Summary
The recent expansion of EU SMP exports is set to continue, initially at current elevated level but subsequently at substantially expanded levels. By 2030 EU SMP exports are projected to be 65% above those witnessed in 2016. Throughout this period EU SMP prices are projected to be between 13% (beginning of the period) and 3% (end of the period) below world market SMP prices. This is likely to act as a drag on world market SMP price recovery. These price trends cannot be delinked from the high levels of EU public sector support to both public and private storage schemes for SMP. These public policy interventions schemes give rise to supply responses to low prices by EU diary companies which simply do not correspond with the normal functioning of markets. These high EU SMP export volumes and low prices overshadow national efforts in ACP countries to develop local milk-to-dairy supply chains. This is being compounded by the rapid growth in EU exports of fat filled milk powders (FFMP). These trade trends appear to be undermining efforts to expand local milk production in African countries in response to growing local demand for dairy products.
In terms of future EU dairy sector development, for ACP countries developments in EU production and export of milk powders (skimmed milk powder, fat filled milk powders and whole milk powder) constitute the most important trend. Imported milk powders can be used to benchmark local milk producer prices in many ACP countries, with local global milk powder prices having a major impact on local public and private sector efforts to develop milk-to-dairy supply chains in ACP countries (see companion articles ‘Fears over impact EU SMP stocks on global dairy prices being realized’, 2 November 2017 and ‘Report Paints Grim Picture for Prospects for Integrated Dairy Sector Development in Nigeria’, 12 October 2017).
The impact of the expansion of EU SMP exports in recent years has been particular acute for ACP countries given it has coincide with and indeed been driven by ‘the introduction of the Russian import ban’. The closure of the Russian market to imports of dairy products from the EU has been compounded by ‘a significant drop in Chinese purchases’ (1).
Currently global prices of skimmed milk powder are being strongly affected by the volume of stocks of milk powder being held in the EU (1). For most of 2017 stock levels of SMP hovered around 350,000 tonnes before rising to 375,000 tonnes towards the end of the year (3). This is a volume equivalent to fully three months of EU SMP production.
This gave rise to world market for SMP which, despite a slight recovery in the first quarter of 2017 showed a general decline throughout the year, to a level almost 30% below the March 2017 ‘highs’ (‘highs’ which were 55% below 2013 peaks) (3).
In the final third of 2017 EU SMP price fell below the level of the EU’s earlier intervention price, with this trend continuing into 2018, when SMP prices were on average 15% below the earlier EU intervention price. This saw production of SKM falling back 4.7% in the first 10 months of 2017, despite the resumption of growth in EU milk production (+0.8%) (3). Entering 2018 EU WMP prices were down around 12% compared to the preceding year.
Despite this poor global price performance EU exports of SMP were up almost 26.1% compared to 2016 export levels (4). This mainly saw a draw down on private stocks of SMP which had been accumulated with the assistance of EU aid for private storage schemes. Draw down from private storage schemes has also seen the expanded use of SMP domestically to produce fat filled milk powders (FFMP), for which sub-Saharan Africa constitutes a major market (taking almost half of FFMP exported to the top 10 export destinations and almost a quarter of total EU exports of FFMP see companion article ‘Growth in EU dairy exports overhangs ACP dairy sector development’, 16 February 2017).
According to the January 2018 EU Milk Market Observatory report on EU dairy exports to third countries, in the first 11th months of 2017 six ACP countries were in the top 30 destinations for EU skimmed milk powder exports, up from three for the whole of 2016, with exports to these ACP destinations up 39% in the first 11 months of 2017 when compared to the whole of 2016 (3).
ACP countries amongst the top 30 destinations for EU Extra-EU Skimmed Milk Powder Exports
| January-November 2017 | 2016 | % increase | |
| Nigeria | 23,677 | 22,924 | +3.3% |
| Ghana | 9,475 | 8,680 | +9.2% |
| South Africa | 6,525 | 5,207 | +25.3 |
| Dominican Republic | 4,033 | – | – |
| Kenya | 3,837 | – | – |
| Ivory Coast | 3,643 | – | – |
| Sub-Total | 51,190 | 36,811 | +39.1% |
| EU Total | 723,777 | 574,185 | +26.1% |
| % share ACP destinations | 7.1% | 6.4% |
Source: EC, Milk Market Situation’, 18 January 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/market-situation-slides_en.pdf
The EC suggests that if no sales are made from SMP intervention stocks in 2018, given the run down in privately held stocks, this could create scope for a recovery in EU SMP prices (1). However the EC acknowledges ‘SMP prices are expected to remain rather low in next 2 to 3 years’. Developments beyond this period will then depend on EU public policy decisions on the future of SMP intervention stocks. These public policy decisions will prove critical to both EU SMP price trends and overall export volumes.
