In the past weeks there has been a lot of media coverage outlining that production in the EU will only grow very modestly. We disagree but let’s look at the reasons these voices are providing for it:
The biggest growth in milk production has already taken place in the past two years.
The past two years growth was capped by the quota system. In anticipation of the abolition of the quota, significant investments have taken place in heifers, stables and processing capacity. We have seen a sharp reduction in milk output in some member states but these were a function of looming super levies rather than anything else. The transcendence of the quota ceilings and subsequent break on production out may be viewed as an indicative for the production potential available now that there’s no penalty anymore on production.
Low prices will discourage additional production.
Although intuitively there will be few people that disagree on this statement in general terms. As we have briefly pointed out in our update of last week however, the argument doesn’t seem to carry very far. Only in very extreme cases ( >25% price increase or decrease) there’s a very small effect noticeable. We have looked this week at a longer period and the conclusion of last week remains valid, as the below graph illustrates:
