Food Processing Export Strategy

Transcription

1 Food Processing Export Strategy Cheese Action Plan Consultation Document - Draft Final - Project: Trade Enhancement Programme A (TEP-A Lot 2, Comp 4) Assignment: Policy and Capacity Building: Food Processing Export Council Author: Paul Baker Date: Disclaimer: The views and propositions expressed herein are those of the expert (Paul Baker) and do not necessarily represent any official view of the European Commission or any other organisations mentioned in the Report

2 Preface This report has been produced as part of an assignment to support capacity building of the Food Processing Export Council (FPEC) in order to ensure that the Council is able to perform and act as a qualified partner for the Ministry of Trade and Industry (MTI), representing and serving the development of the Egyptian food processing sector. The purpose of the report is to briefly analyse the export situation of the cheese sector and to put-forward suggestions for a possible series of actions to support cheese exports ( Action Plan ). In its current form, the report attempts to raise a number of relevant issues to be addressed by the industry, and policy-making and support institutions, as part of the development of an industry-wide medium-tern strategy for cheese exports. Finally, the reader should note that the views and propositions expressed in this report are those of the author and do not necessarily represent the views of the European Commission (funding agency), COPCA (contractor), the Egyptian Food Export Council (beneficiary) or any other organisation mentioned in the Report. Paul Baker i

3 Table of Contents 1. Introduction Food Export Strategy Recommendations Global context: diary and cheese developments Dairy sector situation in mid Dairy sector short-term prospects Demand side developments Supply side developments Processed cheese developments (European Union) Prospects for cheese in the European Union Prospects for cheese in Middle East and North Africa Trade patterns Global trade patterns Gulf Region trade patterns Global supply demand balancing Egypt s strategic positioning Brief overview of the Egyptian cheese sector Current export position Strategic issues Scenarios for future development Geographical market focus Other issues Outline cheese export action plan Current situation Strategy development: defining, agreeing and aligning priorities Overview of key issues and action areas Assessment of future prospects and scenarios for the cheese sector Enhancing awareness and information on international markets Image building and awareness raising Export market diversification Paul Baker ii

4 Index of Tables Table 1 Cheese consumption and growth by region... 6 Table 2 Per capita cheese consumption and growth by region... 6 Table 3 Cheese imports and growth by region... 7 Table 4 Cheese production and growth by region... 9 Table 5 Cheese exports and growth by region... 9 Table 6 EU15 production of processed cheese ( ) Table 7 EU15 exports of processed cheese ( ) Table 8 GCC: imports of cheese and curd (HS 0406) in Table 9 Egypt cheese exports: value Table 10 Egypt cheese exports: volume Table 11 Egypt cheese exports: average unit values Table 12 Egypt cheese exports: main markets by value Table 13 Egypt cheese exports: main markets by volume Table 14 Egypt cheese exports to COMESA Table 15 Egypt cheese exports to other sub-saharan Africa Table 16 Country specific tariff quotas for cheese applied by the EU Index of Figures Figure 1 Monthly index of international prices of dairy products (98-00=100)... 4 Figure 2 EU stocks of skim milk and butter... 4 Figure 3 Prices of milk in selected countries, and indicative world price... 4 Figure 4 EU export shares of world markets... 4 Figure 5 Outlook for the EU cheese market (million tonnes), Figure 6 Cheese trade flows (>= 10,000 tonnes) Index of Boxes Box A International investments in cheese production in MENA Box B: ESR recommendations for a brand orientated approach for white cheese Paul Baker iii

5 List of Acronyms ABARE ALEB CAP CIS COMESA EAC EFPS EGP Australian Bureau of Agricultural and Resource Economics Agricultural-Led Export Businesses Project (funded by USAID) Common Agricultural Policy (European Union) Commonwealth of Independent States Common Market for Eastern and Southern Africa East African Community Egyptian Food Processing Sector Egyptian Pound ESR Export Strategy Report ( Food Export Strategy Study PS137 Final Report, STEM-VCR, May 2006, for IMC) EU European Union EU-10 Member States that joined the European Union on May, 1st 2004 EU-15 Member States of the European Union before May, 1st 2004 FAO Food and Agriculture Organisation of the United Nations FAPRI Food and Agricultural Policy Research Institute FDI Foreign Direct Investment FP Food Processing FPI Food Processing Industry FPEC Food Processing Export Council FSR Food Sector Review ( Egyptian Processed Food Sector Review Final Report ECORYS-NEI, May 2005, for IMC) GCC Gulf Cooperation Council GOEIC General Organization for Exports and Imports Control IMC Industrial Modernisation Centre IPRT Inward Processing Relief Traffic MENA Middle East and North Africa MFN Most Favoured Nation MTI Ministry of Trade and Industry NDM Nonfat Dry Milk OECD Organisation for Economic Cooperation and Development SMP Skim Milk Powder SWOT Strengths, Weaknesses, Opportunities, Threats TARIC Integrated Tariff of the European Communities TEP-A Trade Enhancement Programme A ToR Terms of Reference TRQ Tariff Rate Quota WMP Whole Milk Powder Paul Baker iv

