There is no certainty about exactly how Europe’s dairy industry will evolve without limits on milk production but change will definitely occur.
The EU has been gearing up for the removal of quotas since 2008. In April 2008 milk quotas were increased by 2%. It was also agreed the quotas would increase by 1% a year to prepare the industry for their removal this year.
The process of allowing member states to gradually increase milk production is referred to as a soft landing because the change is gradual rather than abrupt or hard.
The European milk quotas were introduced in 1984 and have long been criticised for the market distortions they create. First, a restriction in milk supply typically means consumers have to pay higher prices for dairy products.
If European domestic prices are higher than global market prices then it makes European exports less competitive and encourages the importation of dairy products into Europe.
Quotas are difficult and costly to administer and distort market signals. This means the EU member states that produce milk are not necessarily the European countries that have the lowest costs of production.
One study, by Manchester University, suggested €2.27 billion could be saved annually by abolishing EU milk quotas.
The gradual increase in quotas means milk production in many member states is no longer being restricted by quota but instead market forces are dictating how much milk should be produced. That is exactly what the soft landing process aimed to do.
However, in the most cost-efficient nations production has continued to be restricted by the quota, ie the growth in milk quota has been equally matched by an increase in milk production.
At times milk production in these countries has exceeded quota limits, so a superlevy fine has been imposed.
With the exception of Cyprus the member states that have regularly exceeded their milk quotas are in northern Europe where most of the expansion in milk production is expected to occur when the quotas are abolished.
Milk production is expected to become increasingly concentrated in regions with lower production costs and where farmers and processors have invested the most in additional processing capacity. These countries are Denmark, Germany, Ireland, France, the Netherlands, Poland and the United Kingdom.
These seven states produce more than 70% of the milk collected in the EU. Despite the potential for them to expand milk production significantly the general consensus is that, with the exception of Ireland, growth in milk supply will be extremely moderate.
The European Commission projects that from 2014 to 2024 milk production will expand at an average of only 0.8% a year.
First, production is expected to increase in 2015 following the removal of the quotas before easing back in 2016 as the less cost-effective producers reduce their output.
Low milk prices are already stopping many European dairy farmers making a profit.
Milk prices typically fall during the northern hemisphere spring and summer when milk flows are at a seasonal high. This implies EU farmer profits will be squeezed further.
EU research suggests the volume of milk produced in Europe is very sensitive to the price farmers get paid for their milk. The EU projects the farmgate milk prices will average €0.350/kg in the coming decade, considerably more than the €0.329/kg, where milk price averaged in December.
Under that scenario EU milk production could reach 158 million tonnes by 2024, ie 12m tonnes (8%) more than in 2014. EU exports would increase considerably over the next 10 years: whey products (+50%), whole milk powder (+8%), skim milk powder (+39%), butter (+25%) and cheese (+50%). But should the milk price average €0.317/kg, then the EU could end up exporting less product than it does now.
As a result of the abolition of the EU milk quotas, New Zealand exporters are likely to face increased competition from European suppliers, particularly in the skim milk powder and cheese markets.
In fact this is already occurring as the EU looks for alternative markets to sell the product that was previously bought by Russia.
Milk prices in Europe are likely to become more attuned to the global markets and this is expected to result in greater volatility in farmgate milk prices – something NZ farmers are already well used to.
