Global dairy trade. a changing landscape

Transcription

1 Global dairy trade a changing landscape

2 Title Global dairy trade - a changing landscape Author Mark Voorbergen Date June 2004 Copyright No part of this publication may be reproduced in any form by print, photo print, microfilm or any other means without written permission of Rabobank. Disclaimer Neither Rabobank, or other legal entities in the group to which it belongs, accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection herewith. Contact adress for this publication Rabobank International F&A Research and Advisory Telephone Fax info@rabobank.com Website Rabobank, Rabobank Global dairy trade

3 Table of contents Introduction 5 1 Main exporting countries 6 2 Main importing countries by product 8 3 Policies affecting global dairy trade 12 4 Outlook Asia, Middle East, North Africa: growing import requirements EU: growing exports of cheese New Zealand: best of both worlds Australia: still room for expansion in dairy commodities Outlook for other potential exporters 16 5 Conclusions 18 Rabobank Global dairy trade 3

4 4 Rabobank Global dairy trade

5 Introduction Global trade growing faster than global production Milk is a perishable product.therefore it is no surprise that, if we exclude intra EU trade, only 7% of global milk production is traded internationally. Still, the volume of dairy trade is growing at a faster pace than global milk production. International travel has created growing demand for products produced in other parts of the world and the latest WTO agreement has created better access for dairy exporters to potential import demand. Some regions in the world are not likely ever to have self-sufficiency in dairy products, while other regions have built their entire dairy industry based mainly on their export positions. Changes in this landscape of global dairy trade are occurring slowly but surely, driven to a large extent by political measures as well as by individual company ambitions. This report summarises the main developments occurring in both importing and exporting regions. Rabobank Global dairy trade 5

6 1 Main exporting countries The figure below shows that global dairy supply is still dominated by the EU, Australia and New Zealand, with Asia, North America and the Middle East the main destinations for dairy exports. Figure 1.1 Major trade dairy flows (>=250,000 tonnes of milk equivalents) Russian Federation Canada EU US Mexico Algeria Egypt Israel Saudi Arabia Dubai China Thailand Japan Taiwan Vietnam Philippines Nigeria Sri Lanka Malaysia Singapore Brazil Indonesia Australia Uruguay Argentina New Zealand Source: Dutch Dairy Board, Rabobank 2004 Declining market shares for the EU Since 1995 the EU s global market shares have been on the decline for all dairy products except for whey. Lower levels of price support in the EU and the irreversible global trend towards abolishing export restitutions will further reduce the EU s role in the dairy commodity trade. European traders have anticipated this trend by stretching their sourcing network beyond EU borders while European processors are increasingly opting for direct investments in new growth markets instead of addressing these markets through exports. Nevertheless, opportunities for EU exports remain in cheese, whey products and branded milk powder products. 6 Rabobank Global dairy trade

7 Figure 1.2 Global market shares in milk equivalents % of volume Rest of world 4% Argentina 5% USA 6% EU-15 36% Rest of world 5% Argentina 4% USA 4% EU-15 29% Australia 16% Australia 18% Rest of Europe 11% New Zealand 22% Rest of Europe 11% New Zealand 29% Total market 33.2 million tonnes milk equivelants Total market 36.7 million tonnes milk equivelants Source: Dutch Dairy Board, Rabobank, 2004 Australia and New Zealand become more dominant Australia and New Zealand have been the main beneficiaries of the EU s declining role in global dairy trade where both countries have the potential and the ambition to play a dominant role.this is different to the position of the US, whose potential is offset by a lack of ambition and Argentina whose ambition is not matched by its potential. In 1999 the combined market share of Australia and New Zealand exceeded the EU s global market share for the first time and three years later New Zealand s market share alone reached a par with the EU s market share. Rabobank Global dairy trade 7

8 2 Main importing countries by product Dairy trade mainly concerns ingredients Most dairy trade concerns dairy ingredients like skimmed milk powder and butter oil, which to a large extent is used by importers to supplement deficiencies in the local milk supply. However, about half of the whole milk powder trade and the greater part of the cheese trade are in end-consumer products.the greater part of the trade in whey products concerns whey powder to be used as a feed ingredient.the importance of value added whey products for high-end food and non-food applications is growing in terms of value, but this significance in volume terms is negligible. Figure 2.1 tonnes Top-15 importing countries of butter and butter oil 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 EU-15 Russia Egypt Iran USA Mexico Saudi Arabia Morocco Latvia Singapore Canada Taiwan Thailand Algeria Indonesia Source: Dutch Dairy Board, Rabobank, 2004 Russian butter imports more consistent The EU-15 remains the world s number one importer of butter. A large proportion of these imports consist of New Zealand butter exported to the UK as part of an agreement that came into force when the UK joined the EU. Russia has been a more consistent buyer of butter in recent years, although volumes have still fluctuated between 33,000 tonnes and 62,000 tonnes in the last three years. Imports by the US are also quite erratic. Requirements fluctuate along with the volatile domestic supply and demand situation for butter.with the exception of Singapore, imports of butter and butter oil have grown with Iran, Canada and Morocco witnessing the highest rises and import volumes in the United Arab Emirates and Malaysia declining with the result that they have dropped out of the top Rabobank Global dairy trade

