Growth in EU dairy exports overhangs ACP dairy sector development

Summary
The expansion of EU milk production has fuelled increased dairy exports. Except for fat-filled milk powders and to a lesser degree skimmed milk powder, ACP countries are not major markets for EU dairy exports. However the small size of national ACP dairy markets means even relatively small volumes of EU exports can disrupt efforts to expand local milk-to dairy supply chains. What is more the strongest growth in EU dairy exports has been in fat filled milk powders and skimmed milk powder, where ACP markets are more significant and where the dangers of displacement of local milk supplies are highest.

With EU milk production projected to increase 14.6 million tonnes in the next decade and with 50% of this expanded production needing to be exported, concerns are increasing over the impact this could have on efforts to develop milk-to-dairy supply chains in ACP countries.

The latest EU report on medium term prospects for EU agricultural markets shows an expansion of EU milk deliveries to dairies of 8% between 2013 and 2016, delivering an extra 11.3 million tonnes of milk to the market (see Annex: Table 1). (1) This expansion of EU milk production had some major trade consequences.

  • EU Cheese exports

Despite the loss of the Russian market, which accounted for 1/3 of extra-EU cheese exports in 2013, (2) over the 2013-15 period there was only a 9% decline in total EU cheese exports, (3) with the EC projecting a return to 2013 levels of cheese exports in 2016. EU exporters have thus done a remarkable job in finding alternative markets for cheese exports. (1)

While overall ACP markets for cheese are of marginal importance to EU exporters, three ACP countries were amongst the top 30 destination for extra-EU cheese exports over the 2013-15 period, namely South Africa, Angola and the Dominican Republic. EU Exports of cheese to South Africa grew 76% between 2013 and 2015, with a further  26% increase from January to September 2016. (3)

Similarly EU cheese exports to the Dominican Republic grew 65% between 2013 and 2015, with a further 82% increase from January to September 2016. Exports to Angola meanwhile have declined, as the oil price fall squeezed imports, taking it out of the top 30 destinations for extra EU cheese exports in 2016. (3) (see Annex: Table 2)

  • EU Skimmed Milk Powder exports

The strongest growth in extra EU bulk dairy commodity exports was in skimmed milk powder (SMP), these grew a massive 68%, despite the activation of both EU support to private storage programmes and the opening of intervention buying for SMP. In 2015 EU public storage programmes for SMP   took fully a third of EU annual production off the market (some 355,000 tonnes equal to almost 4 million tonnes of EU milk production). (1)

ACP markets have become an increasingly important destination for EU SMP exports since 2009, although this importance has receded in recent years as the trade in fat filled milk powders targeting low income consumers in Africa has been developed (see later section).

Three ACP countries are amongst the top 30 destinations for EU SMP exports: Nigeria, Ghana and South Africa. Exports to Nigeria have in part been affected by the oil price slump and in part by the rise in exports of bespoke fat-filled milk powders, which increased 71% between 2012-2015 (see Annex: Table 7). By 2015 Nigeria was the single largest market for EU exports of fat filled milk powders taking fully 87,439 tonnes, over 10% of EU exports in this product category (4).

Exports of SMP to Ghana grew 64% between 2013 and 2015 and were up a further 11% from January to September 2016 compared to the corresponding period in 2015. Exports of SMP to South Africa meanwhile more than doubled between 2013 and 2015, before falling 17% over the January to September period 2016, compared to the corresponding period in 2015 (see Anne: Table 3).

  • EU Butter exports

The second largest area of increase in EU dairy bulk commodity exports between 2013 and 2015 was in butter, which increased 89%, on the back of a resurgence in global demand. (1) Once again ACP markets are relatively marginal in EU butter exports, although here again 3 ACP countries appeared amongst the top 30 export destinations for extra EU butter exports over the 2013-15 period, namely  South Africa, Angola and Senegal.

