Milk production is a very important element of the whole dairy chain. In this part of the value chain the major share of a) the costs, b) resources used, c) emissions created and d) the political challenges come from producing the milk itself. That s why IFCN is focusing since the last ten years on analyzing and better understanding milk production world wide. This article summarises the findings of the IFCN work in 2010 and the recently published IFCN Dairy Report 2010 (www.ifcndairy.org). Torsten Hemme*, Kiel, Germany Status and trends in milk production world wide A summary of results from the IFCN dairy report 2010 Price volatility The prices for dairy commodities like butter, skim milk powder and cheese are driven 80 90 per cent by the milk price which the processor pays to the farmers. In simple terms, this means that the on-farm cost of producing milk is the most important driver for a competitive dairy region. In a world moving towards a more and more liberal trade, regions with low cost will gain market share while regions with high costs will most likely reduce milk production. Milk trade is also affected by milk prices and feed prices which have been extremely volatile in recent years. As we can see from the coefficient of variation calculated for the time series from 1998 to 2009, milk is the most volatile agricultural commodity with 43 per cent (figure 1). Figure 1: Measuring price volatility (1998 2009) Milk Feed Coffee Cocoa Poultry Meat Feed (based on IFCN feed price indicator) is on second place with nearly 35 per cent, single feed ingredients and coarse grains show a range from 35 to 50 per cent. Especially milk and feed have faced greater volatility in recent years starting 2006. Coefficient of variation (in per cent) 1998 Bovine Meat * Torsten Hemme and dairy researchers from 86 countries participating in IFCN; IFCN Dairy Research Center at CAU University Kiel Faculty of Agricultural and Nutritional Sciences, Schauenburgerstraße 116, 24118 Kiel, Germany, E-Mail: info@ifcndairy.org, www.ifcndairy.org Tea Cotton 0 5 10 15 20 25 30 35 40 45 50 14 European Dairy Magazine 1/2011 (23. Jg.)
tonnes. As milk trade is also influenced by supply and demand forces it is important to know the regions of the world where milk is in surplus or deficit. Figure 2 gives a worldwide overview about the milk supply and demand situation. The countries with green dots produce more milk than they consume and therefore have the potential to export milk, meanwhile those with red dots need to import milk. It is also important to note that milk consumption habits in many countries, especially developing countries. This easy example shows that the global dairy world is linked with each other and small changes in demand and supply could have a big impact of the world milk prices and farmers living standard. Milk surplus and deficit regions world wide This price volatility is mainly influenced by milk supply and milk demand. The 2008 price reduction was the result of the lower increase in demand that is normally between 10 20 million tonnes per year for the past decade. Additional reinforcing factors were the world finicial crisis and the melamine scandal. In the same time milk production was increasing, because the farmers were stimulated by the high milk price in 2007, especially in China, India, North America and Pakistan. The result was a supply increase of 17 19 million Milk production in Bangladesh Milk demand and supply Milk demand is highly influenced by the number of people and the amount of milk that each person is willing to drink and can afford. The world population is increasing by 78 million people per year in the past 15 years; meanwhile, the average per capita milk consumption for the year 2009 was 105 kg ME (Milk Equivalents). If we assume that this per capita consumption stays constant, then we need about 8 million tonnes more of milk per year to satisfy the additional demand due to population growth. However, the per capita consumption varies between countries. It also changes depending on consumption patterns in different countries which are mainly affected by changes in per capita income and urbanisation. In Asia for example, which is the highest populated continent in the world, milk consumption is also increasing at the highest Figure 2: Milk surplus and deficit worldwide European Dairy Magazine 1/2011 (23. Jg.) 15
black box in the dairy world and hard to be predicted. Like already mentioned, a small change in the supply and demand could affect the milk price and the situation of farmers; therefore China s behaviour at the dairy market is one main driver in the future. To satisfy the growing dairy demand, milk producers need to produce sustainably. This means their farming system has to meet economic criteria like cost competitiveness. On one hand, they need to be socially integrated and should produce under conditions which secure a safe environment in the present and in the future. Harvest in North Germany rate. We see on Figure 2 that milk is usually moving in the US, for example milk is moving from the west to the east, while in China, it moves from north to south. On the supply side, climate changes are a high source of uncertainty. This year, for example, disasters like the flood in Pakistan, fire in Russia as well as the consequences of El Niño and la Nina have influenced the availability of feed and water to dairy