9 Figure 2.2 tonnes Top-15 importing countries of skimmed milk powder 120, ,000 90,000 75,000 60,000 45,000 30,000 15,000 Mexico Philippines Thailand Indonesia Malaysia Japan EU-15 China Algeria Singapore Saudi Arabia Taiwan Vietnam Egypt Morocco Source: Dutch Dairy Board, Rabobank, 2004 Pre-accession agreements turned the EU into a major SMP importer For years Mexico has been the number one destination for SMP trade, followed by a large group of Asian and Middle East countries. Most Mexican imports of SMP and WMP are used to reconstitute milk in the Liconsa social feeding programme. Liconsa is increasing the use of domestically produced milk but this still covers only 16% of the requirements.the EU-15 is relatively new in the group of major SMP importers.together with China and Indonesia, the EU-15 has witnessed the strongest growth in SMP imports. EU imports were strongly affected by the preaccession agreements with the new EU-10 member states.the tariff-free quota between the EU-15 en the new EU-10 triggered significant new trade flows. Imports of SMP by India and Cuba have declined in recent years, causing them to drop out of the top-15. Figure 2.3 tonnes Top-15 importing countries of whole milk powder 120, ,000 80,000 60,000 40,000 20,000 Algeria China Saudi Arabia Malaysia Indonesia Philippines Sri Lanka Thailand Taiwan Nigeria Mexico Venezuela Singapore Oman United Arab Emirates Source: Dutch Dairy Board, Rabobank, 2004 Rabobank Global dairy trade 9

10 China going for the number one spot Algeria s longstanding position as the world s biggest importer of whole milk powder is being threatened by China. Algeria still imports its traditional huge volume from France supplemented by significant volumes from New Zealand and Argentina, but overall volumes are rather stable between 100,000 tonnes and 120,000 tonnes. China s WMP import requirements, on the other hand, changed up a gear significantly in 2002 to over 80,000 tonnes, from some 30,000 tonnes in previous years. Although milk production is growing rapidly in China, shortage of feed, poor farm management and limited availability of land and clean water resources are limiting expansion.therefore, imports are expected to continue to grow. In the first half of 2003 Chinese milk powder imports went up by another 76%. Another country making impressive progress as an importer was Indonesia which has gradually recouped the 60,000-plus tonnes range, from close to zero right after the 1998 economic crisis.the Philippines, Nigeria and Mexico also experienced significant import growth.thailand recently increased its tariff free quota, which is likely to result in a significant increase in imports this year.vietnam had the most significant decline in 2002, at 22,308 tonnes well down on the 70,000 tonnes imported the year before and which made the country the world s number two importer. Now Vietnam does not even feature in the the top-15. Figure 2.4 tonnes Top-15 importing countries of cheese 200, , , , , ,000 80,000 60,000 40,000 20,000 Japan USA EU-15 Russia Saudi Arabia Mexico Australia South Korea Switzerland Canada Algeria Philippines Egypt United Arab Emirates Lebanon Source: Dutch Dairy Board, Rabobank, Rabobank Global dairy trade

