The Perplexing Persistence of EU Milk Production Growth
Global prices for dairy commodities are low. Very low. Since 2014, prices have fallen by as much as 60 percent, and they are sitting at price levels last seen in 2009. Finding an explanation for this situation is relatively straightforward: too much supply chasing easing demand. High prices prior to 2014 drove increases in milk production, which arrived after the market turned. And the market has also had to contend with the removal of milk quotas in Europe, following more than 30 years of regulation. It was always expected (maybe even feared) that the EU would increase production once limits were removed. However, the market is now increasingly perplexed as to why the EU continues to pump out milk in spite of such difficult trading conditions.
Not everyone is to blame
In 2015, the EU-28 produced 3.1 million tonnes more milk than it did in 2014: the same as an extra Austria. However, almost half of this originated in two countries: the Netherlands and Ireland. Adding the UK, Poland and France will then explain a further 25 percent, so three-quarters of the extra milk produced sat in five countries—out of 28.
The reasons for this vary. Some are EU-wide, while others are country-specific. With milk quotas ending, farmers looked to expand production. They built new barns and added extra cows. As a result, increasing production while prices fell ensured they maintained their cash flow.
The fall of the euro versus the US dollar has been a key driver in allowing European dairy players to grow exports during 2015. Even cheese—heavily impacted by the Russian embargo—saw 2015 exports at a whisker under previous-year levels (which included seven months of Russian exports).
Irish farmers receive a helping hand
Irish milk prices fell during 2015. However, many Irish farmers received a welcome bonus in their milk cheques. Irish coops—wanting to support their members—have been able to release funds by diluting their stake in the larger companies they supply milk to. This support (both direct and indirect) totalled almost EUR 100 million during 2015.
... while Dutch farmers keep cows as regulations are clarified
In addition to utilising post-quota investments, Dutch farmers have had to contend with ongoing deliberations on regulations concerning phosphate. The expectation is that regulations will be linked to the number of cows. Therefore, farmers have kept herd numbers as high as possible, with more milk as a result.
So... where does that leave us?
EU milk production growth has perplexed many, as global markets remain weak. Prices will need to fall below the cash cost of production, taking into account continuing land-based subsidies. For most, that point has not yet been reached, but prices continue under heavy pressure. While the euro continues to be weak against the US dollar, European exports will continue to be more competitive on global markets. In Ireland, cooperatives will continue to try and support milk prices. Those with a stake in other businesses may be successful in doing so, but the level will reduce from others, as reserves run low. The critical environmental regulations in the Netherlands continue to be 'under discussion’. And most of this points to a continuation of higher export levels from Europe.
