FAO Food Outlook report 2011

An extended period of favourable international prices has meant that publically financed inventories of dairy commodities have been drawn down and are now at minimal levels in the EU and the United States. Consequently, international dairy quotations for the coming year will remain particularly sensitive to climatic conditions in relation to pasture growth, the availability and price of fodder and feed, and their effect on milk production.

In spite of improved supply prospects and weakening demand, agricultural commodity market conditions remain fairly tight, which is the major factor underpinning prices. Production forecasts for nearly all key food crops in 2011 have risen steadily since the previous report in June.

General Summary

For cereals, while the forecast for ending stocks in 2012 has also been revised up significantly, larger anticipated inventories reflect not only improved production prospects but also expectations of a slowing demand growth because of the unfavourable macroeconomic environment. In spite of these developments, however, international prices of all commodities covered in this report continue to be high and, in most cases, above the previous year. Strong underlying demand in certain countries, where economic growth is robust, is price supportive. Aside from being high, most prices are also extremely volatile, moving in tandem with unstable financial and equity markets. Fluctuations in exchange rates and uncertainties in energy markets are also contributing to sharp price swings in agricultural markets.

Given all these uncertainties, it is difficult to predict how markets will evolve in the near-term. While there is some room for optimism that, for most commodities, prices could remain below their recent highs, the general picture still points to firm markets well into 2012. For most food commodities, next year’s production will have to increase in order to meet the expected demand, albeit moderately. However, if this demand were to rise faster than currently envisaged, which is a possibility even assuming a slow economic recovery, then a more significant production expansion will be required. The question therefore is: do the current market signals convey the correct information for producers to adjust their production plans for next year? More critically, will there be enough time for an adequate production response in the event of an unexpected surge in demand? Input costs, from fertilizers to energy, remain high, interest rates have climbed in many emerging economies, all of which could dampen production next year and, hence, draw down stocks and boost prices further. This year’s global food import bill is expected to approach USD 1.3 trillion, with the cost of food purchases for the Least Developed Countries (LDCs) soaring by over a third from last year.

Reducing market uncertainty may not be among the fastest remedies for lowering the number of hungry. Yet, letting international markets continue in their present state, volatile and unpredictable, will only aggravate an already grim outlook for world food security. This is the reason why world leaders have been dwelling at length on the issue of price volatility since the start of the year. Such discussions gained momentum in recent months as attention turned towards finding ways to improve the accuracy of supply and demand forecasts for major food crops as an important first step in promoting stable and transparent food markets.

Read the full report here: FAO Food Outlook2011

Dairy Market Summary

Following a peak in the first quarter of 2011, prices for most dairy products fell back for the remainder of the year. The price slide reflected a rise in export availability and a fall in the value of the Euro in relation to the US Dollar since July, which promoted competition among exporters, as import demand remained firm.

World milk production in 2011 is forecast to grow by 2 percent to 728 million tonnes. Most of the increase will come from developing countries, in particular Argentina, China and India. Output of milk will also increase in a number of developed countries, including in the EU, New Zealand and the United States. The continuing effects of drought may reduce output in some parts of Africa.

Economic growth and a desire for a more diversified diet in many developing countries are expected to sustain import demand in 2011 to 49.5 million tonnes of milk equivalent, an increase of 5.4 percent. Increased trade is anticipated for all major dairy products, although growth in butter will be muted, as some processors switch to more remunerative products. Overall, most of the main trading countries are likely to record an increase in sales, especially Argentina, Belarus, the EU, New Zealand and the United States.

An extended period of favourable international prices has meant that publically financed inventories of dairy commodities have been drawn down and are now at minimal levels in the EU and the United States. Consequently, international dairy quotations for the coming year will remain particularly sensitive to climatic conditions in relation to pasture growth, the availability and price of fodder and feed, and their effect on milk production.

MILK AND MILK PRODUCTS

Prices

International dairy product prices fall back from first quarter highs

Since reaching a peak in the first quarter of 2011, the FAO international dairy products price index (2002–2004=100) has trended downwards, dropping by 13 percent between March and October to stand at 204. The product most affected was whole milk powder (WMP), although skim milk powder (SMP) and butter prices also fell. WMP dropped by USD 1 100 per tonne, or 24 percent, from its March peak. Since March, butter has declined by USD 800 per tonne, or 17 percent, SMP by USD 500 per tonne, or 13 percent and cheddar cheese prices by USD 400 or 9 percent. The price slide of dairy commodities overall reflects a rise in export availability and a fall in the value of the Euro in relation to the US Dollar since July.

