Dairy production faces unique challenges, expert claims

By Neil Merrett

- Last updated on GMT

Related tags: Dairy production, Milk, Dairy product

There are difficult times ahead for the global dairy industry
as it strives to meet growing challenges over
preserving supply, says the head of the European
Dairy Association (EDA).

Joop Kleibeuker told DairyReporter.com that should current conditions persist, there is a genuine possibility that the market could face milk shortages in the near future. "Certainly in my experience the problem we are facing is quite unique,"​ he said. In the last year, prices for raw materials like milk powder, vital to dairy processors, have continued to rise as demand outgrows supply. The EU has suggested that the prices on the international dairy market are at a "historically high level."​ Last week they reached well above US$400 (€298)/100kg with cheese prices also approaching the figure in value. In assessing a prominent cause, Kleibeuker added that price surges were the result of complex economic and environmental factors and not specifically related to any single factor. Nonetheless, he accepted that significant increases in demand from emerging markets and oil rich nations had certainly been playing a part in driving up prices. "Demand is growing strongly, with significant increases from throughoutAsia"​, he added. "As oil producing countries likeRussiabecome increasingly financially stable, they too are spending more on exported dairy goods."​ The effect of growing global demand for dairy on the supply chain has been further compounded by wide ranging reforms that are taking place within the EU, as it moves towards fully implementing its Common Agricultural Policy (CAP). Once fully implemented, production of raw dairy products vital to processors and consumers alike, will be less protected, and consequently reduced. Just last week, the EU announced it had fully revoked subsidies on all exported dairy products for the first time in 40 years, as prices continue to rise. Though the measures are only a temporary reaction to increasing demand, Kleibeuker stressed that it was an indication of where the industry was moving. "As it moves to abolish quotas by 2015, there is a clear development within European dairy for no market support,"​ he said. It is not just Europe though that has seen significant changes to its dairy production practices. Australia, like with much of its agricultural output, has witnessed major declines in dairy production as the ongoing affects of drought continue to hurt the industry. As such, dairy production is expected to decline by four per cent during 2007, according to the US Department of Agriculture (USDA).This was attributed in part in part from some of the lowest mean rainfall in the major milk producing region of Victoria since 1914. Though neighbouring New Zealand is expected to increase its dairy output by one per cent, the rate in production growth is still at its lowest level since 2000. This has occurred in part due to rising land prices beginning to restrict expansion. Though the US offered some possibility of stepping up dairy production, Kleibeuker added that a shifting agricultural focus towards bio-fuels was preventing the country from meeting its full potential. "As more Americans move to consumption of bio-fuel products like bio-ethaynol, feed prices are going up dramatically." ​ In the market for corn alone, the average price per bushel had risen to $3.20 during the 2006 marketing year, from a flat $2 rate in 2005. With these factors in place, Kleibeuker was uncertain over the future for dairy production. "It's difficult to say how long the situation can sustain itself,"​ he said. "Though there is no clear signals yet that prices will drop." Such uncertainty over pricing is unlikely to favour processors within the industry, which tend to agree prices for dairy products in 6 to 12 month contracts, preventing the industry from translating raw material costs into sales. Though he expected price change to occur, Kleibeuker remains unsure of how it will be instigated. "The question now is what factors are likely to change?" he said Kleibeuker added that in supply terms the options were sparse, with Australia and New Zealand unlikely to lift their production and US productivity remaining a question mark. "There has been increased supply by markets likeChinaandUkraine, but these remain insignificant,"​ he added. Kleibeuker suggested that Europe could yet hold some competitive advantages over its rivals in the race to remain competitive within dairy production. Firstly, he pointed to the expansion of the EU this year to 25 member states. With countries like Poland now part of the bloc, the vast areas of untapped agricultural land, could be developed for dairy production. Also with quotas slowly being abolished, existing markets like those in Germany and France could focus on more cost effective agricultural sites. More importantly though, Kleibeuker pointed to the vital role processors would have to play in shifting towards more high-end dairy products, to get better returns from its supply. "The EU has strong experience of producing added-value products in dairy production,"​ he said. "This will be important in shifting towards producing whey proteins and other nutritious goods, and moving away from more basic consumer products."

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