Irish dairy exports are and will become even more internationally focused in coming years. In 2013, almost 40% of Irish dairy exports were sold on international markets, as opposed to 26% of food and drink.

Asia and Africa have been the regions where these increasing exports are being sold. Markets in the Middle East and the US have been declining for the last three years. In terms of product, milk powders and infant milk formula are the two key products that have shown the highest growth for the last number of years and these trends look set to continue.

That said, industry statistics show cheese and butter exports have increased for the last 10 years, with cheese alone increasing by almost 50,000 tonnes for the last three years (see 2013 data in Figure 1).

Emerging markets (Asia and Africa) look set to continue this import trend, with developing countries set to increase butter and cheese consumption by 40% in the next 10 years. It is also forecast that whole and skim milk powder imports in these regions are set to increase by 30% over the next 10 years. One thing is for sure, Irish dairy exports will continue to increase for the next number of years as they have for the last five years (See Figure 2).

The big drivers

Statistics show that world population will grow by 760m people from 2015 to 2025, with 302m born in Africa and 364m in Asia. Populations in Europe, Latin America and North America will flatten, or even decline, over the same period.

An increase in spending power is also another big driver of dairy product consumption. An OECD working paper suggests three billion consumers will join the middle classes from 2010 to 2030, with changing lifestyles shifting dietary habits, especially in India and China.

With milk quotas set to be removed, everyone expects European production to ramp up massively. However, OECD and FAO experts suggest that, while global dairy production is set to increase, they see European production increase from 150 million tonnes (Mt) to 160Mt. But they also indicate that milk production in India is set to grow from 135Mt to over 200Mt in the next 10 years.

Dairy consumption is forecast to increase by over 3% per year in Africa, India and China, with modest increases in most other centres of demand. Tetra Pak research predicts that the main deficit regions for liquid milk will continue to be China, other Asian countries and African countries.

Long-term global fundamentals

Given the significant drop in dairy product prices in 2014, and the predictions for 2015, one has to wonder whether the market fundamentals of the dairy sector are strong for the next 10 years. The following paragraphs present some of the opinions from the OECD/FAO outlook for 2014 to 2023.

World milk production is projected to increase by 180Mt by 2023 when compared with the base years examined (2011 to 2013) and the majority of this increase (78%) is anticipated to come from developing countries which already import a lot of dairy product at the moment.

This, however, is going to be a slower growth rate than we have witnessed for the last 10 years. The average growth rate for the projection period is estimated at 1.9%, which is below the 2.2% encountered for the last 10 years. The slowdown in growth reflects increasing shortages of water and suitable land in developing countries, combined with the slow introduction of modern dairy production systems.

The dairy industry is relatively slow to change compared with other agri sectors, because of the large capital requirement necessary to provide infrastructure, such as winter housing and milk refrigeration and cooling systems.

So while the growth rate of milk production is predicted to slow, for the reasons outlined above, the FAO outlook is that per capita consumption of dairy products in developing countries is expected to increase by 1.2% to 1.9%. And the expansion in demand reflects robust income growth and further globalisation of diets.

The rate of consumption in the developed world is not expected to increase by nearly as much. The FAO outlook suggests per capita consumption in the developed world will increase between 0.2% and 0.9% per year.

A general expansion of trade in dairy products is expected over the coming decade, with strong growth forecast for whey, cheese and skim milk powder at more than 2% per year. But lower levels of growth are predicted for whole milk powder at 1.7% per year and especially butter at 0.7% per year. The OECD predicts the bulk of this consumption growth will be provided through expanded exports from the United States, the EU, New Zealand, Australia and Argentina.

What could slow dairy demand?

The underlying premise behind the OECD’s positive outlook for international dairy prices is the assumption that there will be continued strong growth in incomes among developing countries, especially in the Middle East, north Africa, southeast Asia and China. Any slowdown in economic activity in any of these countries could impact significantly on dairy prices.

Alongside this is the development of the Chinese dairy market and the intention to become self-sufficient in dairy and dairy products over time. Again, this will be a key determinant of price.

It is currently expected that Chinese milk production will start to grow again from 2014 onwards, but at the same time, any delay in that would result in higher dairy prices worldwide and, as we have already said, developing dairy businesses take time to establish. Figure 3 shows the trends and make-up of Irish dairy exports to China.

The ending of milk quotas will undoubtedly have some impact on dairy output prices. However, the FAO/OECD outlook projects a smooth transition, because actual output remained below EU quota levels in historic years for most member states. But if there was a strong supply reaction from some of the more established EU dairy countries, which have more or less filled their national quota year after year, then there could be an impact on global dairy prices. Or at the very least, there could be higher volatility of dairy product supply from the European Union.

As we have seen over the last number of years, unusual weather events can have a major impact on dairy markets due to the knock-on effects on feed supply or grazing conditions. A departure from normal weather conditions, which does occasionally happen, could have an effect on dairy product supply and this could have a positive effect on prices.

External forces

Two other issues that could have a strong impact on supply are environmental legislation and trade agreements. Environmental legislation could have a significant impact on the future development of the dairy supply chain.

In some countries, greenhouse gas emissions from dairy activities comprise a considerable share of total emissions and any policy changes could have an impact on the dairy industry in those markets.

Only very recently, Australia signed a free trade agreement (FTA) with China and further potential exists for other FTAs and/or regional trade agreements (RTA) that could significantly impact on markets.

Specific market access changes have the potential to skew a market one way or the other. At the moment, the Russian ban on European produce on its supermarket shelves is impacting on price. Any further escalation of this ban could again have a serious impact on milk price and the future outlook.

Remember, Russia has a population of 140m people and was seen as a country where a lot of potential existed to improve dairy product consumption. An increasing middle class income was going to drive this increased consumption and European dairy companies were queueing up to supply quality product into Russia. However, all those plans are now on hold, including Irish plans to get product into Russia.

Markets and market prices drive the underlying causes of volatility which are many and varied. Over the last 10 years, the causes of volatility in terms of dairy product were input price volatility, weather/climate, short-term inelasticity of supply and demand, exchange risk, exposure to poorly understood new markets, demand fluctuation, inter-connection between markets, milk price supply contracts and the lag between price and production decisions.

All of these factors combine to state that there is real potential for expansion in a global market that looks set for increased consumption. However, there are things that can go wrong along the way and there will inevitably be some blips on the road to progress.