EU butter exports to South Africa grew 222% between 2013 and 2015, with a  further 95% increase from January to September 2016. Exports to Angola and Senegal grew 44% and 33% respectively over the same period, but fell out of the top 30 destinations ranking in 2016 (see Annex: Table 4).

  • EU Whole Milk Powder exports

The 2013-15 period saw more modest increase in EU exports of whole milk powders of 3.9%, with EU milk production increasingly being used in products with stronger demand growth trends and price prospects.

Overall 12 ACP countries are in the top 30 destinations for EU WMP exports, with Nigeria and Angola being the leading ACP export destinations. Amongst the top 30 destinations, declines in exports to oil producing countries, following the collapse in the oil price dominate the trend in EU WMP exports to ACP countries. These declines in export volumes to oil producing countries dwarf the continuing increase in exports to other ACP countries. In 2013 the ACP countries amongst the top destinations for EU WMP exports accounted for 26.6% of total EU exports, by 2015 this had  fallen to 23 % and 22.4% from January to September 2016. (see Annex: Table 5)

  • EU Whey exports

The 2013-15 period also saw a more modest increase in EU exports of whey of 4.4%. Some 4 ACP countries are amongst the top 30 destinations for extra-EU whey exports, namely South Africa, Nigeria, Ghana and Ivory Coast. Exports to these four countries grew some 30% over the 2013-15 period, but shrank in the first 9 month of 2016 compared to the corresponding period in 2015. This decline in exports to the top ACP destinations occurred despite an acceleration in the growth of overall EU whey exports. (see Annex: Table 6)

  • EU exports of fat Filled Milk Powders and Fresh Dairy Products

Two major noteworthy trends in EU exports have been the growth in EU production and export of fat filled milk powders (FFMP) and the rapid expansion in the last 2 years of fresh dairy product exports.

The growth of exports of fat-filled milk powders has been particular focused on sub-Saharan Africa. Fat filled milk powders (HS code 190190) consist of a blend of high quality skimmed milk powder and vegetable fat, normally either palm or coconut oil. (5) According to the EC ‘except in crisis times’ FFMP are cheaper than WMP, since the vegetable fats are generally cheaper than dairy fats.  According to the EC ‘Fat-filled milk powders are well adapted to countries with high temperatures and have a longer shelf life than WMP. (1) This makes them ideal for dairy product manufacturers targeting low income markets in sub-Saharan Africa.  Five of the top 10 destinations for EU fat-filled milk powder exports are ACP countries, four of which are in West Africa (see Annex: Table 7), with 9 ACP countries in all taking more than 10,000 tonnes in 2015 (6).

The EC has identified West Africa as the main market for EU fat filled milk powder exports, (1) with ECOWAS countries plus Mauritania taking  27% of EU exports in this product category (HS 190190) in 2015. (6)

What Are Fat filled Milk Powders?

The evolution of dairy product prices and dairy product applications has created new demands in terms of product development. This has required the development and commercial launch of both new milk powder  product lines and lower cost milk powder product lines. This has seen the greater use of vegetable fats in dairy ingredients.

Fat filled milk powders (FFMP) are produced by blending high quality skimmed milk powder with palm or coconut vegetable fat. This exploits changes in the pricing of milk and milk fat, to produce a wide range of lower cost inputs which can be used in the manufacturing of dairy products.  The main applications for fat filled milk powder include: Ice cream, bakery, confectionery, chocolate, biscuits, bread, cookies, dairy, processed cheeses, evaporated & sweetened condensed milk, fruit and flavored beverages, soups, sauces.

These fat filled milk powders use the same processing equipment to produce high quality finished products at lower cost than ordinary dairy production. It allows the formulation of bespoke milk powders designed for specific end-users. Recently there has been a significant level of new investment in the EU in expanding fat filled milk powder production capacity. (5)

The 55% growth in the last two years of EU exports of fresh dairy products mainly in the form of liquid UHT milk, has mainly focused on China (over a 12 fold increase since 2011) (7).  This has been driven by cheap return freight rates to China. However exports of fresh dairy products have also increased to ACP countries.