6 1. Introduction This Report is intended as a consultation document, providing background analysis of international and Egyptian cheese trade performance, leading to development of an outline Action Plan for cheese exports. Through the document a range of issues are raised that in the opinion of the author should be addressed as part of a comprehensive Export Strategy and Action Plan for the cheese sector. Deliberately, the document tries to focus on aspects that are specifically relevant for enhancing exports but it is recognised, at the same time, that improving the export performance of the cheese sector will require issues to be analysed and addressed throughout the entire sector value chain. With regard to the proposed elements of the Action Plan, they are not a comprehensive description of required actions, but rather are intended to be illustrative and to serve as a basis for promoting future discussion within the sector and other relevant stakeholders. As the starting point for this analysis, and the reasons underlying the choice of the cheese sector, stem from an earlier Food Export Strategy Report ; the recommendations from the Report are outlined in the following sub-section. Following from this, Section 2 provides an overview of the global context and developments in the sector; Section 3 examines Egypt s strategic export positioning; and Section 4 provides an outline Action Plan Food Export Strategy Recommendations The IMC: Food Export Strategy Report (May 2006) 1 has identified cheese as a product for which Egypt could reinforce its strong position in the area as a leading supplier of cheese and curds (especially processed cheese). This reinforcement could build upon the success that Egypt has already had in establishing itself as a regional hub of marketing oriented multinational cheese producers. The Strategy Report concerns itself primarily with 3 categories of cheese product: Processed (pasteurised processed cheese and spreads, cold packed cheese etc.), for which the export potential is considered to be in fast-growing markets including GCC, Russia and ex-soviet Republics, proximity markets such as Iraq, Libya, Sudan, Ethiopia, and perhaps the EU. The Strategy Report suggests that the success of Egypt in attracting FDI from major branded multinationals and, as a consequence, the strong competitiveness of the processed cheese sector could provide the springboard for development of Egypt as a regional hub supplier. Mozzarella di Buffalo (un-ripened soft cheese), for which potential exports markets include the mature markets of EU and USA. With rising prices for Mozzarella, reflecting inter alia supply constraints and rising costs for Italian producers, the Strategy Report suggests the possibility for Egypt to position itself as a low-cost competitor to Italy and/or as supply partner to Italian producers and distributors. Domiati/Domiata 2 (pickled soft cheese), for which the Strategy Report focuses on brand development and registration of a Domiati brand that could serve to unify the 1 Food Export Strategy Study PS137 Final Report, STEM-VCR, May Domiati is the most popular soft white cheese produced in Egypt. Paul Baker 1

7 Egyptian offer of soft white cheese 3. The markets offering opportunities for Egyptian branded soft white cheese are seen mainly to be in GCC, but may also include neighbours such as Sudan, or further away in South and South-East Asian minority markets and, even, USA (subject to proper market evaluation). However, in the face of existing strong local brands, the successful branding and promotion of Egyptian white cheese is seen as a prerequisite for penetrating markets in MENA region. The main activities (action plan) proposed in the Strategy Report to maintain and/or strengthen Egypt s export position in the cheese sector include: Brand development: the creation of a brand-orientated approach, especially for white cheese (e.g. creation of a protected designation of origin (POD) trademark for Domiati brand ) that could effectively differentiate the Egyptian product from generic and locally supplied products in export markets (particularly in GCC and MENA). Similarly, a brand orientated approach would be necessary to enter premium segments of the market for Mozzarella. Given the high costs and specialised skills required for developing sophisticated branded marketing strategies, the Strategy proposes a joint approach with an industry partnership with one of the major multinational companies already producing in Egypt 4. Marketing: Aggressive promotion of (branded) Egyptian cheeses particularly in Middle East and North Africa. With respect to soft white cheeses - such as Domiati creation of a strong brand identity is seen as a pre-requisite for export success given the existence of strong local brands. Further, the Strategy proposes adoption of a more aggressive promotional plan to be implemented in all main food retail chains in the Middle East. Export rebate: reflecting the fact that the processed cheese segment is highly dependent on imported raw materials, maintaining the export rebate is seen as important for ensuring that Egypt maintains its price competitiveness 5,6. Other, less sector specific measures, include improving export logistics infrastructure (particularly to GCC), and targeting the Iraqi market. It is in this context that the present document attempts to make some steps towards the development of an outline strategic action plan for the enhancement of Egyptian cheese exports. This reflects the need to go beyond the rather limited action plan contained in the ESR. Deliberately, given the limited time and resources available for this activity, the focus of the background analysis is upon developments in the global market place. It is clearly desirable that this analysis should, eventually, be accompanied by a complementary detailed analysis of the local (Egyptian) situation. 3 The Strategy Report also raises the possibility that one if the major multinational companies could play a leading partner role in this band development. 4 The Strategy Report specifically mentions Lactalis. 5 The Export strategy points to the fact that the price competitiveness of Egyptian processed cheese production (compared to regional competitors) stems from the relative cost of imported raw materials compared to domestic milk supplies. For example, Saudi Arabia has a more integrate dairy sector with cheese production more reliant on local milk production, which at the time of writing the Strategy Report was estimated to be significantly more expensive than imported raw materials used by Egyptian producers. 6 For cheese produced from locally produced milk supplies (e.g. Domiati), the Strategy Report suggests that the export rebate should be earmarked for upgrading the supply chain. Paul Baker 2