animals. Milk quality is also an issue, where for example, the melamine scandal in China has been very influential on milk supply and demand in the country. A good milk quality needs to be assured by appropriate infrastructure which is required for a smooth flow in the dairy chain. Of course the increase of per capita demand also affects milk quality that is the reason why after the melamine scandal especially the market in China is a Figure 3: Cost of milk production by world region 2009 US-$/100 kg milk (ECM) 80 70 60 50 40 30 20 10 103 0 Western North Middle Europe America East Africa CEEC South Asia America Oceania Cost of milk production 2009 The annual IFCN work of comparing typical farms around the world is an ongoing process since the year 2000. Since then the number of countries has increased from eight to 44. Moreover, the number of dairy farm types analysed has increased from 21 to 143. The cost indicator used in this article is representing the concept of full economic costs. Technically it is defined as follows: Costs from the profit loss account of the dairy farm plus opportunity costs for own production factors (family labour, own land, own capital) the non milk returns (returns from cull cows, calves or heifers, returns from manure and returns coupled direct payments). Figure 3 shows a simplified global overview on milk production costs: a) On average Africa had the lowest milk production costs and is the only region IFCN the IFCN concept + method Technical rule: Each Journal which publishes this article or parts of it must include this box including the picture in the article to describe the method and to show recognition to the researchers who have produced the knowledge. IFCN Our mission: We create a better understanding of milk production worldwide The IFCN International Farm Comparison Network is a global network of dairy researchers from over 80 countries cooperating with over 70 companies representing the dairy chain. The IFCN has a Dairy Research Center (DRC) with 15 dairy experts coordinating the network process and dairy research activities. The IFCN is independent from third parties and committed to truth, science and reliability of results.the main research focus of the IFCN and its core competence is in the field of milk production, milk prices and especially dairy farm economics. Further details: www.ifcndairy.org. Researchers participating in the 11th IFCN Dairy Conference held in Kiel 2010 16 European Dairy Magazine 1/2011 (23. Jg.)
Building our future Cultivating business growth in dairy CSK food enrichment is going to expand the production capacity of its strategic product group of dairy cultures. In building a new culture plant in Leeuwarden, CSK anticipates on further growth and positive developments in the dairy market. This substantial investment underlines the positive development of CSK. As a supplier of a broad range of active dairy ingredients and consultancy, CSK positions itself in a unique way in the field of taste, texture and biopreservation of dairy products. Customer intimacy serves as a basis for the co-development of dairy products on sustainable trends in dairy like indulgence, health and clean labelling. The culture plant to be built in Leeuwarden has a capacity which is more than double compared to the capacity currently available. The latest technologies and techniques are going to be used to realise an efficient, aseptic and energy-efficient production location. The new production installation is expected to be fully operational at the end of 2014. For more information please contact: Paul Visschedijk Managing director info@cskfood.com CSK food enrichment BV Pallasweg 1, 8938 AS Leeuwarden Postbus 225, 8901 BA Leeuwarden Nederland Tel: +31 58 284 42 42 Fax: +31 58 284 42 10 Web: www.cskfood.com
How have dairy farms been affected during the crisis? Based on IFCN analysis, it was observed that farm economics is even more sensitive than we usually think. Due to the volatility in milk and feed prices, monthly fluctuations in farm economics could be very important in making strategic decisions. Figure 5 shows monthly farm economics in three farms and gives an impression of the differences in dairy where milk was produced at costs below 26 US-$ b) Western Europe, North America and the Middle East had the highest cost c) Cost in Eastern Europe, South America, Asia and Oceania were on a similar level of 28 to 31 US-$ per 100 kg milk Cost of milk production monthly from January 2006 to June 2010 Bangladesh 2-cow farm: The cost of this farm is not changing significantly as the farm operates on low milk yields (721 kg/cow/year) with small amounts of purchased feed.the high volatility in milk prices lead to a doubling in income especially in the end of 2008. In 2009 and 2010 costs in US-$ terms remained on a level on 30 US-$ per 100 kg milk while milk prices are moving towards 33 US-$ per 100 kg milk. German 90-cow farm: The cost of this farm is changing much more compared to the Bangladeshi farm as the farm has a substantially higher milk yield (8725 kg/cow/year). The increasing feed prices and the US-$/Euro fluctuations have increased the milk production costs to 55 US-$ in June 2008. Compared to the costs level on January 2006 this was an increase of 60 per cent. In the period March October 2009 the farm was not able to generate any income for the farming family. With the recovery of