Summary
From an ACP perspective the OECD/FAO analysis highlights the impact of EU skimmed milk powder (SMP) stocks on prospects for global SMP prices. It suggests EU SMP stock polices continue to limit the rise of global SMP prices. This is important since SMP and fat filled milk powder (FFMP) imports represent the principal competitor to domestic milk producers in African ACP countries. There is however also a growing EU export trade in liquid milk to African and Caribbean countries. The role of the EU in the global dairy trade is projected to grow in the coming ten years, in a context where the EU is less well placed to serve the main import market China, than Oceanian dairy exporters. The OECD/FAO highlighted how import restrictions continue to influence patterns of global dairy trade, with this suggesting eliminating import restrictions on EU products on a preferential basis likely to become an important focus of EU trade policy in the coming period.
Current Price Situation
According to the OECD/FAO review in 2017 most international dairy prices continued to increase in response to declines in milk production in the last quarter of2016 and first quarter of 2017.This includes an average 65% increase in butter prices and a 28% increase in whole milk powder ‘WMP) prices and a 25% increase in cheese prices. However skimmed milk powder (SMP) prices increased only a modest 3% in the face of the large scale stocks of skimmed milk powder being held in the EU. Although WMP prices are expected to continue to recover the price drag effects of high EU skimmed milk powder stocks is expected to continue into 2018 (1).
Indeed reports suggest accumulated stocks of EU SMP are being sold at a discount on low world market prices given the short time left before these stocks become unfit for human consumption (see companion epamonitoring.net article, ‘Ageing EU SMP Intervention Stocks See EU SMP Prices Discounted’, 6 July 2018). According to the OECD/FAO analysis EU SMP stocks of 378,000 tonnes are equivalent to 6.5% of global SMP production and 20% of global SMP trade (1).
Looking forward the OECD/FAO analysis notes the release of EU SMP stocks ‘may limit the rise in SMP prices’ up to 2027 (1).
In the coming decade according to the OCED/FAO analysis “as compared to the previous Outlook dairy product prices are lower”, with this projected to induce “a lower production increase for major exporters” (1).
Projected Consumption Trends
There is a generalized trend of more rapid growth in dairy consumption in developing countries then developed economies. World consumption of fresh dairy products and processed dairy products is projected to grow at 2.1% and 1.7% per annum respectively. Currently ‘the largest share of milk and dairy product consumption is in the form of fresh dairy products, taking up about 50% of the world’s total milk production’. This is projected to increase to 52% ‘due to rising milk consumption in developing countries’. However in the coming period the rate of growth in diary consumption in developing countries is projected to slow down after the rapid growth of the last decade (1).
Projected Production Trends
According to the OECD/FAO Agricultural Outlook report between 2018 and 2027 world milk production is projected to increase by 22%. The largest share of this increase will come from Pakistan and India. Indeed by 2027 Pakistan and India are ‘expected to jointly account for 32% of global milk production’ compared to 26% in the base period. However this production growth will largely be consumed domestically, with this expanded production not entering global trade (1).
Against this background the share of developed country production in global milk production is projected to decline to 43% in 2027 from 48% in 2017 (1).
Currently the EU is as large a milk producer as India (around 20% each) but with the EU’s share of global production projected to fall to 18%. According to the OECD/FAO analysis in the coming decade EU ‘milk production is projected to grow at 0.7% p.a. ….which is slower than the 1.2% p.a. observed during the previous decade’. This increase in production takes place on the basis of higher milk yield (+1.2% per annum) but is driven by ‘an increase in domestic demand (cheese, butter, cream and other products) as well as an increase in global demand for dairy products’(1).
In the coming period the EU’s share of:
- global cheese production decreases from 44% to 43%;
- global butter production decreases from 21% to 19%;
- global SMP production decreases from 21% to 19%;
- global WMP production decreases from 14% to 13% (1).
Projected Trade Trends
However overall developed country producers dominate the global dairy trade, accounting for 81% of world exports of dairy products with this projected to increase to 82% by 2027. This will occur on the back of an annual increase in exports of 1.8% p.a. or a 22% expansion by 2027. This rate of expansion in exports is slower than the past decade as the rate of consumption growth in developing countries slows down (1).
Currently the leading dairy exporter in New Zealand with 32% followed by the EU at 24%, with the United States and Australia having a 12% and 6% share respectively. In the coming ten year export shares are projected to ‘increase slightly for the United States the European Union and Argentina’ (1).
In the coming period the EU is also projected to remain the main global cheese exporter accounting for 37% of global exports by 2027. The EU is projected to increase its share of global SMP exports from 15% to 16% of world exports by 2027 (1).
Overall according to the OECD/FAO analysis Oceania producers remain the best placed to serve this market (1). Nevertheless since 2010 EU exports of dairy products to China have shown strong growth in both absolute and % terms (2).