8 2. Global context: diary and cheese developments This section provides a brief overview of the current global situation in the cheese sector. Its purpose is to provide a background context in which to place the strategic considerations that will motivate the development of an outline action plan for Egyptian cheese exports Dairy sector situation in mid-2007 The global dairy sector has been under going a period of soaring prices. According to FAO estimates 7, between November 2006 and April 2007 the FAO s price index of traded dairy products rose by 46 percent (see Figure 1). Behind this aggregate figure, prices of skim milk powder (SMP) and whole milk powder (WMP) increased by 56 and 61 percent respectively. By contrast, price increases for cheese and butter were more modest, by 18 and 34 percent respectively. The slower growth in the world price of cheese (and butter) compared to other dairy products reflects the fact that trade between developed countries which is characterized by relatively flat demand and tariff rate quotas accounts for a much higher proportion of total world trade than is the case for other dairy products. These record prices are attributed to a combination of short-run factors and structural causes mainly affecting supply-side conditions. On the one hand, drought in Australia, suspension of milk powder exports by India, and the export taxes applied by Argentina are restraining export supply in the short term. On the other hand, European Union dairy policy reform is changing the structure of international markets as its export market share declines (see Figure 4). In this context, the rapid rise in prices for powdered milk observed since the autumn of 2006 is primarily attributable to the exhaustion of public stocks in the EU (see Figure 2). The high international price has meant that it has reached a level at which the indicative world price is at a level similar to that in the USA and EU, thus enabling them to export without subsidies (see Figure 3). Commentators suggest that this may act as a break on further prices increases. More important for the short-term future is, perhaps, the need for reconfiguration in the production balance of different dairy-based products. As the FAO points out prices of milk powders are now far too high relative to the other milk products. For example, the ratio of WMP to cheese prices has averaged about 0.85 in , but the ratio now stands at Market correction should bring those prices closer into line, as processors allocate more production to powders and less to other under-priced dairy products, eventually resulting in a weakening of milk powder prices 8. As a consequence, additional milk production is expected at least in the short run - to be allocated to other dairy products and away from cheese. 7 Food Outlook Global Market Analysis, FAO, June 2007, available at: 8 Ibid, footnote 7 Paul Baker 3

9 Figure 1 Monthly index of international prices of dairy products (98-00=100) Figure 3 Prices of milk in selected countries, and indicative world price Source: FAO, June 2007 Source: FAO, June 2007 Figure 2 butter EU stocks of skim milk and Figure 4 markets EU export shares of world Source: FAO, June 2007 Source: FAO, June 2007 Paul Baker 4

10 2.2. Dairy sector short-term prospects There is a great deal of uncertainty over the likely track of prices for dairy products in the short-term. According to USDA 9, the fundamental factors that have promoted the rapid escalation in dairy prices will continue to persist. Exportable dairy product supplies are not expected to grow significantly either from the major Oceania suppliers (Australia and New Zealand) or the EU and United States. In the United States, strong internal demand for dairy products such as cheese is diverting milk away from non-fat dry milk (NDM) production. The situation is similar in the EU, where the recent suspension of all EU export restitutions for dairy products is directly related to growth in internal consumption of cheese, while milk production is held steady by quotas. There is, however, an intuitive expectation that inevitably prices are cyclical and demand will flag particularly once the impact of these high prices are fully transmitted to consumers. Nevertheless, USDA concludes that it is difficult to envisage a scenario in which global prices in 2007 or 2008 drop dramatically to the EU intervention (support) levels or the lower U.S. price support levels Demand side developments 10 Global consumption of milk and processed dairy products has been rising steadily in recent years, driven by higher incomes and changing consumption patterns, particularly in major developing countries in Asia. Of the major dairy products, total world consumption of butter increased by 10.5 percent in the five years to 2006, cheese by 9.5 per cent and whole milk powder by 8.5 percent. Consumption of skim milk powder, however, was down by 9 per cent over the period. Increases in world consumption of dairy products were driven largely by increased consumption in China, India, the Russian Federation and the Ukraine. Continued strong economic growth and rising incomes in these countries particularly in China and India together with the adoption of more western style diets are expected to promote moderate growth in import demand for milk and dairy products over the medium term. World demand for the various dairy products has diverged over the past few years, with demand increasing for cheese relative to other products such as butter and skim milk powder. Increases in cheese production in response to growing demand have come at the expense of other dairy products particularly milk powder production. As a consequence of their lower availability relative to demand, prices of milk powders have risen strongly (see Section 2.1). Strong growth in global demand for cheese largely reflects rising consumer incomes, leading to increasing per person cheese consumption, particularly in the major developing countries of Asia and Eastern Europe. Robust income growth in these areas, and also in oil exporting countries of Africa and Latin America and the Caribbean have driven growing demand for dairy products (see Table 1 and Table 2). 9 USDA, Dairy: World Markets and Trade, Circular Series, FD 1-07, July 2007, available at 10 Information sources for this section include: Dairy outlook to , Australian Commodities, March 2007, ABARE Economics, available at: Some sections of the text are taken directly from these reports. Paul Baker 5

