Appetite for Milk

3/23/2013 7:00 AM

Insight Into World Supply, Demand Factors Influencing Milk Price

Milk seems to be turning into one of the most volatile agriculture commodities of modern times. There are three major reasons for this phenomenon.

The first is the changes in the quantities of milk available internationally and their effect on world market prices. The second is the amount of time it takes to increase milk production as a result of change, and finally the delayed reaction of the demand to changing dairy commodity prices. Another important determinant of milk price is feed availability. Feed costs increase, leading to cost of production increase, and indirectly land prices increase. The demand for grain by food, fuel and feed has driven prices up and if you add to that droughts in the past years in Australia, and most recently some of the hottest summers on record (U.S. and Russia), world supply of grain has not kept up with demand.

Milk demand in the past was driven by population growth, now milk consumption per capita in developing countries is part of the equation that is fueling demand. As expected due to consumer purchasing power, milk consumption is high in developed countries and low in the developing ones.

For example, the United States per capita consumption of milk is around 250 kilograms (550 pounds) per year. China and other Asian countries have less than 30 kilograms (66 pounds) per capita per year. The size of the market and its potential for sustained growth creates opportunities for U.S. dairy products. Higher incomes in these developing countries will increase the demand for animal based food.

According to studies done by the International Farm Comparison Network (IFCN), if China, which has a milk consumption around 22 kilograms per year, increases its per capita consumption to the level of Japan (78 kilograms per year) the amount of milk needed to cover the demand would be around 72 million tons of energy corrected milk (ECM). This is almost the same volume of milk produced in the U.S.

The IFCN recently released its annual Dairy Report and ranking of countries according to milk production. The IFCN reports milk production in two ways: actual milk volume and ECM, which adjusts for substantial variation in butterfat and protein using 4 percent for butterfat and 3.3 percent for protein. The number one producer of milk in the world (all numbers in million metric tons), is India with 137.5 followed by the U.S. 84.3, Pakistan 41.6, China 33.9, and Brazil 32.0. It may come to a surprise to many that India is the leading country in ECM production but it’s important to note that more than half of its milk produced comes from buffalo. The U.S. ranks first among countries using only cow milk.

New Zealand’s ninth and Australia’s 19th milk production are seen as key influences on international prices. Their surplus milk affects the amount of products such as milk powder, butter and milk fat that they will place on the world market.

The IFCN also provides an estimate of the milk delivered to consumers via the processing and distribution system. The U.S. deliveries surpassed the combined total milk production of the five countries mentioned above. Indian and Pakistan delivered only 17 and 3 percent respectively of their milk produced.

The U.S. Dairy Export Council (USDEC) believes that there will continue to be world demand for dairy products. Milk expansion has slowed worldwide due to various issues, including weather, causing an under-supplied situation for 2013. In 2012 the market absorbed New Zealand and Australian milk production without lowering prices, showing that there is a growing world demand for dairy products. Dairy exports should continue to remain favorable, but there still exists much uncertainty regarding actual milk prices that will be seen in 2013.

Editor’s Note: Ximena del Campo is a dairy Extension educator, Penn State Extension, Lancaster County.

Does milk have a lot of untapped potential in today’s competitive beverage market?

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