In my last blog I promised to provide some insight into how changes in the world economic order are reshaping the global dairy industry. There are many places to start with this but I thought I would start with one of the best indicators of change – milk production growth.
A week or so ago I read yet another comment comparing US milk production with the same period last year. The observation was something like “this has been the smallest % rise in monthly milk production since March 2010”. It looks like I will need to keep saying this endlessly – the percentage change in monthly milk production with the prior year is virtually meaningless! If the prior year was unusually high or low the percentage change can be deceptive. What is more important is the underlying trend – what direction is production moving and why. Xcheque uses a standardisation technique to show this trend (“US milk production turns the corner” Dr Jon Hauser, 20th Nov 2010). The irony of the comments above is that US milk production has returned to a growth path after falling off sharply during the period November 2010 – January 2011.
Whilst monthly production variances are a misleading indicator, changes in annual production are a reasonable guide to industry trends. This week we published a new chart that shows the change in annual milk production for the major global dairy traders. This chart shows the year on year increase since 2005.
The peak years of milk production growth were 2005 and 2010 with increases of more than 4 billion litres. The low point was 2009 where the world stood still while everybody checked how much money they had left in their wallet - all except New Zealand who took a while to realise that extra milk production does not necessarily help to lift prices. 2011 is shaping up to be a record year. After only 4 months we are seeing production growth of almost 3 billion litres.
In the past 6 years the US has done the most of the heavy lifting, adding 10.4 billion litres to the total increase of 18.6 billion litres. During this same period the US has doubled exports from 3 – 4% of total milk production to 6 – 7%. The change is shown in the chart below.
Using the USDA’s wonderful database of dairy industry data, we have made an estimate of the volume of US milk going into the domestic and the export markets. This calculation has been corrected for annual stock movement. About 25% of US exports are cheese with the balance being mostly NFDM powder, or SMP to the rest of the world.
It is easy to see that since 2002 the US has developed an active interest in export markets. This has fuelled additional milk production with 40% of milk production growth being directed to export markets. The balance has supported an ongoing increase in domestic demand (linked to population growth).
So why this increased export activity? Like we will always say on these issues - follow the money. The charts below show the US internal domestic price for dairy commodities and the corresponding Oceania prices – a reasonable proxy for global trade prices. Also shown is the export volume of each commodity.
A close examination of these charts will show that prior to 2006 / 2007 the value of the export market lagged US domestic market prices. Cheese prices came into alignment in early 2006. Since then exports have risen and the internal US price has chased the international price - both up and down.
The US NFDM powder price has been in reasonable alignment with the Oceania SMP price for some time. Since 2003 the Oceania price has more often than not traded at a premium. Over this time there has been a general rise in export volumes but with periodic setbacks. The reason for this is shown in the chart for butter. It was not until 2007 that the international butter price caught up with US domestic prices. Export volumes immediately rose but then dropped again sharply during that latter part of 2008 when international prices crashed.
The relevance of butter to NFDM exports is that they are a co-product pair. Export sales of NFDM powder will not support milk production growth unless there is an outlet for the corresponding butter production. Historically there has been a strong domestic demand for butter in the US - creating surpluses of NFDM that have been pushed into storage or the export market. Reduction in EU export subsidies and stronger international demand has created a more balanced opportunity for US exporters. They have been quick to respond to this opportunity and it seems likely that their butter exports will continue to grow. (For reference a balanced sale of butter and NFDM powder would be roughly 1 tonne of butter and two tonnes of powder.)
These charts show very clearly that US dairy farmers and processors can and will respond to export opportunities if the price is right. Furthermore, they respond very quickly to price rises and falls - it just takes a small turn of the feed dial to add or subtract a billion litres to US and global milk production. Australian and New Zealand processors have always seen Europe as their primary competition for international markets. There is no doubt that they now have a nervous eye on the growing interest and capability of the US.
In my next blog I will take a look at how European dairy industry has changed and how the US and Europe have Oceania in something of a pincer movement. It simply isn't possible for Oceania to match the production growth rate of the US or Europe. That doesn't mean that Oceania won't be able to compete effectively but it will be difficult to maintain market share.