According to a report published by International Dairy Federation (IDF) on the World Dairy Situation 2007, the worldwide milk production is expected to grow at a slower pace in 2007 and is estimated at 655 million tonnes, only 9 million tonnes more than the production of 2006.

The strongest growth would be in Asia, notably in China and India. Milk production is projected at 36 million tonnes in China and 94.60 million tonnes in India. India would continue to be the largest milk producer, followed by the US, with projected production of 82.60 million tonnes.

Milk production in EU is sliding down. As a reaction to the announcements of cuts in support price and the de-coupling policy, which allows farmers to benefit from direct payment, even when they are no longer producing milk. Moreover, an increasing number of dairy farmers have seem to left the industry and taken up better opportunities in other forms of agriculture or jobs outside agriculture, resulting from better economic growth. Growth is also not expected in US, since in countries like America, milk production has lost attractiveness compared to other types of farming. The prices for arable crops, notably grains and soya beans have increased, due to higher demand in the world market and the increasing utilisation of land and crops for bio-fuels.

In Oceania, milk production would be static, as a result of drought in Australia. Milk production in Oceania is largely dependent on weather conditions and these were very bad in Australia as a result of severe droughts. The winter rainfalls in 2007 had improved the situation, but it will be long time before things are back to normal and no recovery is expected in 2007.

Major changes are not expected in dairy products basket. World butter production increased for two years, in 2004 and 2005 and then declined in 2006. It is expected to decline again in 2007. Industrial cheese production is continuing to grow. The major cheese producing regions are Europe and North America and both areas are expected to have a faster growth rate.

The production of condensed and evaporated milks is subject to a declining trend for many years in the developed market. It has been replaced by many other dairy products, especially liquid milks of UHT type, coffee cream and coffee whitener including some of the non-dairy origin.

Production of milk powders increased last year and is expected to continue in the year 2007. However, this growth is mainly restricted to whole milk powder (WMP) and semi-skimmed milk powder, while skim milk powder (SMP) production is on the way down. The reason in favour of WMP was the ongoing fat surplus problem in EU, together with the reduction of butter intervention price. This trend would continue to remain despite the price increase for butter.

For SMP, despite high market price, production is likely to decline in 2007. The reasons are that milk production would grow only modestly and in most major producing areas of the world, less skim milk would be available for drying, because of the on-going growth of the other product markets. In EU, the subsidy for processing skim milk into casein was set at zero, in October 2006, which dampened the production of SMP. This is good news for Indian dairying, which has created a large capacity for SMP production.

World trade in dairy products after a period of relative stagnation, started recovery in the second half of 2006 and it continued in the first half of 2007. The recovery is due to prosperity resulting from economic demand. However, the bullish price situation is not likely to continue long and would level down.

Export of butter and butter-oil recovered in 2006 and this recovery continued in early 2007. Major exports were from EU; New Zealand gained additional market share but it is not sure whether this can continue. The total volume of the world trade in cheese has accelerated and this trend is likely to continue in the year 2007.

The world trade in WMP continued to increase in the first half of 2007, but it seems that though it would continue in the second half also, it would be at a slower pace. The reason is that the supply is short and countries like New Zealand, US and Argentina have cleared their stocks.

The stocks in milk powder in Oceania have also exhausted, because their export exceeded production, last year. The biggest exporter of the WMP in 2006 was the New Zealand with export volume of more than 0.7 million tonnes, which is an all-time record. EU was the second major exporter, but with quantities exported, reduced considerably.

The export of SMP also increased in the first half of 2007. However, the availability of the SMP will be significantly less in the immediate future, despite the fact that consumption is declining in some countries. Further, because price for other dairy products have gone up, SMP production has lost its attractiveness against other utilisation of milk.

The SMP exports in 2006 by the EU were at historically low level. This was mainly due to abolition of export refund. It seems to be unlikely that the subsidy will be reintroduced. This will only happen if the EU market prices and the world market prices go below the level of EU interventions. The high prices for SMP are therefore likely to continue, however with leveling in near future. India was also one of the players, but in February 2007, all exports of SMP were banned until September, because of shortage in home market. The export has been resumed since November 2007 and hopefully would continue offering opportunities of growth to Indian dairy industry.

The outlook for the trade in dairy commodities for 2007 appears bright. However, since the new market equilibrium, in respect of prices has to be found, the question is whether international trade in dairy products will continue its growth in 2007 at the same momentum as in previous years. Because of the price situation in 2007, one may ask whether demand can follow the expected trends, but it would be premature to expect stagnation in the trade. In established markets, the potential for demand to reduce slightly can release the additional supplies, which are needed to maintain the growth of trade.

The price rise in 2006 and 2007 was unprecedented and therefore no experience is available on which to base conclusions as to what might happen in future! Nevertheless, it can be assumed that much would however depend on the farm policies of the big players. These policies are mainly oriented towards supporting their protected domestic markets and not, with the exception of few, aiming at the new opportunities which are offered by the growing demand of milk and its product by the world's population and its growing purchasing power.

The IDF has also published prevailing milk producers' price trend to reflect the development of product prices as well. Looking back at the year 2006, the farm gate prices continued to descent in the many parts of the world and farmers were faced with reduced prices. The lowest prices were paid in India and rural China; it being Euro 21 per 100 kg, in comparison to Euro 28 in US; Euro 33 in New Zealand; Euro 34 in EU; Euro 56 in Norway; Euro 58 in Canada and Euro 68 per 100 kg in Japan. In the year 2007, strong increases of milk prices are expected in the EU, particularly in the second half of the year and in the US. In the emerging markets, prices might also have to follow these tendencies.

In India, the milk producers are already demanding better prices and it is the responsibility of the processing industry, especially those engaged in the production of export-oriented products to share the benefits of high prices of milk products prevailing in the international markets with their milk producer suppliers. This would lead to equity in development at the end of both producers and processors.
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