Looking forward between 2017 and 2023 the EC is projecting a 14.8% expansion in skimmed milk powder production with the current elevated levels of SMP exports being maintained over the period.
This will involve marginal increases in 2018 and a 3% increase in 2019. The EC sees a recovery in both EU and world market SMP prices over the 2017-2023, but in the early years of the period EU SMP prices are still projected to be around 13% below world market price levels. However, the price differential is projected to fall dramatically between 2019 and 2022 to 6% in 2020 and 4% in 2022, as world market prices for SMP recover more strongly than EU market prices.
EU SMP Production, Exports, EU and World Market Prices (2015-2022) thousand tonnes (€/t)
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | +% 2017-23 | |
| Production | 1,538 | 1,561 | 1,492 | 1525 | 1550 | 1,623 | 1,681 | 1,713 | +14.8% |
| Exports | 692 | 575 | 793 | 798 | 820 | 787 | 763 | 782 | -1.4% |
| EU15 Price (€/t) | 1,862 | 1,789 | 1,800 | 1,783 | 1,953 | 2,213 | 2,456 | 2,540 | +41.1% |
| World price (€/t) | 1,951 | 1,802 | 1,845 | 2,046 | 2,242 | 2,353 | 2,573 | 2,646 | +43.4% |
| EU v WMP | -89 | -13 | -45 | -263 | -289 | -140 | -117 | -106 |
Source: EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, Table ‘SMP market projections for the EU, 2010-2030 (thousand tonnes)’, December 2017, https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf
From 2023 to 2030 the EC is projecting a 12.3% expansion in skimmed milk powder production, but with export volumes rising consistently over the period by a total of 18.5% by 2030. Prices of SMP are projected to rise between 2023 and 2030 period but at a much slower rate, with EU prices projected to be between 3 and 4% below world market SMP prices during this period (2).
By 2030 EU SMP exports will be 65% above the export volumes witnessed in 2016, while world market SMP prices are projected to be 67.4% above 2017 prices and EU prices 66.8% higher. Despite these price increases, these prices will still be below the high SMP prices experienced in 2007 and 2013, when in a number of ACP countries high dairy prices made it more commercially viable to launch initiatives to develop local milk-to-dairy supply chains (2).
EU SMP Production, Exports, EU and World Market Prices (2023-2030) thousand tonnes (€/t)
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | +% 2017-23 | |
| Production | 1,754 | 1,713 | ,1754 | 1,797 | 1,838 | 1,878 | 1,919 | 1,959 | +12.3% |
| Exports | 801 | 823 | 844 | 867 | 888 | 908 | 929 | 949 | +18.5% |
| EU15 Price (€/t) | 2,616 | 2,671 | 2,739 | 2,796 | 2,856 | 2,907 | 2,960 | 3,003 | +14.8% |
| World price (€/t) | 2,719 | 2,769 | 2,837 | 2,893 | 2,948 | 2,997 | 3,053 | 3,089 | +13.6% |
| EU v WMP | -103 | -98 | -98 | -97 | -92 | -90 | -93 | -86 |
Source: EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, Table ‘SMP market projections for the EU, 2010-2030 (thousand tonnes)’, December 2017, https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf
Beyond the direct exports of SMP the EC notes the growing use of SMP in the manufacture of Fat Fill Milk Powders (FFMP). According to research cited in the EC analysis, ‘the global market for FFMPs was estimated … at around 800 000 t in 2016’, with ‘around 500 000… consumed in Africa’. (1).
| What Are Fat Filled Milk Powders
FFMPs are a mix between dairy proteins and vegetable fat (often palm oil) with around 25 % protein content. The EU is the major global producer of FFMP accounting for almost two thirds of global production with much of the remainder being produced in Malaysia. Production in Malaysia largely occurs on the basis of imported SMP and whey. In the first 10 months of 2017 Malaysia took some 24,410 tonnes of EU SMP exports and 57,496 tonnes of whey (the third largest export destination for the EU). This was more than double total EU SMP exports to Malaysia in 2016 and in excess of the total volume of whey exported to Malaysia in 2016 (56,928 tonnes). |
According to the EC ‘African FFMP imports grew by 8 % per year in the last 10 years’, with the EU being ‘the main supplier of the African market’. The EC projects a continuation of this growth but at a slower pace. The EC notes while the trade in FFMP was developed to exploit a price differential between butter oil and palm oil, now ‘consumers are getting used to its taste’ (1).