world market prices in 2010 the German milk prices increased towards a level of 40 US-$. The production costs decreased substantially in US-$ terms towards 40 US-$. The main driver here was the devaluation of the Euro against the US-$. USA 2000-cow farm: The farm with a milk yield of 10.000 kg/cow and a small share of feed production on the farm shows the strongest increase of milk production costs. From January 2006 to mid 2008 the costs have increased from 28 to 51 US-$ per 100 kg milk. This was an increase of 85 per cent within two and a half years and shows how sensitive are the high yielding dairy farming system in changing feed prices. In the times of very low milk prices this farm was loosing about more than ten US$ per 100 kg milk. The estimated cash flow deficit in 2009 was more than 1,5 million US-$. In 2010 until June the costs have decreased slightly to a level of 35 US-$ per 100 kg milk. This was mainly driven by the decline of feed prices. As milk prices match reasonably well with costs we see in the USA in 2010 a significant growth in milk production. Based on IFCN analysis, it was observed that farm economics is even more sensitive than we usually think. Due to the volatility in milk and feed prices, knowledge on monthly fluctuations in farm economics is very important in making strategic decisions. Figure 4 shows monthly farm economics in three farms and gives an impression of the dairy trend in different countries. Estimated status of competitiveness in the three countries till June 2010: The lowest costs with 30 US-$ are estimated for the two-cow farm with very low yields farm in Bangladesh. It is followed by the US-2100 cow farm having production costs of about 35 US-$ per 100 kg milk. Finally in times like these where milk production is heavily influenced by policies, it is important to note how these policies affect dairying in various regions. Political instruments like quotas, import and export taxes, non-trade restrictions (e. g. milk quality levels) try to harmonise the volatility of milk prices. In Europe, US, Australia and New Zealand especially, the environmental specifications are becoming stronger and this influences the cost of milk production. Figure 4: Milk surplus and deficit worldwide 18 European Dairy Magazine 1/2011 (23. Jg.)
Furthermore, due to the discussions on global warming, the topic sustainability in agriculture is very crucial, especially in the political scene or the dairy industry. IFCN is developing a method of measuring sustainability in dairy farms based on several indicators. In this approach the estimated CO 2 emissions (ranging from 80 300 kg CO 2 equivalents per 100 kg milk) are used as one indicator for environmental sustainability. The new results of the IFCN analysis on greenhouse gas emissions, water footprints and sustainability in general are shown in IFCN World Dairy Map 2010 special studies of the IFCN Dairy Report 2010. The IFCN idea on measuring sustainability of dairy farms will be intensified in 2011. Conclusion Gone are the times with more stability in the dairy market and milk is presently one of the most volatile agricultural commodities in the world. The results in the IFCN Dairy Report 2010 indicate that in the current times of volatile prices and exchange rates, a continuous monitoring of the milk production costs is essential for the future of every dairy region. Here all stakeholders of the dairy chain farmers, milk processors, farm input suppliers and local policy makers should realise that they have a continuous task in defining the most appropriate strategies for the future. On the supply side there are significant cost differences between world regions and the volatile milk price, feed prices and exchange rates have a very strong impact on international competitiveness of milk production. It should be highlighted that developing countries which usually have low yields are able to produce milk cheapest and are less affected by changing feed prices due to low input. Milk demand is driven by population growth, income developments, consumer prices and shifts in consumer preferences. Just the expected growth in population leads to an increasing demand of 8 million t milk per year which is almost the annual milk production volume of Australia. In addition to this, the increasing per capita consumption will lead to significant growth in milk demand in the future. A realistic assumption of the annual milk demand growth is 15 million tonnes per year. Over a ten year time frame this adds up to 150 million tonnes which represent roughly the current milk volume produced in the EU. All these imply that the dairy industry will be growing in milk demand and even more in milk processing and packaging in the next years. The dairy regions that are able to adapt fastest will gain market shares via: a) cost competitive farming systems, b) ensuring overall sustainability needs c) building trust in the chain and d) having useful strategies on how to cope with future crises, shocks and price volatility. In the past, regions with the most favourable conditions regarding climate, factor prices and political conditions gained market shares. In the future those regions where all stakeholders work together in developing long term strategies which are in line with the overall driving forces on the world dairy market will gain market share. European Dairy Magazine 1/2011 (23. Jg.) 19