The most important driver for long term market prospects remains the expectation of continued demand growth in emerging economies, facilitated by economic growth, increasing population and preference for dairy products. After two consecutive years of favorable price developments, dairy commodity markets witnessed decreasing prices over the first five months of 2012 due to greater supplies, both at EU and world level. During the second part of 2012 this trend started to revert and prices to recover. Strong market turbulence characterized previous years: unprecedented high prices in 2007 and a sharp drop in 2008 and early 2009 that led to the milk crisis in the EU and worldwide when, due to low output prices and high costs, farmers saw their margins shrink and turn negative.
Of late almost all the farmers tried to utilize every little bit out of their cows capacity to produce milk in improving the conditions of economy of themselves, since fixed costs are relatively high, so in order to cover them when prices fell even farther below breakeven, they could only focus on what they do best, that is milking cows. As milk production in Europe is largely insensitive to price changes because of the high fixed costs, it is going to be a big challenge for milk prices to go up or forward. In December, New Zealand exports of milk powder, cheese, butterfat and whey were more than the EU, United States and Australia combined, but drought on the North Island has brought a quick end to the production season. Though buyers are mostly covered into Q2, the prospect of tighter supplies over the next few months is firming the markets. Oceania prices continue to rise, closing the gap with Europe and the United States. The path of economic recovery in the Europe and worldwide constitutes a considerable risk and increases the level of uncertainty regarding the outlook projections. A slowdown in global economic development for 2012 and 2013, not just in the developed world but also in large emerging economies, would negatively impact the demand for EU exports.
Growth Prospects in Europe and Global Dairy Market
Global milk production is at its annual trough, but orders are seasonally slow as buyers prefer to go hand-to-mouth until they get a better feel for the new Southern Hemisphere season starting in the second half of August. In this thinly-traded period, the global markets are steady. In the months ahead, much will depend on the how aggressively China continues to buy. U.S. exporters moved record volumes in May, led by continued heavy NDM/SMP sales. We expect U.S. volumes to remain strong in the months ahead. After an estimated increase of 2% in 2011, EU cow’s milk deliveries to dairies are expected to further expand by 1.1% in 2012. Total EU milk production would reach 153.1 million tons in 2012, thanks to a continuous increase in milk yields both in the EU-15 group and in the EU-N12 (the new Member States) which compensates for the contraction in the herd. The 2012 milk production figure incorporates the impact of the severe drought in the US and in certain EU Member States, which heavily limited coarse grain production and led to a sharp increase in feed prices in summer months. Price variations on the commodity markets were reflected in the farm gate price paid to milk producers, albeit with a certain delay and only partially, among others, prompting the European Commission to reflect on the functioning of the supply chain through a High Level Expert Group on Milk.
Medium term prospects for milk and dairy products appear favorable. The continued expansion of world demand, resulting from global population and economic growth, and increasing preference for dairy products are expected to be the main drivers, fueling EU exports and sustaining commodity prices. The best export performance is shown by cheese and SMP, whose exports over the outlook period would expand by two thirds and triple respectively. Their market share percentage of EU exports on total world exports is expected to improve, reaching 32% in both cases. Butter and WMP products’ market shares are projected to deteriorate, partly due to greater dynamic quality of other exporting countries.
As historically, Australia and New Zealand were not subject to volatility in the dairy marketplace, there have been slight experiences of the highs and lows similar to the rest of the globe. Since uncertainly looms over the region’s ability to supply the global marketplace, Australia milk production is declining and future growth in New Zealand is limited unfortunately. Almost 40% of New Zealand’s herd is currently in a drought zone, which is nearing the end of the milk season, which means that the production for the year is predicted to be around 1.5-2% below expectations, but compared to the large increase in product surplus in 2009 due to the export decline and financial crisis, the domestic market continues to deliver strong growth, as Australia emerged from the global financial crisis unscathed.
There has also been seen some tremendous growth which China is exhibiting and China’s demand has increased substantially in a fairly rapid period and they are not seeing any slowdown; however, there has been a large reduction in animal numbers and its capability to increase production in the short term is fairly limited. In the recent reports related to policies and regulations for this, there have been support programs that are reduced or removed, which will only determine a true market price will be established, but supply and demand swings will create greater price volatility. And the assumed exchange rate developments may foster commodity price prospects when expressed in Euro. This suggests potential for improved EU exports, particularly during the early years of the projections.