exporter.