EU fat filled milk powder exports (HS code 190190) to the Main Sub Saharan African Markets and Total (‘000 tonnes)
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | % change 2011-16 | |
| Nigeria | 60,472 | 51,088 | 57,410 | 71,189, | 87,439 | 66,009 | +9.2% |
| Senegal | 25,395 | 34,616 | 37,128 | 43,247 | 40,837 | 55,235 | +117.5% |
| Mauritania | 13,456 | 18,697 | 19,353 | 26,534 | 28,233 | 29,670 | +16.8% |
| Mali | 8,717 | 10,618 | 12,962 | 17,375 | 19,568 | 20,899 | +139.7% |
| Ghana | 8,053 | 9,858 | 12,587 | 7,597 | 10,352 | 12,102 | +50.3% |
| Ivory Coast | 4,405 | 4,758 | 7,259 | 8,725 | 10,206 | 10,441 | +137.0% |
| Angola | 7,514 | 6,800 | 7,301 | 7,851 | 8,378 | 4,896 | -34.8% |
| Cameroon | 2,864 | 1,609 | 226 | 4,195 | 2,566 | 2,930 | +2.3% |
| South Africa | 5,156 | 5,054 | 4,501 | 6,413 | 7,387 | 12,398 | +140% |
| Mozambique | 136 | 336 | 444 | 473 | 584 | 2,283 | +1,578.7% |
| Malawi | 665 | 435 | 831 | 3,508 | 842 | 2,316 | +248.3% |
| Kenya | 29,179 | 11,619 | 7,213 | 16,181 | 21,031 | 11,980 | -58.9% |
| Sub-total 12 ACP | 166,677 | 155,489 | 180.615 | 213,288 | 237,423 | 231,159 | +38.7% |
| Total EU | 558,387 | 609,109 | 618,884 | 780,514 | 852,311 | 895,698, | +60.4% |
| Top 12 ACP % total EU | 29.8% | 25.5% | 29.2% | 27.3% | 27.9% | 25.8% |
Source: EC Market Access Data Base
These EU FFMP exports to African countries are particularly heavily concentrated in West Africa to which they are ‘exported in bulk and then packed into small portions’. According to the EC several EU dairy companies have ‘invested in re-packing facilities in west Africa’. Consumer ready packaged sachets are then sold, which are re-constituted into liquid milk at the household level (1). This saw some exceptionally high rates of EU export growth in FFMP between 2011 and 2016, with exports really taking off after 2013. There has however been a variable trend in FFMP exports to Nigeria where the government makes more active use of trade policy tools and EU investment has been more cautious.
There has also been a dramatic expansion of EU FFMP exports to South Africa since 2013 and the emergence in 2016 of a growing volume of exports to neighbouring markets, notably Malawi and Mozambique.
EU exports of Whole Milk Powder (WMP) are stabilising in the context of declining EU share of global WMP markets. Since the EU is far less price competitive on global WMP markets the EU share of global WMP markets is expected to fall to 15% from 30% ten years ago (1). This will however still be in the context of a 21% expansion of EU WMP exports between 2017 and 2030 (2).
In 2016 sub-Saharan African markets took 18.2% of total EU WMP exports to the top 30 worldwide destinations for EU WSP exports, with Caribbean destinations taking a further 3.8% of EU WMP exports to the top 30 global destinations (3). This saw a decline compared to 2014 when sub-Saharan African markets took 2.6% of EU WMP exports and Caribbean markets a further 3.4%. Thus while ACP markets remain important in a difficult market context or EU WMP exporters, the EU’s position in these markets is eroding.
