6 March 2012

14 minute read

Dairy

World dairy prices to ease in 2012–13

World dairy product prices are forecast to fall slightly in 2012–13. While demand for dairy products is expected to remain firm in developing countries, an assumed slowdown in economic growth in the European Union and weak economic growth in the United States are expected to dampen demand for dairy products in these countries. Furthermore, continuing high production in key producing and exporting countries is expected to add to the downwards pressure on dairy product prices in the short-term.

World prices for butter are forecast to fall by 5 per cent in 2012–13 to average US$3850 a tonne, mainly reflecting higher supplies in the major exporting countries. World prices for skim milk powder and whole milk powder are both forecast to decline by around 1 per cent to US$3300 a tonne and US$3550 a tonne, respectively. Cheese prices are forecast to fall by around 3 per cent and average US4200 a tonne.

Medium-term outlook for world dairy prices

Over the medium-term, world dairy product prices in real terms are projected to decline slowly but still average around 20 to 30 per cent higher than the average prices over the five years to 2006–07. Although demand for dairy products in developing countries is expected to provide some support to world dairy prices over the next few years, an expected increase in supply of dairy products in the main producing and exporting countries in the second half of the projection period is expected to outpace the projected rise in demand.

Global supplies to remain high

In 2012–13, milk production in most major producing and exporting countries is forecast to increase as a result of further gains in milk yields, albeit at a slower rate than in 2011–12, leading to higher supplies of dairy products. Over the medium-term, milk production is projected to rise in the key exporting countries as dairy product prices remain historically favourable. At the same time, milk output in the developing countries of Asia is also expected to rise.

European Union

Following a relatively strong increase in milk production in the European Union in 2011–12, the growth in milk output is expected to moderate in 2012–13 in response to lower profitability.

In the European Union, milk production is projected to increase over the mediumterm as higher milk yields offset an expected decline in dairy cow numbers. There is likely to be further restructuring within the EU dairy industry as those member countries with relatively high costs of milk production, such as Romania, Bulgaria, Slovakia and Hungary, reduce milk output over the next five years.

While the EU milk quota will increase by 1 per cent a year through to 2013–14 before complete removal of quotas from 1 April 2015 the quotas are unlikely to be a binding constraint on production. Over the past two years EU milk production was 6 to 7 per cent below the overall quota and production is expected to remain below quota until 2014–15.

United States

Milk production in the United States is forecast to rise by 1.3 per cent in 2012 to 90 million tonnes, driven by rising average milk yields per cow. While milk yields are forecast to rise, production growth is forecast to be slowed by relatively high feed grain costs and lower milk prices, which are expected to lower producers’ profitability and increase dairy cow culling. Further gains in milk yields and a projected decline in the cost of feed grain in the second half of the projection period is likely to lead to improvement in profitability and increase US milk production over the medium-term.

New Zealand

Assuming average seasonal conditions, New Zealand milk production is forecast to be 1 to 2 per cent higher in 2012–13 following an expected 6 per cent increase in production in 2011–12. This forecast higher production is expected to be supported by an increase in dairy cow numbers, particularly in the South Island. It is expected that an additional 80 to 100 dairy farms in the South Island will come into production in the second half of 2012 as beef farms are converted to dairy.

Milk production in New Zealand is projected to expand by around 2 per cent annually over the medium-term. Favourable milk prices are expected to result in further increases in dairy cow numbers as more beef farms are converted to dairy farms in the South Island. Additionally, further gains in milk production per hectare are expected to be underpinned by genetic improvements to the herd and improved pasture management.

Argentina

Milk production in Argentina is expected to increase by around 3 per cent over the medium-term as producers invest in new equipment and dairying technologies. The extent to which new farmers enter the industry is likely to be limited by the high capital costs of dairying compared with alternative enterprises, such as soybean production.

Global dairy trade to expand

While the demand for some dairy products is expected to weaken in 2012 in developed economies, particularly Western Europe, import demand by the developing countries of Asia, North Africa and the Middle East is expected to remain relatively firm.

Nearly all the growth in world dairy trade over the medium-term is expected to result from increasing consumption of dairy products in developing economies. The key factors driving demand in developing countries are expected to be: increases in per person incomes, increasing consumption of Western foods in Asian diets, and population growth.

China

China has become a significant importer of milk powders since 2009 and accounted for around 25 per cent of world trade in whole milk powder in 2011. This increase in imports has been driven by strong growth in domestic demand for dairy products and consumer concerns about the safety of domestically produced products following detection of melamine in 2008.

The growth in Chinese consumption of dairy products is expected to continue over the medium-term, driven largely by rising per person incomes.

