Europe's dairy producers go from boom to stagnation

Monday, April 6, 2015

European milk producers who expanded production in expectation of a post-quota bonanza are now having to slam on the brakes as dairy export markets dwindle or disappear

by NORMAN DUNN

Thirty years ago, quotas were introduced to cap milk production in Europe. Just in time, many said, because up until then the European Union (EU) policy of buying up surplus milk was not only bleeding the community dry, it was also filling cold stores from Copenhagen to Cadiz with unsellable deep-frozen butter.

By April this year, milk quotas will be history in the EU. In expectation of the new free market, milking herds have been expanding in all major European dairy production countries. Ireland, for instance, aims to increase its milk output by 50 per cent by 2020. Last year, the Netherlands announced an expected eight to 10 per cent increase in milk output.

France may not increase output in total, but main production areas such as Brittany have long planned massive expansion aprés quota. Here's a statistic from INRA, the French research and advisory organization, that reflected well the mood there. Back in 2000, only three per cent of the country's dairy farms ran 100 cows or more. By 2020, INRA reckons this will apply to over 30 per cent.

Germany is not expected to increase milk output (it already produces 20 per cent of all EU milk). But the country is restructuring at full speed with huge capital investments by the dairy farmers who choose to remain in the business. With under 80,000 left compared with 91,000 just five years ago, milking cow numbers remain stable at around four million.

But here's the shock: politicians, bankers, market planners – yes, and farm organisation leaders, too – tended, even three months ago, to predict a bonanza in global dairy trade, especially for what they see as ultra-efficient large-scale European milking herds. Instead, there's stagnation, at best.

It's easy to understand where the euphoria came from. Just look at the expansion in the early years of the millennium. Europe's dairy exports to developing countries, particularly in North Africa and Asia, doubled to the equivalent of C$18.3 billion between 2000 and 2005. Dutch dairy farmers creamed off the most of this new trade with a 26 per cent share. France grabbed 19 per cent. In the last decade, Germany continually expanded its cheese and milk powder export empire, bringing in $1.4 billion per year from sales in developing countries alone.

But, as February 2015 came to an end, dairy folk found themselves in a completely different world. Russia's (admittedly not-to-be-foreseen) embargo, and reductions in the huge Chinese market, meant no conventional producers – the ones that expanded output capacity at great cost – are making money out of milk. Quite the opposite, in fact. In February, the 18,000 Dutch farmers who produce milk were receiving an average 34 Canadian cents per litre and claiming that over 50 cents is needed to pay all production costs. Before Putin closed the borders, Russia was worth an annual $3.2 billion just a year ago in terms of dairy export earnings, paying $1.4 billion for European cheeses alone.

The sector sits on a whole milk powder (WMP) export market with a thumping 50 per cent drop in price at the beginning of 2015, much of this due to dwindling demand from China. The republic is still buying loads of European milk powder, but nothing like the amounts of just a year ago.

Not brightening the outlook for the Far East dairy market is increased competition from New Zealand, Australia and North American dairy sectors. Australia, for example, is planning a new campaign selling fresh (Ultra High Temperature) drinking milk into China. Deals with the customs authorities mean the commodity can now land in Chinese supermarkets just eight days after leaving Australian dairies. The Australians expect to sell an extra 100,000 tonnes of drinking milk in the present year, representing an increase of 20 per cent in Australian fresh dairy exports to the East.

What's in store for the beleaguered EU dairy farmers? Well, at least the brakes are on now. Milk output has already levelled off, compared with a five per cent increase in 2014. And at least cattle feed is comparatively cheap so far. A safety net of sorts – what the EU calls Private Storage Aid (PSA) – is already in place with the EU paying all storage costs for dairies electing to take some of their butter, milk powders and cheeses off the market until the price situation eases.  

It would be wrong to say that no one warned against this uncontrolled expansion. John Allen, dairy adviser with the global Kite Consulting Group told Farmers Weekly in Britain that the expectation of sufficient market growth to soak-up extra production immediately post-quota was wrong. In the first weeks of this year, he correctly warned that expansion would push farm gate prices down to under 30 cents a litre, with few farmers therefore able to produce milk profitably.

By then, though, it was too late for hundreds of thousands of European milk producers. This adviser predicts extensive restructuring will be required for EU dairy farms. He's almost certainly correct there, too. BF

Norman Dunn writes about European agriculture from Germany.