Professor Nicola M Shadbolt

Massey University, New Zealand

OCB Conference, November 21st, 2012,

Goiania, Brazil

World Dairy Markets

Introduction

the value chain of milk is quite complex and unique.

the dairy market is one of the most heavily regulated agricultural markets

particularly in developed countries. Government interventions:

control quantities of production,

establish minimum prices

guarantee farmers an assured income.

Governments also intervene through public purchases, storage of oversupply

and by applying policies to support dairy consumption

Global demand is outstripping supply so opportunities abound

The following overview of global dairy trade taken from the recent World

Dairy Summit presentations provides some context to these opportunities

and an understanding of the key players in the market

Global production increased by 40% over the

last three decades to 749 million tonnes (MT)

in 2011; largest milk producing

countries/regions were EU-27 (156 MT),

India (127 MT) and USA (91 MT)

From 2005 to 2009, India, China and

Pakistan alone contributed to 55% of the

global annual growth in milk volume

Buffalo milk currently accounts for 13% of

world milk production; but accounts for more

than half of the milk produced in both India

and Pakistan.

Milk Production

The global dairy sector - a dichotomy of two disparate but co-existing systems;

the smallholder production systems – supporting numerous family livelihoods and

household food security and contributing to rural food security;

large scale commercial production systems – supporting the global food supply

system and providing employment to producers and others in associated processing,

distribution, marketing and support services (FAO, 2008).

The milk production growth in developing countries has been mainly due to an

increase in numbers of dairy animals and farms. In contrast, developed countries

have been focused on increasing yields and intensification of milk production

Milk Production

Asia has the highest share in consumption (38.4%) followed by Europe (29.6%) and

North America (13.3%); the world average per capita milk consumption was 107.3

kg/year. The per capita consumption is higher in developed countries (100 to >

300kg/year) and lower in developing countries (10 to 100 kg/year) where

consumption of all dairy products is expected to increase by around 30%.

Milk Consumption

Only 62% of milk produced is delivered to processing plants, the USA and

Europe account for 51.3% , with South Asia accounting for only 5.1%.

In developing countries there is a large informal sector.

However most of these countries present a trade deficit in milk

Milk Consumption

Strong relationship between GNI and dairy

consumption per capita

Milk Consumption

Consumers then….

Consumers now…

what, when, with whom, where

Slow growth in cheese in EU27

and USA

Milk Processing

Steady growth in whole milk powder

particularly in China and New Zealand

Milk Processing

Steady growth in skim milk powder

particularly in EU 27 and the USA

Milk Processing

Steady growth in butter and butteroil

particularly in India and, more recently

the EU 27

Milk Processing

Globally the dairy industry is extremely fragmented with the top 21

processors accounting for just 21% of world milk production.

Top three dairy companies by volume are Fonterra (20.5 MT), Dairy

Farmers of America (17.3 MT) and Nestle (14.9 MT).

In terms of revenue the top three were Nestle (27.3), Danone (16.0)

and Lactalis (11.8).

Key Players in Dairy Industry

Key Players in Dairy Industry

Key Players in Dairy Industry

Key Players in Dairy Industry

Key Players in Dairy Industry

The leading customers for

dairy products are food

retailers, food service

industry and the food

processing industry. These

companies are larger than

dairy industry players and

hence have significant

market power. The

response to this in the dairy

industry, mergers,

acquisitions and strategic

alliances, has been very

pronounced.

Brouyer (CNIEL)

Mergers & Acquisitions - IDF

World trade – 7% of production

Three largest exporting nations in 2011: New Zealand (26%), EU-27 (26%)

and USA (12%) - 64% of all exports; top 10 exporting countries account for

nearly 98% of all dairy exports. But 6 of the largest importing nations

account for less than half of the world market.

World trade – top 5 cheese exporters

World trade – top 5 WMP exporters

World trade – top 5 SMP exporters

World trade – top 5 butter and

butteroil exporters

Imports carried out by emerging countries consisted mainly of dried dairy

products. They absorb 96% of WMP deliveries, 92% of SMP shipments,

57% of traded butter and 44% of cheese exports

Milk Imports

Milk Processing

Investments in new driers

World trade

• Dairy industry globalisation, together with domestic and

trade policy reforms, have shifted international dairy

markets from a supply driven paradigm, characterised by

excess production and depressed world prices, to a

demand driven paradigm that is responsive to world

market signals and changing consumer preferences.

• But there are:

– increasing concerns of consumers about health and nutrition

– tightening of food law legislations (e.g. tax on saturated fat)

– Increasing concerns on environmental impact – sustainability,

energy, biodiversity, carbon & water footprint

– a more unstable market environment

– more extreme weather patterns,

– rapidly changing macroeconomic situation, input prices and

consequently increased price variability (FAO, 2011).

World trade prices

Volatility, uncertainty, complexity, ambiguity

Estimated world trade CAGR 4-6% challenged by price and

exchange rate volatility, differing government policies on trade

These are the choices farmers of the world face

NZ land/climate is really only suited to growing grass/forages.

For most farmers in the world it is the cropping conundrum that is their greatest challenge. This creates or exacerbates the volatility in global food and fibre markets - delicate supply:demand – vulnerable to shocks – where will the milk come from?

Changes in regional milk volumes – Jan 07 – March 12

Food – Feed – Fuel – Fibre?

Milk and feed

prices

IFCN Profit indicator

Base = year 2006

Indicators combining milk & feed price

IFCN milk price indicator based on skim milk powder and butter

IFCN feed price indicator = world corn price * 0.7 + world soybean meal price * 0.3

IFCN Profit indicator 2006 = (milk price in a month/year – Ø 2006 milk price) - (feed price in a month/year – Ø 2006 feed price) *

factor of g concentrate / kg milk which is depending on the farming system

Milk feed price

ratio

1996-2005

annual

2006 -5/2012

monthly

1996-2005

annual

2006 -5/2012

monthly 1996-2005

annual

2006 -5/2012

monthly

2011 2011 2011

Conclusions

• The world demand is growing by over 2 per cent a year, and milk supply is growing at a slower pace. The demand for dairy products is stagnant in developed countries but is strongly increasing in some developing regions.

• Much of the future growth in consumption of dairy products is expected to happen in the developing world.

• Many of these countries view food security as an integral part of their nations overall security; agricultural policies in these countries can be focused on promoting domestic production and restricting imports; much of the milk is sold in the informal markets in these countries.

• The assumption is that the emerging middle classes will shift from informal to formal markets – what is the trigger point

• A challenge for export oriented dairy businesses - entry into these fast growing markets is strategically essential.

• What will the consumers in these formal markets require?

Thank you