After an extended period of favourable international prices, publically financed inventories of dairy commodities are at minimal levels in the EU and the United States. Consequently, international dairy quotations for the coming year will be particularly sensitive to climatic conditions in relation to pasture growth and availability and price of fodder and feed, and to their effect on milk production.

Production

World dairy production forecast to grow by 2 percent in 2011, supported by gains in Asia

World milk production in 2011 is forecast to grow by 2 percent to 728 million tonnes. Much of the anticipated expansion is likely to accrue in Asia, where India, the world’s largest milk producing country, is expected to witness an output rise of 5 million tonnes to 121.7 million tonnes. Rising domestic demand is the main engine stimulating growth in the country, as India is largely absent from the international market for dairy products. Substantial increases in production are also anticipated in China and Turkey, spurred by brisk consumer demand. The milk sector in China, recovering from the 2009 tainted-milk scandal, rebounded by 10 percent in 2010 and despite rising costs, is expected to grow a further 7 percent in 2011, a reflection of the consolidation of the industry. In contrast, Japan may experience a limited contraction, in part as a result of the aftermath of the earthquake which struck the country this year.

In Africa, milk output may stagnate or even contract this year, as feed costs have been rising and pasture conditions have deteriorated from last year’s excellent conditions. The lingering drought in the Horn of Africa and the ensuing high cattle mortality rates are expected to depress production in Ethiopia, Kenya and Somalia. In the rest of the region, Egypt looks set to produce 6 million tonnes, little changed from 2010.

Rising incomes and strong international prices have favoured production growth in several countries in Latin America and the Caribbean. In most of South America, pasture conditions have been good so far this year and milk output has expanded in a number of countries, including Argentina and Uruguay, where it is on course to rise by 10 and 15 percent, respectively. In both cases, good returns on the international market have led to a greater use of concentrated feed, further increasing milk per animal yields. Elsewhere in the region, most countries are on track to maintain or slightly increase production compared with the previous year. An exception is Brazil, the region’s largest producer, where poor pasture conditions and high feed prices are expected to depress production by 2 percent.

In North America, milk production in the United States is forecast to rise to 89 million tonnes, partly as a result of dairy herd expansion in response to positive national and international demand. Production in Canada was stable at 8.3 million tonnes, within the limits set by the milk quota system.

In Europe, the EU is forecast to raise production by 1 percent to 156.4 million tonnes, as improved milk yields more than compensate for reduced cow numbers. While the sector remains subject to production limits, quotas are being raised by 1 percent a year in preparation for the system’s abolition in 2015. In the Russian Federation, last year’s drought induced a sharp contraction in the dairy herd, as severe feed shortages prompted producers to cull animals. Consequently, a second year of below average output is anticipated, with milk production expected to drop by 2 percent to 31.2 million tonnes. In neighbouring Ukraine, milk production has declined for a number of years and is expected to fall further in 2011. This trend reflects a movement out of dairying by former large collective farms, which has been only partly counterbalanced by a rise in family farms.

In Oceania, a prolonged period of high prices for dairy products on the international market and associated levels of profitability have stimulated milk production. In New Zealand, output during the 2010/11 season (June/May) was constrained by unusually wet weather, while in the current 2011/12 season, an increase in herd size combined with average weather is forecast to raise output by over a million tonnes to 17.5 million tonnes. In Australia, the ending of the prolonged drought has encouraged farmers to rebuild their dairy herds, but it will take a few years before they reach pre-drought levels. Nonetheless, milk production is expected to register a 3 percent increase in 2010/2011 (July/June), followed by more substantial growth in the subsequent season.

Trade

Adequate supplies lead to a weakening of international prices

World trade of dairy products is expected to continue expanding during 2011, reflecting strong international demand, reaching 49.5 million tonnes of milk equivalent. However, good export availabilities and a fall in value of the euro against the US Dollar led to some price decline during the year, as exporters competed for sales. Purchases by Asian countries are anticipated to be moderately higher with import demand being maintained or increasing in China, Indonesia, the Republic of Korea, the Philippines, Singapore and Thailand. Elsewhere, imports by Algeria and Egypt are also expected to grow substantially. On the export side, most of the main trading countries are likely to record an increase in sales, especially Argentina, Belarus, the EU, New Zealand and the United States.

