Publications - Global milk supply and the UK dairy
sector
Introduction
The Dairy Supply Chain Forum
(DSCF) recently commissioned a piece of work to give the dairy sector an
overview on the emerging trends in the global supply of milk and dairy produce.
The tender was awarded to the International Farm Comparison Network (IFCN) a
German based body that collates statistics on milk production around the world.
The report provides a desk-top review of milk supply trends around the world
and analyses the competitive position of the UK dairy sector in the light of
further trade liberalisation.
Report
Summary
The key
findings of this work are:
- Little milk is traded on world markets (only 7%), although 22%
of non perishable products are traded.
- Liberalisation is likely to see production gravitate from high
cost to low cost producers
- EU and Oceania are the main exporters and are likely to remain
so under a more liberalised market
- Production can be expected to increase in E Europe, Latin
America and Oceania. It is likely that there would be a small reduction in EU
output under a liberalised world market and a more marked reduction in high
cost countries such as Japan and Norway.
- Marginal costs of production (i.e. those that bridge the gap
between 'low' and 'high' costs of production) would tend to drive world market
prices because world demand could not be satisfied from the lowest cost
producers.
- Under a liberalised world market, the UK, Ireland and Denmark
could be marginal cost commodity producers.
This last finding is the most significant and has provoked
the most discussion. The report suggests that while UK milk production costs
may not be world beating, they certainly contrast very favourably with most EU
competitors and could be sufficient to be marginal in terms of worldwide
commodity production costs. This does not mean, of course that the UK would not
need to continue to improve its efficiency, but that it would not need to go as
far and as fast as some other major EU producers to be competitive, giving the
UK at least a short-term edge in the EU market.
There are several
caveats to this central conclusion:
- The methodology employed by IFCN to determine average farm
costs takes a very small number of 'typical' farms in each country which may
not be fully representative of average or optimum production costs
- The shortage of economic modelling in the work (although the
assumptions on liberalisation are backed up by modelling work reported in
another recent piece of work by the OECD)
- Increases/ decreases in demand are not taken into account nor
is the inevitable geographical and local segmentation of markets that ensures
milk prices vary regionally and internationally
- The analysis that world markets under liberalisation would
gravitate towards marginal world production costs (or probably US production
costs as the largest marginal cost producer) is difficult to establish
empirically, although it is economically logical as the cheapest producers are
unlikely to be able to fill world demand. This is based partly on an assumption
that they may already be working to capacity in terms of land, water or
infrastructure or may be affected by political or economic instability
- There is little empirical data to substantiate the production
potential or otherwise of the lowest cost producers such as Argentina or India.
Both the survey by IFCN and the recent report by the OECD
conclude that in a fully liberalised world market, prices for the main dairy
commodities would all rise significantly. Though a disparity may remain between
current EU raw milk prices and those under a liberalised scenario, it would not
be as great as it is currently.
The Forum has identified several areas
where further analysis is required. These include a better understanding of
comparative production costs between the UK and other major international milk
producers, manufacturing costs and exchange rate volatility.
Further information is
available on our Help page about
downloading or reading Adobe Acrobat
PDF
documents.
Page last modified:
23 August 2007
