In 2015 European milk production expanded by 2.3% compared with 2014. In percentage terms this doesn’t sound much but in absolute terms it is. An extra 5.5 million tonnes of milk was produced by the European Union 28 countries last year. This equates to about 25% of New Zealand’s annual milk production.
Typically when NZ milk production slows, the global markets react by a lift in prices. However, with so much extra milk coming out of Europe at the moment it is not surprising the markets are taking little notice of the slowing in NZ’s milk output.
Assuming normal market forces were in play the extra milk supply coming out of Europe, not matched by an equivalent lift in demand, would result in a decrease in dairy commodities prices that would in turn reduce farmgate milk prices. This is exactly what is happening in NZ, but the price signal European farmers are receiving is being muffled by the supportive measures the European Commission is using.
The commission has doubled the size of its intervention programmes for skim milk powder and butter. The programme now allows for 218,000t of skim milk powder and 100,000t of butter to be bought. The intervention price for butter is €1698/t or about US$1900/t. The extension of the intervention scheme will allow European dairy companies to continue to pay a milk price that is above the level they might otherwise have been able to afford. Milk prices have not dropped far enough to encourage farmers to abandon plans to grow their milk supply.
Other ways the commission is supporting its farmers include additional direct subsidies for those in need, and allowing milk processing companies to put voluntary limits on milk production in place. What these measures do is encourage farmers to hold on to plans to grow or at least maintain milk supply. The support measures muddy the price signals coming from international markets.
It is not surprising European dairy farmers have embraced the post-milk quota era with all guns blazing. Some farmers spent many years preparing their businesses for the opportunity to expand milk production. New barns were built, dairies were expanded and herd sizes increased. Dairy companies also reacted by building new processing facilities to absorb the expected increase in milk supply.
Numerous studies were done, before the quota was removed, to assess the impact of this policy change. They mostly under-estimated the actual increase in milk production. Several studies concluded there would be a lift in milk output of about 1% and the growth would come from the more efficient milk-producing countries in the north-west of Europe. The studies might have got the scale of the increase wrong but they did correctly pick which nations would expand milk output. Figuring out where the extra milk would come from wasn’t that difficult given there were only about eight countries that were constrained by the quotas in the years leading up to their removal.
The countries that were expected to increase production the most were: France, Germany, Ireland, Denmark, Poland, the United Kingdom and the Netherlands. In absolute terms the countries that have expanded output the most are: the Netherlands, Germany, Ireland, Spain, the UK, Poland and Belgium. The expansion has largely happened where it was expected to, with the exception of Spain. Spain did exceed its quota limit in the year to 2015 but was probably written off by analysts because of its Mediterranean location, more famous for beach holidays than producing milk.
Even some of Europe’s largest dairy companies weren’t fully prepared for the sharp lift in milk production in recent months. Friesland Campina – the largest milk processor in the Netherlands – couldn’t manage all the milk it was supplied earlier this year, despite investing heavily in extra processing capacity. This resulted in the dairy company paying its farmers a bonus to not expand milk supply until the processor could find ways to manage the larger intakes.
One factor that might have been overlooked in the studies was the impact of the extremely high dairy prices that happened from 2013 to 2014. This was the point when Europe’s dairy farmers were planning for the post-quota era. This was when they made plans to build bigger sheds, and keep additional replacement stock.
Since the quotas have come off these farmers have concentrated on operating larger dairy units, rather than focusing on the profitability of these systems. And as long as the European Commission keeps bailing them out there is little incentive to cut milk supply.
