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8 December 1995

Low stocks and reduced subsidies to sustain firm: Dairy prices, says WTO report

Limited export supplies, declining stocks and lower subsidies as a result of the Uruguay Round should sustain firm world prices for dairy products well into 1996. Cheese continued to trade at high prices while butter sold at near-record levels in the third quarter of 1995. This year also marked the start of implementation of the commitments in the World Trade Organization (WTO) on liberalizing trade in agriculture with two of the world's main producers - the United States and the European Union - making reductions in subsidies on dairy exports.

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These are among the findings contained in the WTO's first annual report(1) on the international dairy products market, published today. The report reviews the situation in the world dairy market in 1994 and the first half of 1995. Highlights include:

- World milk production in 1994 continued to decline slightly, as further drops in output in Central and Eastern European countries offset increases in most developing countries and further record level output in Australia and New Zealand. The outlook for 1995 is for a slight increase in world milk production. Growth in Western Europe, North America, Oceania, Latin America and Asia will exceed further declines in Central and Eastern Europe and in the Commonwealth of Independent States.

- World production of skimmed milk powder also declined in 1994, particularly in European countries. In contrast, world trade recovered somewhat, and price levels were relatively high. Japan substantially increased imports of skimmed milk powder as domestic milk was diverted to meet an increase in demand for drinking milk due to the unusually hot summer weather. The draw-down of stocks in some major producing areas has reduced the supplies normally available for animal feed use. In the first three quarters of 1995 stocks remained very low, and the world market situation for skimmed milk powder was characterized by high prices and tight supplies.

- Whole milk powder production continued to increase globally in 1994, but the increase in demand for skimmed milk powder and butter in late 1994 led some major exporters to begin a shift away from production of whole milk powder to skimmed milk powder and butter. Prices for whole milk powder improved during the latter part of 1994 and remained firm in the first nine months of 1995.

- World butter and butter oil production continued to drop, while world consumption appeared to have levelled off after a long-term decline. World exports in 1994 are estimated to have declined further, but there was a notable surge in Russian import demand in the closing months of 1994 and into early 1995. World prices for butter were substantially higher in the latter part of 1994 than in recent years. They continued to increase in the first nine of 1995 and were near record levels in September 1995. World stock levels were 10 per cent lower at the end of 1994 than the previous year, and the decline continued in 1995.

- Cheese production continued to increase globally by 1 per cent in 1994, and consumption also continued to grow by 1-2 per cent. World trade further expanded, although prices were relatively high and steady. The situation in the first three quarters of 1995 was the same.

- The quantity of dairy products eligible for export subsidies under the US Dairy Export Incentive Program (DEIP) for the first half of 1995 was set at 156,000 tons of milk powder, butter/butter oil and cheese, far greater than half of actual 1994 DEIP sales. (US commitments to reduce subsidized export quantities as a result of the Uruguay Round negotiations took effect as of 1 July 1995.) In June, allocations for the period July to September 1995 were announced, totalling 73,500 tons of milk power, butter/butter oil and cheese. However, allocations were not fully utilized, notably for butter and butter oil. In September, allocations for the period October to December 1995 were announced, totalling 61,500 tons of dairy products, of which 44,000 tons were skimmed milk powder. Mexico and Algeria remain the major destinations for DEIP products, but certain Asian countries were targeted for the first time in 1995.

Note to Editors:

The International Dairy Agreement entered into effect on 1 January 1995. It replaces the International Dairy Arrangement, which had operated since 1980. As of 15 November 1995, the following were parties to the International Dairy Agreement: Argentina, Bulgaria, the European Community (15), Japan, New Zealand, Norway, Romania, Switzerland and Uruguay.

The primary objectives of the Agreement, like its predecessor, are to advance the expansion and liberalization of world trade in dairy products under as stable as possible market conditions, on the basis of mutual benefit to exporting and importing countries, and to further economic and social development in developing countries. In adopting these objectives, the economic importance of milk and dairy products to many countries was recognized, as well as the need to avoid surpluses and shortages and to maintain prices at an equitable level. An International Dairy Council and a Committee on Certain Milk Products have been established to administer the Agreement. Previously three Protocols were annexed to the International Dairy Arrangement; under the International Dairy Agreement these have been combined into a single Annex on Certain Milk Products. This Annex establishes minimum export prices for skimmed milk powder, whole milk powder, buttermilk powder, anhydrous milk fat, butter and cheese.

The International Dairy Council, on 17 October 1995, noted that limited membership in the Agreement, and in particular the absence of some major dairy exporting countries, made the operation of the minimum price provisions untenable. It decided to suspend minimum prices for all dairy products from 18 October 1995 until 31 December 1997. The Committee on Certain Milk Products, whose work was related directly to the implementation of the minimum prices, was also suspended until 31 December 1997.

(1)The World Market for Dairy Products 1995 - First Annual Report in English is available upon request from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21, Switzerland. The French and Spanish editions will be available soon.