Over the medium-term, China is expected to remain a significant importer of dairy products with a projected rise in milk production unlikely to match the expected growth in domestic demand. Chinese milk production has partially recovered since 2008 and is forecast to rise by 5 per cent in 2012 to around 32.2 million tonnes. Milk production is expected to increase further over the next few years as herd genetics are enhanced by imported breeding cows.

While New Zealand is expected to remain the largest exporter of milk powders to China, the United States has the potential to expand its exports of skim milk powder to this market over the medium-term. China is likely to remain an important market for Australian exports of whole milk powder and cheese.

Russian Federation

The Russian Federation is expected to remain a significant importer of dairy products with further growth in domestic demand and limited increases in milk production. In 2011, the Russian Federation imported 130 000 tonnes of butter and 315 000 tonnes of cheese; slightly higher import volumes are forecast for 2012.

Milk production in the Russian Federation declined in 2010 following a severe drought in the main agricultural regions and milk output has increased only slightly since. A modest rise in milk production over the medium-term is likely to be driven by higher milk yields. However, despite the projected increase in production, expected growth in consumption of dairy products, particularly cheese, is expected to lead to a further rise in cheese imports over the medium-term.

India

Historically, India imported small quantities of dairy products and this is likely to remain the case as expected increases in milk production are forecast to match increases in demand. However, there are likely to be periods when demand exceeds supply which will result in increased imports of dairy products. Milk production in India is steadily increasing and is forecast to rise by 4.5 per cent in 2012 to 127 million tonnes in response to favourable milk prices. Milk yields are relatively low but government programs to improve the genetics of the breeding stock and the quality of the feed have the potential to increase yield.

While dairy products are a traditional part of the Indian diet, an emerging middle class is driving demand for greater diversity of choices of dairy products. Demand for products such as yoghurt, ice cream and western style cheese is increasing particularly in urban centres where modern retail outlets are proliferating. India has recently increased its imports of skim milk powder, butter and butter oil in response to strong domestic demand and concern over seasonal domestic supplies. The Indian Government increased the import quota for skim milk powder (subject to a zero tariff rate) from 30 000 tonnes in 2010–11 (April to March) to 50 000 tonnes in 2011–12. The import quota for butter and butter oil (subject to a zero tariff rate) remained unchanged at 15 000 tonnes for 2011–12 (April to March).

North Asia

Cheese imports by Japan are forecast to rise by 2 per cent in 2012 to 210 000 tonnes in response to increased household consumption and expanded use of cheese in the food service sector. Over the medium-term, Japan is expected to remain a large and stable export market for cheese. While milk production is expected to continue to fall over the next few years, an expected decline in drinking milk consumption is likely to lead to a higher proportion of milk being used in the manufacture of processed dairy products in Japan.

Cheese imports by the Republic of Korea are forecast to increase by around 20 per cent in 2012 to 96 000 tonnes. This follows a 60 per cent rise in cheese imports between 2007 and 2011 and reflects the strong growth in consumption of cheese. The increase in demand for dairy products in the Republic of Korea is being driven by increased exposure to Western diets, a rise in fast food outlets and availability of a greater diversity of dairy products.

Developing countries of Asia, Middle East and North Africa

Import demand for dairy products, particularly milk powders, in most developing countries is expected to remain firm in 2012 following strong growth in imports in 2011. Indonesia and the Philippines are expected to increase imports of skim milk powder in 2012 by 9 per cent and 3 per cent to 240 000 tonnes and 118 000 tonnes, respectively. The United States, having increased its exports of skim milk powder to the Asian region in the past two years, is expected to remain a competitive supplier in these markets.

In most developing countries in Asia, the per person consumption of milk and dairy products is low compared with the more developed Asian countries such as Japan and the Republic of Korea, even after experiencing strong growth in recent years. Given that demand for dairy products rises as incomes increase, further increases in consumption of milk and dairy products are likely over the medium-term. Expected limited growth in domestic milk production will mean most developing countries are likely to increase their imports of milk powders over the next few years.

The Middle East and North Africa are large importers of milk powders, butter and, to a lesser extent, cheese. While some countries in the region, such as Algeria, are expected to increase milk production in response to increased government support, the increase in production is unlikely to meet expected growth in demand. Algerian imports of whole milk powder are forecast to increase slightly in 2012 to around 200 000 tonnes.

Prospects for Australian dairy industry

The Australian farm-gate price for milk is forecast to fall by 3 per cent in 2012–13 to average around 39.6 cents a litre. Forecast lower world prices for dairy product prices will reduce unit returns to Australian dairy exporters.

