OECD says cheese to recovery

By PHILIPPA STEVENSON

Cheese and wholemilk powder, both important New Zealand exports, are forecast to be in a vanguard of agricultural products leading a recovery from all-time low international commodity prices.

The gradual turnaround in the historically low prices of the past two years is predicted in a major report released last week by the 29-member Organisation for Economic Cooperation and Development (OECD), to which New Zealand belongs.

It expected OECD country cheese exports to grow by more than 33 per cent and wholemilk powder by 23 per cent over the next five years.

In its sixth Agricultural Outlook, giving detailed projections up to 2005, the OECD said the main factor driving recovery would be a strengthening demand for farm products as the global economy recovered faster than expected from the economic and financial shocks of the past three years.

The report warned, however, that the pace and extent of market recovery could be put at risk by an apparent lack of enthusiasm and dedication with which nations had pursued further policy reforms over the past couple of years.

In responding to pressures on farm incomes, a number of OECD countries have resorted to additional measures of support and protection that have not always been consistent with the longer-term direction of reform and which risk delaying needed adjustments, the OECD said.

The report said accelerated trade liberalisation from WTO farm trade talks would create an environment for stronger recovery in both world trade and producer incomes.

Trade liberalisation in China, which could gain entry to the WTO next year, could also offer a substantial further boost to demand for farm products, especially if accompanied by domestic reforms.

Wholemilk powder prices are expected to benefit from economic recovery in Asia and Latin America. The reports forecasted that skim milk powder returns would be boosted by the economic turnaround in Asia, which accounts for around 50 per cent of world skim milk powder imports.

Butter prices, strongly dependent on Russia's faltering economy, are forecast to advance with rising vegetable oil prices, while cheese returns should rise on the back of strong global demand, especially from within the OECD, which accounts for 80 per cent of world consumption.

The report said the world dairy product trade continued to shift from supply-led trade in basic commodities to demand-led, high value-added products.

The two factors driving the change were the reduction in subsidised exports agreed under the Gatt (now WTO) Uruguay Round, and the wider adoption of domestic support policies de-coupled from production.

This has reduced the volume of surpluses available for dumping on international markets and enabled market forces to exert more influence on both producer and processor decision-making.

Technological advances, especially protein extraction and fractionating, had also enabled rapid development of the dairy ingredients markets.

In the Pacific beef market, the OECD said trade should increase with an upturn in demand in Asia, especially in Korea.

However, it said intense competition following a sharp rise in exports from the United States and Canada would constrain prices.

It said the threat from South American countries to other beef exporters in the Pacific beef market was light in the short term because quota allocated to them in North America was small, Asian markets were remote, supply was restricted, and markets for their high-quality, grass-fed beef had yet to be established.

Over the medium term, though, Argentina, Brazil, Paraguay and Uruguay could become more competitive.

The sheepmeat trade would continue its downward path with little change expected in the European Union, and market prospects dependent mainly on trends in Oceania and, to a lesser extent, the United States.

The US tariff quota restrictions placed on New Zealand and Australian imports last year would sharpen competition between the transtasman neighbours for non-OECD custom, especially in the Middle and Far East, the OECD said.

The tariff quotas could also raise prices for domestic lamb in the US domestic market, encouraging consumers to switch to other meats.