11 South Korea: interesting new cheese destination Cheese trade is much less volatile than trade in butter and milk powders.the top-15 importing countries in 2002 were the same as in Compared to other traded dairy products, the number of countries with a significant volume of imports is limited. Not every dairy importing country has a level of consumer affluence that allows cheese to be part of the daily diet. However, South Korea and, to a lesser extent, China are examples that suggest that Asia may become a promising cheese importing region. In South Korea per capita cheese consumption went up from close to zero to over 1 kg, driven mainly by cheese consumption in quick service restaurants. Locals are unable to compete with imports, even at the current high tariff regime. Japan and the US have traditionally been the major destinations for cheese for years while EU imports, mainly from Switzerland, Australia and New Zealand, have experienced a moderate decline. The most significant increases have been in Russia, Mexico and South Korea. Figure 2.5 tonnes Top-15 importing countries of whey products 120, ,000 90,000 75,000 60,000 45,000 30,000 15,000 China EU-15 Japan Thailand Canada Philippines Mexico South Korea Indonesia Brasil Malaysia Taiwan Singapore USA Czech Republic Source: Dutch Dairy Board, Rabobank, 2004 EU and US both big exporters and big importers of whey Global whey trade is growing strongly; China alone accounts for a large proportion of this growth. Since whey powder is a cheap source of protein, and local availability of whey in China is zero, demand for whey has grown as the country, which has no cheese production of its own, tries to expand domestic output of animal protein. Imports volumes are expanding in the EU-15,Thailand, Indonesia and the Czech Republic, among others.the fact that both the EU and the US are to be found amongst the top-15 importers of whey products seems a contradiction, since the two are the major exporters of these products as well.the reason might be the wide range of products to be found in this product group which allows for imports in one category and exports in another. Rabobank Global dairy trade 11

12 3 Policies affecting global dairy trade Policies have strong impact on dairy trade Policy changes have always strongly impacted global supply and demand in dairy commodities. For instance, the EU s dominance in global dairy commodity trade in previous decades was built on its common agricultural policy aimed at turning the EU from a net importer to a net exporter of agricultural products. In the case of dairy this resulted in a serious oversupply situation at the beginning of the 1980s, with huge stocks of butter and skimmed milk powder which later on had to be trimmed through internal subsidised consumption programmes and lowpriced exports to the world market.with the implementation of the milk quota system in 1984, which basically fixed total milk production in the EU at a volume of some 120 million tonnes, the oversupply situation gradually diminished. EU policy change will further reduce the EU s role in butter and SMP trade This trend consolidated further in 1995, when the EU agreed to bring down its volumes of subsidised exports in accordance with the WTO agreement negotiated at the Uruguay round. From that point on, the EU s role in the global trade of butter and SMP dwindled considerably.the world market for dairy commodities will continue to be affected by subsidised European products, but the volumes will be much less.the reform of the EU dairy policy in the summer of 2003 which will result in lower intervention prices for butter and SMP will even further reduce the appetite of EU processors to produce these products for the world market. US policy provides ceiling to global SMP prices A side effect of the domestic price support policy in the US is occasional oversupply of raw milk.the US has solved this situation in the same manner as the EU: stock retention by the Commodity Credit Corporation (CCC) and occasionally low-priced exports using its Dairy Export Incentive Program (DEIP). Because of the erratic nature of these oversupplies, the US has never been a very stable exporter of dairy commodities to the world market, but the USD 1,870 per tonne CCC clearing price is often regarded as the ceiling for global SMP prices. Above that level, American SMP starts flooding the global market. Only when the CCC is outof-stock, as it was in 2000/2001, will SMP prices rise above this level. Although the level of price support has been reduced over the years, the system is still in place despite the announcement in the 1996 Farm Bill to abolish the price support system.therefore, it is expected that American SMP will continue to occasionally flood global markets. New Zealand and Australia go for RTAs In Australia, New Zealand and Argentina market intervention is, to all intents and purposes, absent.the dairy industries are fully subject to normal market circumstances. Both Australia and New Zealand are strong advocates of further liberalisation of global trade.wto should provide the structure for further progress in this field, but developments are currently on hold, the entire process proving very slow and time consuming.this might be one of the reasons why we 12 Rabobank Global dairy trade

13 observe a growing number of free-trade blocks and bilateral trade agreements amongst countries. NAFTA, Mercosur and the new EU-25 are huge trade blocks with more or less free trade amongst the participating countries. New Zealand and Australia are working on al kinds of Regional Trade Agreements (RTAs). In the first few months of 2004, for instance, Australia managed to raise its duty-free quota of exports to the US and also get Bangladesh to drop its supplementary duty on skimmed milk powder by 15%.Trade volumes to the Asian region are increasingly determined by bilaterally negotiated trade quotas. Pace of WTO progress is slow Developments in the current round of WTO negotiations will have a strong impact on the overall global trading environment. Most of the major SMP importers and all but one of the major exporters are WTO members.the exceptions on the import side are Algeria, Saudi Arabia and Vietnam; the exception on the export side is the Ukraine.These countries currently hold observer status. The pace of current progress is slow and it has become clear, especially after the recent Cancun failure, that 2004 will be another lost year for WTO.With elections coming up in the US and the accession of ten new member countries in EU, it is not expected that anyone will make strong commitments this year.the main conclusion is that a new agreement will not be reached before the end of 2005 at the earliest. Despite the difficulty of saying anything sensible about the timing of events in the WTO environment, the direction is more or less apparent after the Harbinson proposal was put on the table at the beginning of 2003.While the package will probably be diluted, the next agreement is likely to see: a further reduction of import tariffs (Harbinson proposed, amongst other things, a cut of 60% on all tariffs over 90% in the next 5 years) higher tariff quota (Harbinson proposed a minimum of 10% of domestic consumption) lower export restitutions (Harbinson proposed a 50% cut in the next 5 years and the rest in 9 years) EU and US will try to limit import access Both the EU and the US are more likely to consent to export restitutions than to import access. Both nations will probably team up in trying to negotiate a lower tariff quota than the proposed 10% of domestic consumption. Most dairy importing WTO members will try to hang on to some kind of local protection in order to enable local dairy production to grow. In a completely free trading environment, local milk produced in most Asian, Middle East and North African countries cannot compete with cheap milk powder imports coming from New Zealand and Australia. Rabobank Global dairy trade 13