11 Table 1 Cheese consumption and growth by region Consumption 2005 Average annual growth rate of consumption Thousand tonnes Share of World World 18, % Western Europe 8, % North America 4, % Australia & NZ % Japan % CIS 1, % Other Eastern Europe % North Africa % Egypt % Sub Saharan Africa % Latin America 1, % Argentina % Brazil % Mexico % Asia & Pacific 1, % China % Korea % Turkey % Iran % Saudi Arabia % Source: FAO-OECD Agricultural Outlook Database (extracted from OECD Stat) and author s calculations Table 2 Per capita cheese consumption and growth by region Consumption per capita 2005 (kg) Average annual growth rate of consumption per capita World Western Europe North America Australia & NZ Japan CIS Other Eastern Europe North Africa Egypt Sub Saharan Africa Latin America Argentina Brazil Mexico Asia & Pacific China Korea Turkey Iran Saudi Arabia Source: FAO-OECD Agricultural Outlook Database (extracted from OECD Stat) and author s calculations Paul Baker 6

12 For many years Japan has been the world s large importer of cheese and has consistently accounted for around 20 per cent of world imports, or 200,000 tonnes a year. However, in 2005 the Russian Federation overtook Japan to become the world s largest importer of cheese.. With growth in consumption consistently exceeding production in the Russian Federation, cheese imports are expected to continue to rise strongly. Mexico and the Republic of Korea have also become relatively large importers of cheese (see Table 3). The OECD-FAO 11 and FAPRI 12 foresee that the medium-term outlook for the dairy sector will remain dominated by substantial expansion in global demand for dairy products. The strong demand will be driven by income and population growth in many regions of the world, and by changes in consumer preferences towards dairy products. Demand growth is projected to be strongest in the non-oecd zone, most notably in Southeast Asia, the Far East and North Africa. The steady growth in import demand and the gradual growth in global supplies are forecasted to generate upward pressure on dairy product prices over the medium term. Supported by the steady rise in global consumption, cheese prices would display relatively high prices over the medium term. These medium-term perspectives remain strongly dependent on the future development in some key markets such as Russia and East Asia. Furthermore, the trend towards further concentration and globalisation of the dairy industry, and greater differentiation of dairy products, is expected to make trade projections increasingly complex and dependent on dairy firms cost structure, production and marketing strategy 13. Table 3 Cheese imports and growth by region Imports 2005 Average annual growth rate of imports Thousand tonnes Share of World World 1, % Western Europe % North America % Australia & NZ % Japan % CIS % Russia % Other Eastern Europe % North Africa % Algeria % Egypt % Sub Saharan Africa % Latin America % Mexico % Asia & Pacific % China % Korea % Saudi Arabia % Source: FAO-OECD Agricultural Outlook Database (extracted from OECD Stat) and author s calculations 11 Agricultural Outlook , OECD-FAO, June 2006, available at: 12 World Dairy Products, FAPRI 2006 Agricultural Outlook, available at: 13 Source: Prospects for agricultural markets and income in the European Union , European Commission, January 2007, available at: Paul Baker 7

13 2.4. Supply side developments Developed country producers in Western Europe, North America and Oceania dominate global cheese production, accounting for around three-quarters of total production (see Table 4). The European Union together with Australia and New Zealand, also dominant cheese exports (see Table 5). However, in Australia, the current drought has sharply reduced dairy production and exports as dairy farmers reduce herds in order to control expenditures particularly the higher feed costs associated with reduced irrigation water allocations. Poor seasonal conditions are also evident in New Zealand, with limited growth in dairy production expected for Elsewhere, new suppliers such as Argentina and Ukraine are emerging as important exporters of dairy products, including cheese. Over the medium term, significant increases in world cheese production are projected in response to continuing strong growth in global cheese demand. ABARE 14 project that after 2009 growing cheese production and exports from major producers will lead to an easing in cheese prices. EU cheese exporters are expected to become more price competitive in global markets as the EU dairy industry is forced to become more efficient following reductions in subsidies under the revised Common Agricultural Policy. Although world demand for dairy products is expected to grow, a significant part of demand is expected to be met by domestic production. For example, increases in world milk production are expected as a result of the continued expansion of the dairy industries in China, India and Argentina. In these countries, new investment in dairy production has been spurred by rising average incomes, increasing domestic demand and higher world prices. Growth in dairy production in the major established producers, however, is expected to be relatively slow. In the United States, for example, growth in production is expected to be hindered by increased competition for grains (particularly for use in producing bio-fuels) and consequent higher feed costs. In Australia and New Zealand, dairy production is expected to grow moderately but is highly dependent upon on weather conditions. Apart from the EU, US and Oceania, Uruguay is also forecast to gain from the increase in cheese exports that are expected to grow by 23 % according to both OECD and FAPRI 15. Ukraine would remain an important exporter of cheese, although with export quantities highly dependant on Russian imports. 14 Source: ibid footnote Ibid, footnotes 11 and12. Paul Baker 8