EU Dairy Exports to China
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | % change 10-17 | |
| 0401 Liquid milk | 8,211 | 25,386 | 63,782 | 117,316 | 203,884 | 311,685 | 391,242 | 380,570 | +4,535% |
| 0402 Milk powders | 27,366 | 34,272 | 35,927 | 68,950 | 78,458 | 97,004 | 99,242 | 117,979 | +331% |
| 0403 Butter milk etc | 1,220 | 1,655 | 2,377 | 3,219 | 4,153 | 26,800 | 19,291 | 32,919 | +2,598% |
| 0404 Whey | 96,543 | 142,867 | 146,835 | 169,216 | 151,992 | 162,900 | 160,788 | 169,010 | +75% |
| 0405 Butter | 1,538 | 1,780 | 2,023 | 3,105 | 4,543 | 18,387 | 18,394 | 13,435 | +774% |
| 0406 Cheese | 2,301 | 2,612 | 3,860 | 4,935 | 6,820 | 9,736 | 13,750 | 17,997 | +682% |
Source: EC, Market Access Data Base http://madb.europa.eu/madb/statistical_form.htm
While the OECD/FAO maintains that while demand for fresh dairy products is stronger than for processed dairy products ‘higher costs of transport and storage of fresh products generally limit such trade’ (1). However this does not appear to have been the case for EU liquid milk exports to China (the major global dairy importer) which since 2010 have grown a staggering 4,535% (2). By 2016 China was taking fully 36.3% of total extra EU liquid milk exports (2). This remarkable growth in EU liquid milk exports is however flattening out (declining 4.7% overall in 2017 and 2.7% in trade with China), with according to the OECD/FAO analysis these EU exports expected to stabilize in the coming decade (1).
However since 2010 EU exports of liquid milk to ACP markets have more than doubled, increasing 124% (118% to sub-Saharan Africa). By 2017 ACP markets were taking 179,730 tonnes of EU liquid milk exports (18% of total extra-EU liquid milk exports), up from 80,203 tonnes in 2010. Exports to sub-Saharan Africa rose form 75,978 tonnes to 161,110 tonnes. The main growth markets in sub-Saharan Africa over this period were Southern Africa and Central Africa, but with West African markets remaining the most important (41% of exports to sub-Saharan Africa).
There has also been a strong growth in EU liquid milk exports to Caribbean ACP countries, which increased from 4,225 tonnes in 2010 to 18,576 tonnes in 2017, almost 2% in extra-EU liquid milk exports.
EU Liquid Milk Exports to ACP Countries (tonnes)
| 2010 | 2017 | % change 2010-17 | |
| West Africa | 47,431 | 65,915 | +39% |
| Southern Africa (SADC EPA) | 1,112 | 38,275 | +3,342% |
| Central Africa | 22,866 | 48,661 | +113% |
| East African Community | 152 | 249 | +64% |
| Other Africa | 4,397 | 18,576 | +82% |
| Caribbean | 4,225 | 18,576 | +340% |
| Sub-Total | 80,203 | 179,730 | +124% |
Source: EC Market Access Data Base http://madb.europa.eu/madb/statistical_form.htm
The OECD/FAO analysis notes how ‘the relatively high prices of milk fat may induce a substitution of milk fat by vegetable fat (e.g. fat filled milk powders for certain uses and destinations’ (1). However the OECD/FAO analysis does not include an analysis of developments in trade in fat filled milk powders in its analysis of global dairy sector trade trends.
Currently, non-tariff trade measures, from India’s import restrictions to targeted import bans in Russia, Mexico and Indonesia continue to impact on the global dairy trade.
| Comment and Analysis Developments in production and trade in skimmed milk powders are probably the most important dairy sub-category for ACP countries, particularly in Africa. It is the trade in SMPs and FFMP which provides the principal competition for domestic ACP milk producers. The role of EU SMP stocks in holding back the recovery in global SMP prices is thus a particular source of concern for ACP milk producers, especially in certain sub-Saharan African regions. OECD/FAO projections that the release of EU SMP stocks ‘may well limit the rise in SMP prices’ up to 2027 is potentially alarming is this could seriously undermine the commercial viability of efforts to develop local milk-to-dairy supply chains in Africa.The effects of general EU dairy support programmes (particularly the maintenance of ‘coupled’ support payments) and EU storage policies for SMP are being intensified by the trade and investment strategies being pursued by EU dairy companies. This has included: · investment in expansion of milk powder production capacity; · investment in innovations in milk powder formulations to target particular market · the development of low cost investment models to increasingly serve expanding · the growing investment presence of EU dairy companies in Africa, particularly in In this context SMP price trends are likely to be an important conditioning factor for national efforts to promote local diary sector development across Africa over the next decade. This does not bode well for the prospects of small scale milk producers on the continent. Indeed it is likely to see an extension of the current trend whereby African dairy sector development takes place on a basis largely if not entirely delinked from local milk production. In addition sub-Saharan African and wider ACP markets have not been immune to the increase in EU exports of liquid milk. This is largely linked to the technical innovations which have extended the shelf life of long life liquid milk, making inter-continental trade in liquid technically viable. The issue then becomes one of securing cheap freight rates for exports in a context where middle class African consumers show a marked preference for imported EU dairy products on the basis of their perceived higher quality and food safety standards. This needs to be seen in a broader context where EU dairy producers are increasingly dependent on export markets for their continued commercial well-being. |
Sources:
(1) FAO ‘Agricultural outlook 2018-2027 – Dairy and dairy products’, 2018
http://www.fao.org/docrep/i9166e/i9166e_Chapter7_Dairy.pdf
(2) EC, Market Access Data Base
http://madb.europa.eu/madb/statistical_form.htm