And signs were now emerging the surge that followed the removal of EU milk quotas was finally slowing, Johnson, who is based in the Netherlands, said.
However, price and demand recovery would be gradual over the rest of the year and New Zealand would face competition from Europeans, especially for skim milk powder.
After exhibiting significant growth in the first year after liberalisation, EU milk production growth was “finally starting to taper off”.
“The removal of milk quotas on April 1, 2015, signified the end of more than three decades of regulation in the European dairy industry,” he said.
“While the subsequent surge in milk production across many EU member states was anticipated, the fact that this growth has been sustained despite the slump in global dairy prices has taken everyone by surprise.”
There had effectively been a perfect storm in global dairy markets with the removal of quotas encouraging European farmers to increase production to maintain their cashflows.
“And this just happened to coincide with weaker demand, particularly out of China, which has prolonged the slump in global prices.”
Johnson, who spoke to dairy farmers at Rabobank client events in Canterbury, Waikato, Taranaki and Manawatu, has interpreted trends in the EU dairy market for more than 10 years.
With a key interest in the changing milk supply map across Europe, he is a close observer of how European farmers are adapting to the new marketplace since the removal of quotas.
European producers had been buffered from some of the downturn in global dairy prices, at least initially, by the favourable Euro exchange rate and slightly lower feed costs, Johnson said.
“However, the cost of production is now below break-even for many European producers and we are starting to see this translate into an increased focus on cost-saving rather than expansion,” he said.
While the economics would invariably slow milk production growth, the slow-down would not be uniform across the EU, with production showing no signs of abating in Ireland and expected to remain strong in the Netherlands.
“The Irish industry has been given a helping hand, with Irish dairy co-operatives supporting members throughout 2015 to the tune of around €100 million,” he said.
“Production also remains strong in the Netherlands, as uncertainty over environmental regulations has caused confusion, encouraging farmers to hold on to cows they would have normally slaughtered.”
Meanwhile, production growth was set to remain muted in the two largest milk-producing countries, Germany and France, which posted respective increases of only 1.3% and 1.2% since quotas were removed.
Operating in an unregulated marketplace, EU producers would now be “more reactive to market signals”, Johnson said.
He advised New Zealand producers to keep a close watch on their European counterparts.
“Producers in NZ will need to keep an eye on what is happening in the EU, particularly Ireland and the Netherlands, as farmers in Europe will produce more if they are incentivised by markets to do so,” he said.
“And we have not seen market signals dictate production in Europe before, like it does here in NZ.”
The EU was increasingly targeting marketing opportunities in the Middle East and sub-Saharan Africa and would directly compete with NZ product in certain markets.
“For example, we would expect to see more competition between European and NZ players in the skim milk market,” he said.
This year dairy consumption growth would remain relatively stable but there would be renewed import demand out of China and southeast Asia.
“As we see demand start to pick-up and production growth slow in the EU, the global dairy market will slowly re-balance.
“This will see global dairy prices improve but it will take most if not all of 2016 for the global market to return to equilibrium,” he said.