In West Africa for example, between 2011 and 2015 EU liquid milk exports rose 33% (see Annex: Table 9), while liquid milk exports to South Africa increased over 21 fold (see Annex: Table 10),  to a level equivalent to 25% of the EU liquid milk exports to West Africa, up from a mere 1.6% in 2011.

Looking forward, the latest EC medium term prospects report indicates EU milk deliveries to dairies are set to continue to increase up to 2026 at a rate of 0.8% per annum. Between 2016 and 2026 this is projected to deliver an extra 14.6 million tonnes to the market.  It is estimated that fully 50% of these additional milk deliveries to dairies will need to find their way into dairy products for export. This contrasts to only 12% of additional US milk production finding its way onto export markets.

This is projected to give rise to a further:

  • 53% expansion of EU skimmed milk powder exports;
  • 34% expansion of EU cheese exports;
  • 30% increase in EU whey exports (production of which is intimately closely linked to trends in EU cheese production);
  • 28% increase in EU butter exports; and
  • 18% increase in EU whole milk powder exports. (see Annex: Table 8).

The trade in liquid milk exports will be strongly influenced by developments in freight rate charges, but the EC projects a slowdown in the expansion of this trade. The EC see’s EU milk being replaced on the shelves in China by ‘local milk or milk coming from geographically closer origins in Oceania’. (1) Nevertheless the EC expects opportunities for EU fresh dairy products to emerge elsewhere with exports expected to reach 2 million tonnes of milk equivalent exports by 2026. (1)

  • Projected trends in the Eu dairy trade with Africa

In terms of trade with Africa, while the yearly per capita intake of dairy products could increase in certain regions, overall per capita consumption is expected to remain stable at below 50 kg per annum. This per capita consumption is less than 42% of the global average. Overall the main driver of growth in consumption of dairy products in sub-Sharan Africa is seen as being population growth.  In this context, consumption growth of dairy products in sub-Saharan Africa is expected to increase much faster than in the past decade. (1)

More significantly sub-Saharan Africa dairy product consumption is projected to grow faster than African milk production, leading to an average expansion of trade by close to 2% every year. By 2026 Africa  as whole, is expected to take account for around 20 % of world dairy imports. (1)

According to the EC this will largely consist of powders, not only SMP and WMP, but also the cheaper fat-filled milk powders. West Africa is already the main destination for EU exports of fat-filled milk powderespecially Nigeria and Senegal’. The EC maintains that even ‘without accounting for a change in consumption patterns, population growth in this region (West Africa) will drive a significant increase in demand for this product’.  This in turn will result in ‘a higher use of SMP within the EU for the elaboration of such products’. (1)

This trade is also likely to be accelerated by EU dairy companies seeking to get closer to their industrial users and increasingly formulating their fat filled milk powders to the specifications of particularly industrial users of dairy ingredients.

Sources:
(1) EC, ‘EU agricultural outlook: Prospects for EU agricultural markets and income 2016-2026’, December 2016
https://ec.europa.eu/agriculture/sites/agriculture/files/mp-mto-2016-fullrep_en.pdf

(2) EC, Market Access Data Base (EU28, country partner – ALL, product code 0406)
http://madb.europa.eu/madb/statistical_form.htm

(3) Milk Market Observatory, ‘Year-to-date EU Exports…’ various years and months
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/eu-extra-trade_en.pdf

(4) EC, Market Access Data Base (EU28, country partner – All, product code 190190)
http://madb.europa.eu/madb/statistical_form.htm

(5) Alpen Dairies, ‘Fat filled milk powder: A full cream milk powder replacement’
http://www.alpendairies.com/fat-filled-milk-powder.html

(6) EC, Market Access Data Base (EU28, country partner – ALL, product code 190190)
http://madb.europa.eu/madb/statistical_form.htm

(7) EC, Market Access Data Base (EU28, country partner – ALL, product code 0401)
http://madb.europa.eu/madb/statistical_form.htm

Comment and Analysis

The impact of EU dairy exports on ACP dairy sector development varies greatly from country to country and region to region. This is strongly influenced by local patterns of production and the structure of dairy market demand. In West Africa for example, the market for fresh liquid milk is limited, with mass market demand taking the form of powder milk sachets. In other regions of Africa, direct consumption of powdered milk is limited.

