8:52 AM Dec 11, 1995

FIRMING MARKETS FOR DAIRY PRODUCTS

Geneva 11 Dec (Chakravarthi Raghavan) -- Higher world prices for the main dairy products over the medium term is forecast in just published report of the World Trade Organization, 'The World Market for Dairy Products 1995'.

The report is by the International Dairy Council, the body looking after the WTO's International Dairy Agreement of 1994, a plurilateral agreement replacing the 1980 Tokyo Round accord in this area.

According to the report, the rise, since mid-1994, in world market prices for the main dairy products is expected to be sustained well into 1996 and this may limit the ability of some developing countries to maintain their import levels.

The current members of the agreement are: Argentina, Bulgaria, the 15-member European Union (EU), Japan, New Zealand, Norway, Romania, Switzerland and Uruguay.

However, the US which was a member of the Tokyo Round accord withdrew from it and has not signed the new agreement. Nor is Canada a member.

However, all the WTO members are party to the Agriculture Agreement which requires cut in export subsidies and domestic support in the agriculture sector including the dairy products sector.

The plurilateral agreement is in effect a cartel of the major producers and exporters of dairy products and sets minimum export prices for skimmed milk powder, whole milk powder, buttermilk powder, anhydrous milk fat, butter and cheese.

The minimum export prices for butter and anhydrous milk fat were suspended on 4 May 1994 for a period of 12 months, and was then reinstated at their previous levels.

In October this year, the International Dairy Council said that its limited membership, and particularly the non-participation of some major dairy exporting countries, made its minimum-price operations "untenable" and suspended as of 18 October the operation of the annex to the Agreement. This resulted in suspending the minimum prices for all dairy products until 31 December 1997.

The annual report of the Council, the first under the WTO, said since mid-1994, prices for all main dairy products had increased due principally to the reduced export supplies since mid-1994 and the low-value of the US dollar. The other facts had been strong demand for butter in December 1994 and January 1995, which drove up international prices for milk fat which have since then remained at those high levels.

Due to the increased world prices, both the US and the EU have reduced their export subsidies and the low stocks would continue to sustain international prices well into 1996.

"At the same time," the report says, "the elevated international prices for dairy products may limit the ability of some developing countries to maintain their import levels."

As for the longer-term outlook, the report says that the continuation of quota policies and lower real support prices in many countries might lead to lower production growth.

The implementation of the Uruguay Round agreement and lower surplus stocks will bring about lower subsidized exports.

As a result, the supply and demand balance will improve and lead to generally higher world prices for dairy products over the medium term.

In 1994, world milk production (including sheep, goat and buffalo milk) declined slightly falling by three million tons to 525 million. This followed a million decline in 1993. The reduced output in Europe and former USSR has not been offset by record production in Australia and New Zealand.

But production in 1995 is expected to increase.

World production of skimmed milk too declined in 1994. The drawdown of stocks in some major producing areas reduced supplies normally available for animal feed use. Stocks in the first three months of 1995 have remained very low and the market was characterised by high prices and low supplies.

Whole milk production continued to increase worldwide in 1994, but the demand for skimmed milk power and butter in late 1994 induced major exports to shift to production of skimmed milk powder and butter.

The world butter and butter oil production continued to drop, with world consumption levelling off after a long-term decline. World prices for butter in latter part of 1994 was substantially higher than in recent years and continued to rise in the first nine months of this year. World stock levels were 10% lower at end of 1994 than end-1993, and has continued to decline in 1995.

Cheese production continued to increase worldwide by one percent in 1994, and consumption also continued to grow by one to two percent.

There has been a steady growth in use of the production-enhancing BST hormone in US dairy herds. The European Community has further extended the moratorium on its use until 2000, with approval given for limited trial uses. In Canada a voluntary moratorium on BST use ended in July 1995, but no final decision has been made by Canadian health authorities.

[A recent meeting under the auspices of the Rome-based FAO has given the green-light for use of the BST, and this may trigger trade disputes between the US and the EU, where despite a scientific view to permit its use, consumer groups are opposing it and threaten to boycott meat and dairy products from herds which are given BST]

In terms of export subsidies, the US set for the first half of 1995, the quantity of products that could get subsidies under its US Dairy Export Incentive Program (DEIP) at 156,000 tons of milk powder, butter/butter oil and cheese. This was far greater than half of the actual 1994 sales.

The US commitments to reduce subsidised exports took effect on 1 July 1995. The allocations for subsidised exports for July to September, announced in June, was for a total of 73,500 tons, but the allocations were not fully utilized. A further 61,500 tons of allocations for subsidised exports to cover the period Oct-Dec were announced in September.

Mexico and Algeria are the main target destinations for US subsidised exports, but some Asian countries have also been targeted for 1995. The Asians targeted include Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, Taiwan, Thailand and India - arousing considerable concern in Australia and New Zealand.