14 Table 4 Cheese production and growth by region Production 2005 Average annual growth rate of production Thousand tonnes Share of World World % Western Europe % EU % North America % Australia & NZ % CIS % Russia % Ukraine % Other Eastern Europe % North Africa % Egypt % Sub Saharan Africa % Latin America % Argentina % Brazil % Mexico % Asia & Pacific % China % Turkey % Iran % Source: FAO-OECD Agricultural Outlook Database (extracted from OECD Stat) and author s calculations Table 5 Cheese exports and growth by region Exports 2005 Average annual growth rate of exports Thousand tonnes Share of World World % Western Europe % North America % Australia & NZ % CIS % Ukraine % Other Eastern Europe % North Africa % Sub Saharan Africa % Latin America % Argentina % Brazil % Chile % Uruguay % Asia & Pacific % Turkey % Source: FAO-OECD Agricultural Outlook Database (extracted from OECD Stat) and author s calculations Paul Baker 9

15 Processed cheese developments (European Union) 16 The importance of processed cheese for local cheese industries is very different. The largest producer of processed cheese in the world is the USA where more than 20 % of all cheese consumed is processed cheese, followed by the EU. In Japan nearly the whole cheese production is used for processed cheese. In Russia processed cheese has a high share of cheese production too. In the European Union the production of processed cheese has been more or less stable in the last years (see Table 6). The main producing countries are Germany and France, the countries with the biggest milk production in the Union. Also Belgium, Spain, the United Kingdom and Austria are important too and production in Austria has increased sharply in the last years. Among the New Member States the major producers are Poland, the Czech Republic, Slovakia and Hungary. The production in these countries was boosted by direct investment of established Western manufacturers. Both the level of European exports (extra-eu) and the share of exports in processed cheese production are declining (see Table 7). One major reason is increased investment and transfer of technology to countries that have been traditionally been importers of processed cheese. Thus the production of processed cheese in emerging markets is increasing, to a large extent on the basis of raw materials which withstanding recent price developments - are less expensive in the international market than in the EU. Table 6 EU15 production of processed cheese ( ) Tons Austria 20,900 23,990 29,385 31,659 33,214 Belgium 44,421 42,100 42,300 44,300 46,300 Denmark 21,000 20,500 20,500 20,000 22,000 Finland 18,597 19,613 19,600 17,000 17,257 France 135, , , , ,570 Germany 175, , , , ,100 Ireland 11,000 11,000 12,000 12,000 12,000 Italy 20,300 20,000 20,150 25,000 23,000 Netherlands 17,800 17,000 16,000 15,927 14,225 Spain 36,100 36,000 37,000 36,500 36,900 Sweden 6,000 7,314 7,406 6,870 6,870 United Kingdom 33,477 36,377 36,000 36,997 37,000 Total 540, , , , ,436 Source: Assifonte 16 Sources: The Role of Processed Cheese Markets for the Overall Cheese and Dairy Sector, Monika Wohlfarth and Erhard Richarts, ZMP Zentrale Markt- und Preisberichtstelle available at Paul Baker 10