Whole milk powder

WMP prices rose in the first months of the year, amid uncertainty about export supplies associated with low stocks and an extended period of very dry weather in Europe at the start of the production season. After reaching a high of USD 4 592 per tonne in March, prices fell to USD 3 475 per tonne by October. The decline accelerated during the second half of the year, when it became clearer that supplies would be adequate. World exports of WMP in 2011 are projected to be moderately higher than the previous year: at 2.2 million tonnes. Purchases rose with strong demand exhibited by the principal importers, Algeria, Mexico and Venezuela. For the exporters, Argentina and New Zealand will meet most of the additional sales associated with increased trade, as supply limitations and more profitable alternative uses are expected to curb exports from Australia and the EU.

Skim milk powder

SMP prices also declined during the second half of the year, although more moderately than those of WMP. From a peak of USD 4 000 per tonne in June, they dropped to USD 3 346 per tonne by October. World SMP exports are anticipated to rise for the fourth consecutive year and could reach 1 694 000 tonnes in 2011. Three-quarters of world exports are supplied by the EU, New Zealand and the United States. While all three are expected to increase shipments, the EU is anticipated to experience the largest gain, as the fall in value of the Euro against the US Dollar has opened up new opportunities for European traders. Furthermore, SMP exports play an important role in maintaining the EU milk market in balance, as overall internal demand is biased towards milk fat (for both butter and cheese production) rather than milk protein. Exports of SMP by the United States have grown substantially in recent years as domestic production milk has been stimulated by favourable international prices. As a consequence, the United States is currently the second supplier of SMP to the world market. Australia and New Zealand, which are respectively ranked third and fourth, are also expected to see exports grow. On the import side, SMP is central to the milk processing industry in many countries and, as such, market demand is widely spread. The principal markets are Algeria, China, Egypt, Indonesia, Malaysia, Mexico, the Philippines, Singapore and Thailand. Demand is expected to remain firm in these markets, overall. In the first half of the year, import figures showed particularly strong growth in purchases by Algeria and Mexico.

Butter

Butter prices also weakened in the course of 2011. From a record of USD 4 883 per tonne in March, prices fell to USD 4 075 per tonne in October, similar to the level of decline of its co-product, SMP. Trade in butter is forecast to be marginally higher in 2011, to stand at 884 000 tonnes. This is a consequence of increased trade by New Zealand and the United States being largely counterbalanced by a fall in sales from Australia and the EU. In the case of the EU, lower profitability for butter has led to more emphasis on using milk for cheese production. EU domestic prices of butter are, in any event, currently higher than international levels, limiting potential for exports. Furthermore, intervention stocks, which have in the past supported exports, are exhausted. In contrast, exports from New Zealand, which now supplies close to 50 percent of the international butter market, are expected to increase by 8 000 tonnes, mainly as a result of meeting the requirements of its traditional customers. Exports by the United States also grew, reflecting the profitability of converting surplus domestic milk supplies into butter (and SMP) for external markets. Demand for butter imports comes principally from Southeast Asia and Middle East countries and the Russian Federation and is expected to remain firm.

Cheese

Among the dairy commodities, only cheese prices were stable during 2011, staying around the USD 4 400 per tonne mark throughout the year, easing only in October to USD 4 029. Trade in cheese is forecast to grow by 5.5 percent in 2011, to 2 336 000 tonnes, sustained by robust import demand. The main markets are high income or oil exporting countries such as Algeria, Japan, Mexico, the Republic of Korea, and the Russian Federation.

Supplies to the world market come principally from the EU, followed by New Zealand, Australia and Belarus. In contrast to other dairy commodities, which are uniform products, cheese is traded in a wide variety of types, each with its own characteristics and in some cases, there are geographically specific limitations on its production. Therefore, it is more difficult to generalize about trends in trade and prices for this product. In fact, the prices quoted above refer to cheddar, which is just one type of cheese among the many traded. In the EU, higher profitability of cheese production compared with other dairy export commodities continues to lead to a steady growth trade, with the Russian Federation being a particularly important market. Sales from Belarus have also risen. In contrast, New Zealand, the second largest supplier to the market, has focussed more on supplying dairy processors with inputs (powder and butter fat) and, as a consequence, its exports of cheese have fallen.

 

Read the full report here: FAO Food Outlook2011

 

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