Even in West Africa there are variations in fresh milk consumption, with local fresh milk production accounting for 30% of the market in Senegal, compared to a regional average of 10%. The impacts of EU patterns of dairy exports and dairy sector investment  therefore need to be assessed at the country level.

Overall, with the exception of fat filled milk powders, ACP markets are not major destinations for EU dairy exports. However, the small size of national ACP dairy markets (African per capita consumption is less than 17% of EU per capita dairy product consumption), means even small volumes of EU dairy product exports can have profound consequences for the development of local supply chains.

As the Managing Director of Namibia Dairies has pointed out, Namibia’s entire annual milk production is equivalent to the milk powder output of one Irish milk powder plant over a 3 day period.  If even a small volume of expanded Irish milk production is exported to Namibia and replaces local milk production, then this could profoundly set back efforts to develop local milk- to-dairy supply chains.

Given the longer term prospects for global dairy demand and global milk production (which sees a milk production deficit emerging by 2050), this situation has led milk industry leaders in small ACP countries to call for the pursuit of responsible trade and investment policies by the EU dairy industry. This is a call which EU dairy companies such as Arla, have begun to take on board, with their proposal for the establishment of a Code of Conduct for Responsible Corporate Trade and Investment in African Dairy Sector Development.

This is particularly important for, as the European Commission implies in its December 2016 Prospects report, the competitive position of EU exporters on the Chinese market could come under increasing pressure in the coming period. This could see EU dairy exporters focusing increasingly on sub-Saharan African markets, where import demand is projected to increase at 2% per annum, as local milk production lags behind the expansion of consumer demand.

This could well give rise to a situation where EU dairy sector trade and investment in sub-Saharan African provides and incentive for ‘processers to use imported powdered milk, instead of sourcing locally, in the production of other dairy products’, with this leading to a situation where the EU dairy sector ‘become an integrated part of the complex systemic factors, which is linked to the continuous underdevelopment of the dairy sector by amplifying the current difficulties’ (see companion article ‘Arla’s Senegalese milk powder repackaging plant begins operations’). Ideally this situation needs to be avoided, particularly in ACP countries where dairy sector development initiatives have enjoyed success and have expanded local milk supplies to local dairies.

This is not to deny that expanding African demand for dairy products will require increased imports of dairy raw materials and final products from the EU. However this EU corporate engagement needs to be developed in ways which leave space for the development local milk production. This is essential for otherwise when the projected global milk shortages emerge African consumers will be left holding the baby of rising prices with no alternative but to continue to import or go without.

Annexes:

Table 1:

Growth in EU milk deliveries to dairies and exports of dairy products  (‘000 tonnes) 2013-2016 and % change

2013 2014 2015 2016 % change 2013-16
Milk deliveries to dairies 141,900 148,400 152,200 153.200 +8.0%

Source: EC, ‘EU agricultural outlook: Prospects for EU agricultural markets and income 2016-2026’, table 9.19 , December 2016

https://ec.europa.eu/agriculture/sites/agriculture/files/mp-mto-2016-fullrep_en.pdf

Table 2:

Total extra-EU Cheese exports and exports to ACP countries amongst the top 30 extra-EU export markets (tonnes)

2013 2014 2015 % growth 13-15 Jan-Sept 2015 Jan-Sept 2016 % change
South Africa 5,341 7,597 9,418 +76% 7,758 9,802 +26.3%
Dominican Republic 2,639 3,225 4,366 +65% 3,072 5,595 +82.1%
Angola 2,906 3,582 2,875 -1% n.a. n.a. n.a.
Total EU exports 787,193 727,285 718,886 -9% 524,387 666,239 +27%