16 Table 7 EU15 exports of processed cheese ( ) Tons Austria 13,134 16,369 20,820 24,497 24,503 Belgium 48,888 50,361 48,344 52,423 51,514 Denmark 12,830 14,095 14,879 15,876 17,030 Finland 9,238 10,347 10,556 9,835 10,131 France 75,401 69,196 65,588 65,705 61,899 Germany 62,667 63,287 57,597 55,289 56,115 Greece Ireland 8,488 7,802 7,662 12,534 13,214 Italy 5,315 6,385 8,267 10,438 9,152 Luxembourg Netherlands 10,559 7,619 5,733 6,156 6,717 Portugal Spain 4,893 4,327 4,893 3,892 4,342 Sweden ,033 United Kingdom 17,296 20,741 21,187 20,805 19,192 Total (all exports) 269, , , , ,414 Total (extra-eu) 101, ,325 90,945 81,575 75,019 Source: Assifonte Prospects for cheese in the European Union The European Union is the world s largest producer and one of the top exporters of dairy products. Over the five years to 2006, EU dairy product exports accounted for around 42 per cent of total world cheese exports, 36 per cent of world butter exports, 22 per cent of world skim milk powder exports and 32 per cent of world whole milk powder exports. With EU dairy exports accounting for such large proportions of world trade in dairy products, changes in EU dairy output can have a large effect on trade flows and world prices. Over the last two decades, the EU cheese sector has been characterised by a strong and steady growth, both for production and consumption. Between 1995 and 2006 EU- 15 cheese production increased by 24 %, and EU-10 production by 95 %. Cheese production absorbs more than 40 % of EU milk deliveries and is concentrated in five Member States, namely Germany, France, Italy, the Netherlands and Poland, which represent around 74 % of EU-25 cheese production. Intra-EU-25 cheese trade has increased by approximately 40 % between 1999 and Milk production in the European Union is forecast to increase slowly over the medium term, reflecting the countervailing influences of relatively small increases to production quotas and some decoupling of dairy farmer support payments from production under CAP reform. Production quotas are expected to have the biggest impact on dairy production in the European Union. These quotas, which will be the subject of a mid-term revue in 2008, are expected to grow relatively slowly to Source: Prospects for agricultural markets and income in the European Union , European Commission, July 2007, available at: 18 Source: Ibid footnote 10 Paul Baker 11

17 There is some debate over the likely effects of the CAP reforms put in place in A priori the EU dairy product output mix is expected to shift toward the production of higher value products like cheese, with bulk commodities such as milk powders that compete for raw milk as an input expected to decline. This change in product mix also reflects the relative strength of demand (and price differentials) for various dairy products within the European Union, with demand for cheese being particularly strong and expected to continue growing. As noted in Section 2.1, however, the current high prices for milk powders means that some commentators are suggesting that processors are likely to allocate more production to powders and less to other under-priced dairy products (such as cheese and butter). This suggestion is supported by recent developments such as Arla s (Denmark) announcement in June 2007 that it will cease production of emmental cheese and switch the milk supplies to production of milk powder and mozzarella; announcing the decision, Arla Foods Production Director Niels Lange Jørgensen commented Having analysed the milk powder market, we believe that prices will remain high for at least 1-2 years. At the same time, we believe that mozzarella has significant growth potential 19. Long-term trend projections by the EU Commission 20 indicate that EU-27 cheese production is expected to expand further over the medium term by 10 per cent between 2006 and 2014, mainly driven by continued strong increases in the EU-12. According to the Commission s analysis, the projected increase would constrain the expansion of production of bulk dairy products: the additional tonnes of cheese that are expected to be produced during the period (representing roughly 5 million tonnes of milk) would outweigh the projected increase in milk delivered (+3.9 million tonnes) over the same period, reducing the amount of milk available for the production of bulk dairy products like butter and SMP. With regard to exports, the European Commission expects that despite the reduction of export refunds for cheese during the first half of 2007, extra-eu-27 exports are forecast to increase further over the short term. However over the medium term, the steady growth in domestic consumption is expected to absorb most of the increase in cheese production, limiting the availabilities for cheese exports, which are projected to decline gradually to the level of tonnes. Imports are projected to expand slightly, due to better use of preferential import quotas and the effect of trade liberalisation between the EU and Switzerland as of June Source: 20 Ibid footnote 17 Paul Baker 12

18 Figure 5 Outlook for the EU cheese market (million tonnes), Source: European Commission Prospects for cheese in Middle East and North Africa 22 According to companies operating in the Middle East, cheese consumption is taking off, with at least double-digit growth experienced over the last two to three years, according to Business Monitor International estimates. The Middle East benefits from a dynamic dairy industry, which is fairly developed and sophisticated relative to other food processing sectors. Cheese has long been popular thanks to its durability and ability to stand up to the heat in the region, especially when compared to milk. Now, the product category is experiencing further growth still thanks to the success of companies that are producing and marketing cheeses as convenience and health foods. According to estimates from Proteus Insight 23, in 2006 the volume sales of cheese in MENA is estimated at 1,351,420 tonnes (worth 3,031.3 million and $US 3,814.2 million) compared to 1,388,070 tonnes in This fall reflected foot and mouth disease affecting the dairy herd in Egypt, the largest cheese market in the MENA region, which had a significant impact on the raw milk supply, with processors shifting raw milk into liquid and fresh dairy products. Nonetheless, by 2010, the market for cheese is expected to reach 1,495,220 tonnes, a 10.6% increase on 2006 levels. Per capita consumption is expected to reach 3.34kg by 2010, up from 3.21kg in Egypt and Turkey are the top two markets in the MENA region with total markets shares of 34.5% and 30.7% of the total volume of sales of cheese in However, the 21 Ibid footnote Sources: Cheese consumption spreading through the region, Middle East and Africa Food & Drink Insight, Business Monitor International, May 2007, available at ; MENA: More scope for dairy, Dairy Industries International, May 2007, available at ; Future Key Global Cheese Markets 2007 Key findings sample page, Proteus Insight, March 2007, available at Some sections of the text are taken directly from these reports 23 Ibid footnote 22. Paul Baker 13