14 4 Outlook Economic growth main condition for import demand growth 4.1 Asia, Middle East, North Africa: growing import requirements In the main dairy importing regions local production cannot keep up with the growth in dairy consumption.though it would be relatively easy to set up a stateof-the-art processing plant, to boost local production to achieve higher milk productivity would take a long time. Dairy demand in this region is strongly related to overall economic growth but if the present positive economic conditions in Asia and the Middle East continue, import demand will continue to grow and this will boost the volume of global dairy trade. Between 1995 and 2002 the volume of global SMP trade, for instance, grew by a CAGR of 4%. Assuming the same pace of growth, this means that by 2010 the current trade volume of a little over one million tonnes will have grown to 1.5 million tonnes. The example of Thailand Overall dairy demand is positively affected by school milk and other government programmes that stress the health benefits of dairy products.this is particularly the case in the urban areas of many Asian countries where growing familiarity with Western diets is boosting dairy consumption.the example of Thailand where annual per capita consumption rose from five kg 15 years ago to over fifteen kg now indicates the potential of the region.though still low compared to Western standards, a consumption level of just 20 kg per capita for the entire region including China would result in an import demand that would be very difficult to satisfy. CAP reform will boost the EU s role in cheese trade 4.2 EU: growing exports of cheese The recent reform of the Common Agricultural Policy will further reduce the appetite of EU processors for production of SMP and butter.the likely result of less milk going into butter and SMP manufacturing will be that more milk will be allocated to cheese manufacturing, since other product groups offer few opportunities for increased milk intake.this will force manufacturers to increase their export efforts in cheese, since this will be the main outlet for additional cheese volumes. Cheese is probably the only dairy product that can be exported from the EU in significant volumes at a competitive price.with the likely decrease of raw milk prices following the recent reform of the EU dairy policy, EU cheese exports will become even more competitive. Already a growing proportion of EU cheese exports are non-subsidised specialty cheeses.the expected decline in raw milk prices and the improving structure of EU dairy farming, both the result of the CAP reform, will further improve the EU s competitive position in cheese. Traders have to expand their sourcing network EU traders that built their business on the EU intervention system will have to deal with lower volumes of butter and SMP available for exports in the EU. If they want to keep their sales volumes in these products stable, they will have to look for additional sourcing opportunities outside the EU. In the countries newly acceded 14 Rabobank Global dairy trade

15 Figure 4.1 tonnes EU cheese exports / / / / / / / / 2003 Non-subsidised Subsidised GATT ceiling Source: ZMP, Rabobank, 2004 to the EU some additional volumes of dairy commodities might be sourced in the medium term, but in the longer run sourcing opportunities in the new EU-10 will also diminish. Availability of cheese and whey products for exports will improve. WMP: opportunities nearby In WMP, prospects for the EU are moderately positive. New Zealand and Australia are better equipped to address the Asian markets, but the EU will continue to play an important role in the Middle East and North Africa. EU processors have in the past been able to build up some strong brands in the end consumer segment of these markets. Fonterra strives for market stability 4.3 New Zealand: best of both worlds Fonterra makes no secret of the fact that it wants to build activities in value added products, without neglecting the importance of commodities. In the words of Fonterra s new CEO Andrew Ferrier: Commodities and value added products need to sit side by side in Fonterra s future. Opportunities to extend the company s role of ingredient supplier to a more active role in marketing and branding will be seized through joint ventures with current trading partners. Fonterra s recent initiatives with Soprole in Chile and Sanlu in China are clear examples of this. On the commodity side of the business Fonterra has been on the lookout for opportunities to diversify their sourcing base in recent years. Fonterra s use of non-new Zealand milk in its global ingredients business has grown from none four years ago to 300,000 tonnes now, and will continue to grow.the company actively markets milk from its supply partners Bonlac in Australia and Dairy Farmers of America in the US under longstanding arrangements. Fonterra currently manages about one third of the world s dairy commodities trade and its main strategy is to coordinate product supply with international demand, neither building up huge stocks nor moving prices dramatically up or down. Rabobank Global dairy trade 15

