Global milk production is estimated at 693 million tonnes in 2008 and expected to increase by two per cent to almost 710 million tonnes in 2009. Milk production is expected to rise by only 3.5 per cent in Asia. This reduced rate of growth is largely caused by a sharp slow down in China. India is expected to sustain its normal growth of about three per cent. The United States dairy sector has responded significantly to attractive internal and external prices in the last two years and is expected to show production gains of 2.2 per cent. However, this growth is lower than expected due to the down turn profitability experienced this year as indicated by the milk to feed price ratio. In Europe, the European Union, milk production increased robustly in the early months of last year as a result of strong prices but under tight feed supplies it started to fall off by mid of the year. After difficult weather condition in last two years, milk production in both Australia and New Zealand has started to improve significantly.

Global export of key milk products in milk equivalent terms may reach 42 million tonnes in 2009 up almost 3 per cent from the previous year. The four leading exporting countries are New Zealand, European Union, Argentina and Australia, in case of Whole Milk Powder (WMP); USA, New Zealand, European Union and Australia in case of Skim Milk Powder (SMP); and New Zealand, European Union, Australia and Belarus in case of Butter. After the unprecedented boom of last two years, the global dairy trade has entered a slump phase amidst weakening market conditions. The countries, especially affected, are Australia and New Zealand which have small population and limited domestic markets for dairy products. Given the extent of dependence on export; 60 per cent of manufactured products in the case of Australia and 95 per cent for New Zealand being exported, the sharp decline in product prices have hit their dairies the hardest.

India is a minor player in the world trade in dairy products despite being the highest milk producing nation. Besides structural inadequacy, a major reason for India's inability to develop its potential is its trade policy which has neither been consistent nor progressive to allow the dairy industry to develop exports. During 2007, fearing shortage in the domestic market the export of SMP was banned between February to October, the Indian dairy could not take advantage of high prices, then prevailing in the international market. Similarly, in the year 2008, in the wake of rising inflation the Government of India decided to control the price rise and suspended the export incentives on dairy products with effect from 17th April, 2008, which could be restored only on 15th December, 2008. Despite these difficulties, the Indian dairy industry has shown an impressive growth in exports during the past five years.

On account of worldwide recession and decrease in the global demand, milk product prices have come down dramatically in the last one year. The prices are expected to fall further. While in 2007-08, global prices averaged $4200 a tonne for SMP, $4027 for butter and $5073 for cheese, it has dropped to $2200, $2450 and $3275 this year, and further likely to fall to $1625, $1750 and $2625 in 2009-2010. The 2009 Oceania export prices in US$ per metric tonne, F.O.B. port are SMP 1600-2000, WMP 1700-2200, Butter 1600-2100 and butter oil 1500. While European Union export prices are 1950-2225 for SMP, 2200-2375 for WMP, 2200-2800 for butter and 2900-3100 for butter oil.

The situation has been exacerbated by the reactivation of export subsidy by the European Union in late January 2009. The quantum of subsidy available on export is, in euro per metric tonne, SMP 170, WMP 210, butter 450 and butter oil 545.

The subsidy alongside the old policy of supporting dairy products through intervention purchases at guaranteed price by the EU is expected to result in a fresh build up of stocks. With the USA's threat to follow suit, there are now fears of large scale release of subsidized dairy products on to the world market which could further depress prices.

Unlike EU and US, Indian dairy industry does not receive any production or export subsidies and is therefore, in danger of getting seriously hit on account of likely imports. Most processing plants in the country have already cut down on their procurement, which would adversely affect the milk producers.

In order to provide protection to developing countries, the Doha round of WTO negotiations had evolved the concept of "Special Products". It was agreed that developing countries will be given additional flexibility for products that are specially important for their food security, livelihood security and rural development. In such cases, lesser tariff quota reduction would be required and the developing countries may fix higher level of import duty. India had identified about 20 per cent of the agricultural products including dairy products as "Special Products". With the collapse of Doha round of negotiation, we lost the opportunity to protect ourselves from imports.

In the face of prevailing prices, the threat of imports of dairy products from European Union or USA, do not appear eminent. In the event of prices falling further in these countries, the imports irrespective of their quantity would be treated as "dumping". These imports being highly subsidised should be banned to protect livelihood of dairy farmers. The real danger of import is, therefore, from Australia and New Zealand.

In India, high value is attached to fat since 'ghee' is consumed in almost every household. The market prices for the fat in India are, therefore, much higher than the prevailing international prices. This may result in substantial quantity of import of butter oil from Australia and New Zealand which will be converted into ghee and sold to Indian consumers. This in turn will adversely affect the processing industry which would not be interested in procurement of milk from the farmers.

Import of dairy products from Australia and New Zealand were not permitted since last many years on account of phyto-sanitary consideration due to large scale use of oestrogens. It is learned that GOI has recently withdrawn this restriction, thus, opening Indian market for dairy products specially the butter oil. The exporters of yesterday have become importers today. The news has been published by “Business Line” dated March 5, 2009, and so for the information of the readers, is being reproduced as below:

“Canberra, March 4, Australian cheese (and other dairy products) may soon be seen on Indian shelves, with the Union Government doing away with a requirement banning use of artificial oestrogens (female sex hormones) in cows. The requirement has been viewed by the Australian dairy industry as a non-tariff barrier translating into a virtual ban on exports to India since 2003, when it was first put in place. We have received an official communication from India Government that the requirement, which entails declaration by exporters that the milk processed by them is not sourced from oestrogen-injected animals, will no longer be necessary,” said Mr. Mark Schipp, General Manager at the Australian Quarantine and Inspection Service (AQIS).

The decision would basically reopen the Indian market for Australian dairy products. This will be a great opportunity for the industry at a time when our dairy producers have been going through a difficult period arising from falling farm-gate prices. “We are quite excited," said Mr. Tony Burke, Australian Minister for Agriculture, Fisheries and Forestry, to Indian press persons on a Australian Department of Foreign Affairs and Trade-sponsored visit.

With such large hearted trade policies — May God save Indian dairy industry.