19 artisanal market in both countries plays an important role. The drop in artisanal production in Egypt and relatively stagnant levels in Turkey in 2006, resulted in both countries combined share of total volume sales declining to 65.2% in 2006 from 67.8% in In fact, an important challenge for commercial dairies in both countries will be to switch artisanal cheese consumption to commercial cheese production. The momentum is, however, with commercial cheese consumption as the local dairy industries continue to develop and the increasing urbanization of both markets is changing consumer purchasing patterns. Furthermore, the drop in raw milk supplies appears to have had a stronger adversely affect on the production of artisanal cheese in the largest market Egypt. Moreover, health-related problems in the supply of raw milk strengthens the marketing message of commercial dairies in reinforcing that healthy quality cheese is made by companies using the highest grade milk. Saudi Arabia accounted for 7.4% of volume sales but 17.2% of value sales ( or $US) in 2006; compared to the region leader Egypt, which accounted for 28.6% of value sales in Together with Turkey, these countries are expected to continue to be the largest markets in the MENA region in the coming few years. Underdeveloped markets, (e.g. Yemen, Iraq, Libya, Syria, and Iran) are seen to represent great potential and suppliers are likely to increase focus on these developing markets, particularly as competition in more mature MENA markets in the Gulf, Egypt and North Africa increases. International cheese producers are strengthening their positions in the MENA region. Key players, such as Kraft which until recently had no production facilities and imported all its products - and Bel are increasing production capacity (see Box A). The Danish dairy company Arla had also established itself as a leading producer, although it suffered from the region-wide boycott of its products last year and it is only recently that regional sales resumed and are slowly climbing back up to pre-boycott levels in some categories. Meanwhile, local companies such as Al Marai the regions largest dairy producer - were able to benefit from the boycott. Local players have also benefited from the trend of consumers preferring locally produced food and drink products. Local companies also have the advantage of knowledge of the market as well as strong distribution networks. Alongside traditional formats, there is an increasing popularity of more convenient forms of packaging, such as spreadable cheese in tubs, processed cheese slices and shredded cheese. This popularity reflects increasingly busy lifestyles, which has led to a growing demand for quick and convenient foods. Increasing health awareness is another trend that is driving cheese sales, as producers have come up with more light that is, low-fat and low-cholesterol products. Some producers, aware of the importance of family in the Middle East, have started to market these products to mothers, highlighting their health benefits. For example, Kraft focuses on the calcium content of its cheese slices, and how this is good for the health of growing children. Local and international dairy companies agree that a key to growth for dairy products is innovation, and revamping away from more traditional products. Paul Baker 14

20 Box A International investments in cheese production in MENA Kraft Foods investment in Bahrain Kraft Foods are investing $40 million in the development of a new facility in Bahrain for the production of cheese and powdered drinks to be exported throughout the Middle East region. The company stated that its decision to invest in Bahrain demonstrated its commitment to its consumers in the GCC and Middle East. According to the company the choice of Bahrain reflected the success of the Bahraini Government to create a favourable economic environment to attract foreign investment. According to Patrick Satamian, Managing Director of Kraft Foods GCC, "Bahrain offers an ideal environment in which Kraft can expand, having a central location with good communication links within the GCC and a rapidly developing business sector." Press reports indicate that the factory will produce 50,000 tonnes of cheese and TANG powdered beverages. Sources: Bel opens second factory in Egypt In 2007 Bel Egypt opened its second factory in Egypt, promising to bring in new products as well as boost production for both local and export markets. The 20 million investment will make Egypt the country the company s 3rd most important factory processing location after France and Morocco. Egypt is seen as a important location both for its domestic market and as a base for penetrating MENA markets; Bel Egypt has become an export hub for the Middle East and North Africa region with 70 percent of production bound for outside the country. Bel also opened a production plant in Syria in 2005 producing 5,000 tonnes of cheese. Sources: Arla Foods activities in the Middle East Before the region wide boycott of the companies products, the Middle East represented the most important market outside Europe for Arla Foods. It operates its own production site in Saudi Arabia (Danya Foods), which produces processed cheese, milk and fruit drinks. Prior to the boycott the company had ambitious plans to expand production, transferring some production of processed cheese out of Denmark to Saudi Arabia. Further, Arla acquired the management rights for three agencies (Lebanon, Qatar and Kuwait) to have greater control over the increased volumes of products to be supplied to consumers in the region. Sources: Paul Baker 15