Source: Milk Market Observatory

Table 3:

Total extra-EU SMP exports and exports to ACP countries amongst the top 30 extra-EU export markets (tonnes)

2013 2014 2015 % growth 13-15 Jan-Sept 2015 Jan-Sept 2016 % change
Nigeria 27,284 34,281 22,673 -7% 17,137 18,886 + 10%
Ghana 6,987 6,349 11,479 +64% 6,868 7,652 +11%
South Africa 3,181 7,394 6,475 +104% 5,596 4,093                  -17%
Total EU exports 406,601 657,160 683,686 +68% 527,516 478,474

Source: Milk Market Observatory

Table 4:

Total extra-EU butter exports and exports to ACP countries amongst the top 30 extra-EU export markets (tonnes)

2013 2014 2015 % growth 13-15 Jan-Sept 2015 Jan-Sept 2016 % change
South Africa 423 846 1,363 222% 1,052 2,047
Angola 806 806 1,162 44% n.a. n.a. n.a.
Senegal 572 678 762 33% n.a. n.a. n.a.
Total EU exports 102,122 121,856 135,333 32% 98,348

Source:  Milk Market Observatory

Table 5:

Total extra-EU WMP exports and exports to ACP countries amongst the top 30 extra-EU export markets (tonnes)

2013 2014 2015 % growth 13-15 Jan-Sept 2015 Jan-Sept 2016 % change
WEST AFRICA
Nigeria 38,467 35,958 27,757 -28% 22,326 14,625 -34%
Ivory Coast 6,234 5,585 7,621 +22% 4,961 6,960 +40%
Senegal 4,669 4,682 5,335 +14% 4,121 5,814 +41%
Mali 4,116 4,097 3,385 -18% 2,548 4,795 +88%
Guinea 3,300 3,438 5,154 +56% 3,447 4,611 +34%
Mauritania 2,679 3,879 n.a. 3,049 4,242 +39%
Cape Verde 2,681 n.a.
Sub-total 56,786 56,439 53,131 -6% 40,452 43,728 +8%
CENTRAL AFRICA
Angola 15,828 15,285 13,246 -16% 9,020 8,284 -8%
Cameroon 3,680 3,579 **4,818 +31% 3,936 4,158 +6%
DRC 4,953 6,205 °2,734 -45% 2,447 3,339 +36%
Gabon 3,331 3,702 3,695 +11% 2,957 2,992 +1%
Congo 3,356 2,859 n.a.
Sub-total 31,148 31,630 24,493 -31% 18,360 18,773 +3%
CARIBBEAN
Dominican Republic 11,768 10,408 12,278 +4.3% 8,244 10,889 +32%
Total EU exports 374,302 392,803 389,061 3.9% 302,852 328,093 +8.3%

Source: Milk Market Observatory, ° January to November 2015, ** January to December 2015

Table 6:

Total extra-EU Whey exports and exports  to ACP countries amongst the top 30 extra-EU export markets (tonnes)

2013 2014 2015 % growth 13-15 Jan-Sept 2015 Jan-Sept 2016 % change
South Africa 6,064 5,771 6,689 +10% 4,894 3,887 -21%
Nigeria 2,548 2,276 3,906 +53% 2,520 2,980 +18%
Ghana 4,034 2,344 3,719 -8% 3,094 3,233 +4%
Ivory Coast 2,170 n.a. 1,793 n.a.
Sub-total 12,646 10,391 16,484 +30% 12,301 10,100 -18%
Total EU exports 515,349 526,589 537,777 +4.4% 400,324 470,551 +18%

Source: Milk Market Observatory

Table 7:

Top ten markets for EU fat filled milk powder exports (HS code 190190)