Australian farm-gate prices for milk are projected to fall slightly over the outlook period to reach around 36 cents a litre (in 2011–12 dollars) in 2016–17, reflecting lower world dairy prices toward the end of the outlook period.

Milk production to expand over the medium-term

Australian milk production is forecast to increase by 1.4 per cent in 2012–13 to 9.55 billion litres, following a 3 per cent rise in 2011–12. Most of the rise in milk production is expected to occur in the irrigation areas of northern Victoria and southern New South Wales where water availability has improved in the past two seasons. Milk production in Tasmania is also forecast to rise further following relatively strong growth in dairy cow numbers.

Relatively firm milk prices and favourable seasonal conditions resulted in dairy producers increasing their cow herds in the 12-month period to June 2011 and the national cow herd is forecast to rise by a further 1 per cent to reach 1.62 million head in June 2012.

Over the medium-term, Australian milk production is projected to rise to reach around 10 billion litres in 2016–17 reflecting further increases in the dairy cow numbers and milk yield per cow.

The significant improvement in water availability for irrigation in northern Victoria and southern New South Wales is expected to underpin a further expansion in milk production. As at early February 2012, water storage levels in the Murray–Darling Basin were approximately 83 per cent of capacity, significantly higher than the 25 per cent in 2009. Additionally, farmers are expected to continue implementing improved water irrigation technologies that will raise dairy farm productivity.

Australian dairy exports

The total value of Australian dairy exports is forecast to decline by 4 per cent in 2012–13 to $2.3 billion, reflecting lower average world dairy product prices. Over the medium-term, the total value of Australian dairy exports is projected to increase slightly to $2.3 billion (in 2011–12 dollars) in 2014–15 reflecting projected higher volumes of exports, before easing slightly to $2.2 billion (in 2011–12 dollars) in 2016–17.

Australian exports of dairy products are concentrated in the Asian region which accounted for around three-quarters of the total value of dairy exports in 2010–11. Japan is the single most important market, accounting for 16 per cent of the value of dairy exports and importing just under half of Australia’s total cheese exports.

Supermarket price discounting of milk

Since late January 2011, the major supermarket chains have reduced the retail price for their home brand fresh milk to $1 a litre, well below prices for branded milk.

The pricing strategy adopted by the major supermarket chains appears to have had some effect on total milk sales. Sales of fresh milk increased by around 2.9 per cent year-on-year in the 11 months ending December 2011, compared with year-on-year growth of 1.4 per cent in the 11 months ending December 2010. The average annual growth in fresh milk sales was 1.9 per cent over the five years to 2009–10.

While total fresh milk sales increased modestly, there has been a more noticeable shift in sales from branded to home brand milks. Between the end of January 2011 and December 2011, the share of home brand milk sold through supermarkets increased by 5 percentage points to 54 per cent while branded milk sales declined by 5 percentage points to 46 per cent. Overall, supermarkets increased their share of fresh milk sales by 1 percentage point to 53 per cent year-on-year for the 11 months ending December 2011.

Although the Australian farm-gate price for milk is forecast to decline by 5 per cent to average 41 cents a litre in 2011–12, it is unclear at this stage whether the pricing strategy of the supermarkets has had any effect on producer returns. In December 2011, for example, negotiations between a processor and producers in northern New South Wales and Queensland were brought forward 12 months and farmers were offered a shorter contract of three years commencing 1 January 2012, instead of the previous contract period of five years. It has been reported that the contract milk price was reduced by 3 cents a litre to between 50 and 55 cents a litre.

However, there is a range of factors that may have led to lower contract prices for these producers. First, previous contracts were negotiated in 2007–08 when manufacturing milk prices were high. Second, production costs fell for dairy farmers because of the increased availability of fodder. Third, manufacturing milk prices fell, especially in the southern dairying regions.

Farm cash incomes by state

Based on information from ABARES farm surveys, average farm cash income for dairy farms in Victoria is projected to fall slightly to an average of $134 000 per farm in 2011–12. The effect on average farm cash income of lower prices paid for milk used to manufacture dairy products is expected to be largely offset by an increase in milk production. In Tasmania, a relatively larger increase is expected in milk production; resulting in farm cash income rising by 32 per cent to an average of $211 000 per farm in 2011–12 (see the farm performance paper in this issue).

In Western Australia and South Australia, farm cash incomes for dairy farms are projected to fall by 10 per cent and 18 per cent to $126 000 and $152 000 per farm, respectively, in 2011–12, reflecting largely the effects of lower milk prices and milk production. Farm cash incomes for dairy farms in Queensland are projected to decline by 23 per cent to an average of $89 000 per farm in 2011–12 in response to lower milk prices and reduced milk production, despite an expected reduction in total cash costs.

Further Reading

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March 2012