21 2.5. Trade patterns Global trade patterns The three dominant dairy trading areas today, as in the past, are the European Union (EU), Australia, and New Zealand. Australia and New Zealand, both with low-cost milk production and industries actively involved in international marketing, are prominent suppliers to the Asian markets for cheese and dry milk powders. The EU focuses on nearby traditional markets and North America, mainly exporting premium cheese. Product differentiation and consumer preferences play major roles in shaping global dairy product demand and trade flows. For example, all high-income countries import EU cheese. The largest dairy trade flow worldwide is cheese from the EU to the United States, even though milk production costs in the EU are higher than in the United States. Recent years have seen the arrival of important new suppliers that have been eating away at the EU s global market share. In particular, Latin American suppliers from Argentina, Chile and Uruguay are entering into the North American market, particularly in Mexico. At the same time, Ukraine and Belarus are positioned as key suppliers into the Russian market. Figure 6 Cheese trade flows (>= 10,000 tonnes) Source: Dairy Trade Offensive Interests, Ecolait presentation, June 2007, available at Paul Baker 16

22 Globalization has tended to emphasize the strength of multinational dairy firms. As international dairy companies recognize the prospects for demand growth around the world, they are repositioning themselves to produce and sell milk and milk products from multiple locations. Foreign investors find the United States, with its large domestic market, particularly attractive for this purpose. Foreign companies such as Nestlé, Unilever, Bongrain SA, and the Fonterra Co-op Group now have a significant presence in the U.S. market Gulf Region trade patterns Table 8 shows details of imports of cheese by GCC Member countries for These data, which probably underestimate the total levels of trade 25, suggest that the total volume of imports of cheese products in the Gulf in 2005 reached approximately 160 thousand tons, with a value of approximately $ 510 million. Major suppliers include traditional EU suppliers such as Denmark although Denmark s exports have been known to have been adversely affected by the boycott in 2006 and France. Also evident are the Oceanic supplies (Australia and New Zealand), together with newer EU Member States of the Czech Republic, Poland and Hungary; for which the latter two countries have enjoyed strong growth in recent years of their exports to the region. Table 8 GCC: imports of cheese and curd (HS 0406) in 2005 Import Volume Import Value Unit Price Imports from Tons Share of Total $US thousand Share of Total $US per ton Index (Total = 100) Denmark 34, , , Australia 26, , , Egypt 18, , , New Zealand 14, , , France 11, , , Morocco 9, , , Poland 5, , , Czech Republic 4, , , Hungary 4, , , Turkey 3, , , Saudi Arabia 3, , , Netherlands 3, , , Germany 3, , , USA 2, , , TOTAL 157, , , Source: ITC and author s calculations based on COMTRADE statistics 25 It should be noted that neither Kuwait nor UAE report data to COMTRADE, as is also the case for Egypt. Accordingly data for these countries is based on mirror estimates (i.e. from exporting countries). In the case of trade between these countries, as there is no data available on their bilateral trade the corresponding data is set to zero. This means, specifically, that Egyptian exports to Kuwait and UAE are not included in the data shown in the table. For information on Egypt s exports to these countries see Section 3.2. Paul Baker 17

23 Egypt is shown as the third most important supplier to the region 26, and further analysis of the underlying data indicates the very strong growth of Egyptian exports to the Gulf Region. However, it is noticeable that the average unit values of cheese imported from Egypt are the lowest of all the main source countries; these are estimated at only 55% of the average unit value for all cheese imports by GCC Member countries Global supply demand balancing As described in Sections 2.1 and 2.2, the global dairy sector has been under going a period of soaring prices. According to ABARE 27 world cheese prices are forecast to be higher over the next two years. In , world cheese prices are forecast to average US$2950 a tonne. Looking further ahead, continuing growth in cheese production and exports from major producers is projected to lead to cheese prices falling to US$2480 a tonne in real terms ( dollars) in , about 13 per cent below the forecast average. Taking a longer term perspective, the joint OECD-FAO 28 outlook foresees an increase in global cheese trade from slightly less than 1.5 million tons in 2007 to slightly less than 1.9 million tons by The outlook suggests that while export growth from Europe (Western and Eastern) will be highly constrained and be virtually zero for North America, strong export growth is forecast for the regions of Latin America, Oceania (Australia and New Zealand) and CIS. All regions are expected to increase imports, but particularly evident are large increases in imports in CIS (Russia), Latin America, and Asia & Pacific (including Japan and Korea). Although the analysis does not provide an assessment of bi-lateral trade patterns, it is indicative of a strengthening of some of the key trade flows shown earlier in Figure 6; notably with increase supply of the North American market (including Mexico) from Latin American exporters (Argentina and Chile), and strengthening of Ukrainian exports to the CIS (primarily Russia); although the increase in import demand in the CIS is expected to significantly outstrip the increase in the export supply within the region. Beyond this, the OECD-FAO figures would indicate a very important role (equivalent to an additional 170 thousand tons of exports) for Australia and New Zealand in balancing excess import demand, notably in Asia & Pacific (including Japan and Korea) but, also, CIS and Africa. 26 Ibid, footnote Source: ibid footnote Source: OECD-FAO Agricultural Outlook ; outlook data available from OECD-Statistics: Paul Baker 18