2002   2011 2012 2013 2014 2015 % change 2011-15
Nigeria 24,974 60,472 51,088 57,410 71,189, 87,439 +44.6%
Saudi Arabia 5,007 19,274 23,379 21,331 42,250, 77,305 +301.1%
Russian Federation 25,363 26,201 37,247 57,241 75,779 46,741 +78.4%
Senegal 22,034 25,395 34,616 37,128 43,247 40,837 +60.8%
UAE 2,317 9,195 9,316 15,597 26,586 31,347 +240.9%
Mauritania 2,155 13,456 18,697 19,353 26,534 28,233 +109.8%
Malaysia 13,106   15,761 14,476 11,631 18,111 22,902 +45.3%
Oman 1,134 3,926 16,579 17,419 18,564 21,484 +447.2%
Kenya 94 29,179 11,619 7,213 16,181 21,031 -28%
Mali 11,020 8,717 10,618 12,962 17,375 19,568 +124.4%
Sub-total top 10 107,204   211,576 227,635 270,685 355,816 396,887 +87.6%
Sub-total ACP top 10 60,277   137,219 126,638 147,466 174,526 197,108 +43.6%
% share ACP top 10 56.2%   64.9% 55.6% 54.5% 49.0% 49.7%
Total EU 351,599   558,387 609,109 618,884 780,514 852,311 +52.6%
Top 5 ACP markets % total EU 17.1%   24.6% 20.8% 23.8¨% 22.4% 23.1%

Source: EC, Market Access Data Base (EU28, country partner – ALL, product code 190190) http://madb.europa.eu/madb/statistical_form.htm

Table 8:

Projected Growth in EU milk deliveries to dairies and exports by product (‘000 tonnes) and % change 2016 to 2026

2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 %
Milk deliveries 153,200 154,100 156,000 157,400 158,900 159,800 161,700 163,200 164,800 166,300 167,800 +9.5%
SMP 621 728 863 848 837 853 875 894 913 933 953 +53%
WMP 408 407 407 418 425 436 444 453 462 471 480 +18%
Cheese 783 816 885 907 928 954 974 994 1,013 1,033 1,053 +34%
Butter 214 232 230 230 241 240 249 255 262 269 274 +28%
Whey 551 574 601 613 633 643 660 674 689 706 716 +30%

Source: EC, ‘EU agricultural outlook: Prospects for EU agricultural markets and income 2016-2026’, table 9.19, 9.21, 9.22, 9.23,9.24, 9.25, December 2016, https://ec.europa.eu/agriculture/sites/agriculture/files/mp-mto-2016-fullrep_en.pdf

Table 9:

EU liquid milk and cream exports to West Africa (0401) 2011-2015 (tonnes)

2011 2012 2013 2014 2015
Mauritania 25,672 30,638, 35,853 30,032 32,529
Cape Verde 9,333 8,698 10,651 10,377 10,825
Senegal 6,246 6,241 6,245 6,229 6,492
Ivory Coast 1,109 1,511 2,168 2,998 5,250
Nigeria 2,843 3,035 3,477 3,661 3,531,0
Ghana 2,548 2,999 3,046 3,043 3,341
Niger 1,559 1,420 1,466 2,306 2,363
Guinea 976 933 1,239 1,232 1,465
Gambia 882 1,175 999 1,195 1,374
Mali 47 248 435 922 1,335
Togo 673 778 817 1,020 961
Benin 909 913 929 1,035 942
Burkino Faso 540 774 660 748 835
Guinea Bissau 82 324 348 469 532
Liberia 882 744 551 476 468
Sierra Leone 246 319 314 378 321
Total West Africa 54,547 60,750 69,198 66,121 72,564

Source: EC, Market Access Data Base (EU28, country partner – ALL, product code (0401) http://madb.europa.eu/madb/statistical_form.htm

Table 10

EU liquid milk and cream exports to South Africa 2011-2015 (tonnes)

2011 2012 2013 2014 2015
855 2,986 253 191 18,455

 

Key words:Dairy, South Africa, Nigeria Senegal, Angola, Namibia, Ivory Coast, Dominican Republic
Area for Posting: Dairy, SADC EPA, West African EPA, Central African EPA, Caribbean EPA