| Comment and Analysis It should be noted how the supply response of EU SMP exporters to low global prices is not to reduce exports but rather to take advantage of the renewed demand stimulated by the low prices to dispose of accumulated stocks held in private storage. This needs to be seen in a context where public sector support for private storage schemes is only provided for a limited period of time. The increased in EU exports of SMP from private storage schemes then contributes to sustained low SMP prices.At one level the most surprising development in EU SMP exports in 2017 was the emergence of Kenya as a top 30 destination for EU SMP exports. However given the corporate links between the French dairy producer Danone and Kenya’s largest dairy Brookside (5) this was perhaps to be expected.Looking forward there would appear to be little prospect of EU production and export volumes for SMP easing the pressures on African milk producers, who, in the absence of a managed dairy sector trade policies are likely to see prices offered producers benchmarked against low global SMP prices. SMP prices are currently being dragged down by the high volume of EU SMP stocks which have been accumulated with the benefit of public assistance to storage programmes. These storage programmes have helped sustain the growth in EU milk production associated with EU milk production quota abolition, building up stocks which at some point need to be exported, generally when low global prices provide a stimulus to import demand. The increased domestic market use of SMP provides little relieve to the situation of African milk producers since much of this increased usage is going into fat filled milk powder production for African markets. The establishment of re-packing facilities by EU dairy companies in African countries the suppliers consumer ready sachets of FFMP which can be reconstituted at the household level. The long shelf life of these sachets, gives powder based milk a distinct advantage over local fresh milk, particularly since individual sachets are financially accessible to low income households. We thus find growth in EU exports of FFMP have been particularly pronounced in countries where investment has recently been made by EU based dairy companies, notably in Ivory Coast (6,7) (+137.0% since 2011) and Ghana (8, 9) (+ 50% since 2011) and where EU dairy companies are long established such as Senegal (+117.5%). In the context of moves towards the implementation of EU economic partnership agreements, which include commitments on the elimination of quantitative restrictions on imports from the EU and restrictions on local sourcing regulations (through the ‘National Treatment’ provisions of the EPAs), sub-Saharan African dairy producers are likely to be increasingly exposed to growing volumes of EU SMP and FFMP exports, which could seriously constrain government and private sector efforts to promote local dairy sector development to capitalise on rising dairy market demand across sub-Saharan Africa. Indeed a particular problem can be seen in regard to the trade in FFMP, a new product not generally covered by dairy sector trade policy measures. In this context the tariff standstill provisions of the EPAs could come into play, preventing ACP governments from regulating this trade in FFMP powders in the interests of local efforts to promote milk-to-dairy supply chains. This would appear to be a particular problem in West Africa where the trade in FFMP is firmly entrenched. As previously indicated the impact of these trends in EU milk powder exports is particularly pronounced in West Africa, where imported powders are used in around 90% of all locally produced dairy products. However it is in East Africa where smallholder milk production is firmly established where the emerging trend towards increased imports of SMP and FFMP could come to have the greatest impact on the functioning of local milk-to dairy supply chains. Concerns also arise in regional markets in Southern Africa, given the use of imported milk powders in the regional market development strategies of South African dairy companies and the recent expansion of EU exports of FFMP to Malawi and Mozambique. In these countries trends towards the development of dairy processing industries based on imported milk powder rather than local milk production could easily become entrenched. This could then replicate the experience in West Africa where diary production based on imported milk powders dominates. Against this background across sub-Saharan Africa locally owned dairy companies which source milk locally to produce dairy products, may well need to rethink their strategies in regard to the utilisation of locally sourced milk and imported milk powders within their product range. They may wish to consider opting for the use of locally sourced fresh milk in high value dairy products aimed at the growing middle income market for dairy products, while utilising imported milk powders for the production of lower value dairy products for the mass market, where demand is also growing strongly. It would appear necessary for locally owned dairy companies concerned with the development of local milk-to-dairy supply chains to proactively review the use of locally sourced milk and imported milk powders in their product mix. This could help ensure greater financial viability in the medium term, in the face of growing EU corporate interest in dairy processing and packaging activities based almost exclusively on imported milk powder. These milk powders are often traded internationally within supply chains owned by a single corporate entity and therefore potentially subject to price manipulation, with broader market development strategies in mind. |
Sources
(1) EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, Full Text, December 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-fullrep_en.pdf
(2) EC, ‘EU Agricultural outlook for the agricultural markets and income 2017-2030’, Tables, December 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2017/2017-tables.pdf
(3) EC, Milk Market Situation’, 18 January 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/market-situation-slides_en.pdf
(4) EC MMO, ‘EU Dairy Exports to Third countries’, 11 January 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/eu-extra-trade_en.pdf
(5) Agritrade, ‘Danone’s acquisition of 40% share in Brookside Dairy confirmed’, 21 September 2014
http://agritrade.cta.int/Agriculture/Commodities/Dairy/Danone-s-acquisition-of-40-share-in-Brookside-Dairy-confirmed
(6) Agritrade, ‘FrieslandCampina to take over Ivorian dairy business’, 06 November 2014
http://agritrade.cta.int/Agriculture/Commodities/Dairy/FrieslandCampina-to-take-over-Ivorian-dairy-business
(7) Agritrade, ‘Arla launches turnkey milk powder packaging facility in Côte d’Ivoire’, 26 October 2013
http://agritrade.cta.int/Agriculture/Commodities/Dairy/Arla-launches-turnkey-milk-powder-packaging-facility-in-Cote-d-Ivoire
(8) Agritrade, ’Danone looking to expand in West Africa’, 18 January 2014
http://agritrade.cta.int/Agriculture/Commodities/Dairy/Danone-looking-to-expand-in-West-Africa
(9) Agritrade, ‘The evolving EU–Africa dairy trade: EU corporate responses to milk production quota abolition’, 4 September 2014
http://agritrade.cta.int/Agriculture/Commodities/Dairy/The-evolving-EU-Africa-dairy-trade-EU-corporate-responses-to-milk-production-quota-abolition