The end of milk quotas will see the limits on European production disappear so farmers and processors will be free to pursue growing world demand.
But the post-quota world will bring new challenges, a Rabobank report has forecast.
It found:
The future is now
A lot of the growth in milk production has already happened as northern European nations constrained by quotas have been pushing their limits in anticipation of abolition.
Production growth will likely slow after 2015, rising by another four billion litres across the European Union by 2020.
That would be about a 3% increase on the current three-year average of 136b litres.
There are other limits
EU milk production can keep growing only until it hits the next barrier. This will vary in different countries: it could be capital, available land, environmental restrictions or competition from other industries.
There’s still support
The story goes that when quotas go, the dairy industry will be fully deregulated. That’s not true.
The Common Agriculture Policy will add to farmers’ incomes, even if payments keep falling. Intervention buying and private storage aid will remain as crisis measures and protected status symbols will help safeguard quality products.
Long-term demand for dairy
Farmers suffering rock-bottom milk prices might be sick of hearing industry chiefs and politicians drone on about dairying’s bright future.
But Rabobank still expects global demand for dairy products to grow 2% a year 2014-2020, despite occasional volatility.
Also, it suggests key exporters will struggle to up production to match that increased interest in the medium term, lending support to prices.
Here come the waves
Volatility will be the key problem for European farmers as world markets become more integrated.
Behind lies the lag between pricing and production decisions, the high cost of starting up and leaving the sector and fluctuating feed, fuel and fertiliser values.
EU farmers will be particularly affected because, compared with global competitors, they have high production costs.
Good convergence
European farmers could benefit from how the gaps in world milk production costs are closing.
Low-cost regions such as New Zealand are coming up against new limits such as land availability and environmental rules. This pushes up their costs towards EU levels, removing their advantage.
Bad convergence
With world prices coming together, it might be cheaper and easier for global processors to buy milk from outside the EU – either inside the far-flung market or close by.
A well-controlled supply chain will be important in a volatile world and buying milk from lots of smaller European farmers adds extra cost.
Asia is catching up
Reports from China suggest milk production costs on some Chinese farms are getting closer to European levels. This trend will continue.
In the Chinese market, more home-grown milk from big, integrated dairy farms will become more competitive with EU exports by harnessing economies of scale.
Hard to grow at home
European farmers will find it tough to get bigger and intensify production because of high land costs and limited availability of capital.
Farmland is a good investment but returns from farm businesses are not good enough to make major cash injections likely.
In Europe’s best dairying areas, land is held by individuals in lots of small parcels, making it hard for investors to gather large blocks.
Beyond the continent
The EU market will still be full of affluent shoppers who eat a lot of dairy. But population growth is only steady and the economy is stuttering so any growth in demand will be slow, not requiring much extra milk.
EU dairy processors will be forced to look to foreign markets for new customers. Then they have a choice: push European production harder and pay the higher milk prices needed or source milk close to the new consumers
Where will the EU grow?
To produce more milk in Europe we might expect dairying to spread in areas close to the current main milk fields. They are Ireland, west England and Wales, the Low Countries, the French and North Sea coasts, central Europe and Scandinavia.
But those areas are hemmed in by the sea and nearby land is expensive. Expansion in eastern Europe is an option but it would require big investments in processing, logistics and skills.
A divided approach
Dairy companies will have to take different routes. Smaller dairies focused on domestic markets could grow value rather than volume while international businesses perhaps take the option to increase milk supplies from abroad.
Even European co-operatives could be forced to look beyond their members for new milk or face losing out in growing markets.
UK Farmers Weekly