16 Temporary standstill 4.4 Australia: still room for expansion in dairy commodities Australia has the best opportunities to supply the growing requirements for dairy ingredients, its potential for milk production growth higher than New Zealand s. It has the land, the necessary feed grain supplies to curb the seasonal fluctuation of milk production and the proximity of the main importing region. Nevertheless, the last 18 months have also shown the vulnerability of Australia s dairy chain.the drought has brought milk production back to the level of two years ago.the impact on traded volumes in the season remained limited because existing obligations could be dealt with by reducing stocks.this year, however, with stock levels close to zero, the total export volume will be 10 to 15% lower. Australia s dependence on the weather remains the only real handicap in its expansion ambitions in dairy commodity trade.the current low milk prices are prompting producers to consider their options and not simply increase their production as they have in the past. Significant player in feed quality SMP Through their involvement with Bonlac, Fonterra s role in the Australian dairy trade has become more important. Opinions differ on whether this may be beneficial to the Australian dairy industry, but the fact is that this creates a very powerful commodity trade unit. 4.5 Outlook for other potential exporters Although reliable trade statistics are lacking, Ukraine is generally considered a potential dairy exporter to be reckoned with. EU and New Zealand traders are already competing with Ukrainian exports of butter, SMP and cheese to Russia. The proximity of this large net importer of dairy products, combined with the traditional trade relationships that Ukraine already has, provides an excellent opportunity.the large milk pool in Ukraine has already attracted Wimm-Bill-Dann to set up a new dairy plant in the Ukraine for dairy exports to its Russian home market. Nevertheless, Ukrainian exports target other markets as well. Feed quality SMP is exported to Japan and other Asian markets as well.the major challenge for the Ukraine is to keep up with international quality standards. Diversifying export activities In recent years Argentina has diversified its exports activities. Its big neighbour Brazil remains the main export destination but opportunities are also being explored in Africa and the Middle East.The decline in exports to Brazil was also the result of the anti-dumping agreement signed in 2001in which Argentina agreed to establish a minimum export price for Argentine milk powder of USD 1,900 per tonne. Argentina exported USD 300 million worth of dairy products to Brazil before 2001, which accounted for 80% of total Argentine exports of dairy products.the share fell to 20 % after the introduction of the agreement. At the end of February 2004, the agreement was extended for an indefinite period of time. 16 Rabobank Global dairy trade

17 The main challenge for Argentine processors and traders in building a more diversified network of trading partners, is the continuity of its domestic milk production, as is the case in Australia. In recent years milk production has fluctuated along with the volatile milk prices. Stability of supply is critical in becoming a reliable trading partner. Potential giant Given its huge volume of milk and its self-sufficiency ratio at around 100%, India could also be an exporter of dairy commodities to the world market. A few per cent more raw milk potentially means an enormous exportable volume. Its huge raw milk base and its proximity to the biggest net importing region of the world provide interesting opportunities. However, the local supply/demand balance is very fragile, as recent developments have shown. In order to become a solid exporter of dairy commodities to the Asian region, India needs a stable exportable surplus and has to invest in consistent quality. Rabobank Global dairy trade 17

18 5 Conclusions EU s diminishing role provides opportunities for others The main change in the landscape of the global dairy trade has been the declining role of the EU, to the benefit of Australia and New Zealand, both of whom are clearly better equipped to address the growing demand for dairy ingredients in Asia. European milk will increasingly remain inside the new EU-25. However, this means that the world s importing nations will have to rely to an even greater extent on the weather-dependent supplies from Australia and New Zealand.This will probably provide opportunities for alternative potential exporters, like Argentina and the Ukraine, to the world market, especially as importers have a tendency to want to diversify their supply base. RTAs provide best short-term opportunities It is generally assumed that global dairy trade will grow. However, whether potential volumes of trade will actually be reached, depends on the trade conditions posed by global and local policies. Most local policies will continue to balance the need for sufficient foreign products with the aim of increasing their level of self-sufficiency.wto will continue to exert pressure to improve market access, but for the short term due to the current lack of progress in WTO RTAs and other bilateral agreements offer better opportunities for traders. 18 Rabobank Global dairy trade

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