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EU dairy sector developments and prospects

15 April 2013

According to the EC’s report, ‘Prospects for agricultural markets and income in the EU 2012–2020’ published in December 2012, price volatility continues to be of concern in the EU dairy sector, particularly given recent increases in animal feed costs linked to drought conditions in the US and parts of the EU. At the policy level, in view of projected global and EU price developments, it is not envisaged that intervention buying and export refunds will play a significant role up to 2022. This is consistent with recent developments. Since the final quarter of 2009, no export refunds have been available for EU dairy exports, and by the end of 2012, EU intervention stocks had largely been disposed of.

According to the EC report, EU milk deliveries to dairies are projected to increase by 5.9% between 2011 and 2022, reflecting increased yields per cow and declining production for on-farm use (-4.9%). This will leave EU dairy companies looking for a market for an additional 12.9 billion litres of milk. While consumption growth for higher-value dairy products is expected “at a relatively faster rate in the near future”, international markets will need to be found for a considerable volume of dairy products (slightly over two-thirds of the additional milk output, according to some estimates – see AgritradeExecutive Brief Update 2012: Dairy sector’, 15 October 2012).

However, good export prospects are reported for EU cheese: exports are projected to increase steadily and strongly, from 683,000 tonnes in 2011 to 956,000 tonnes in 2022 (+40%), while domestic consumption increases only 4.2%.

The EC analysis identified particular opportunities arising from expanding dairy demand in China, South East Asia and the Middle East, but recognised that in Asia the EU faces serious competitive challenges in bulk products (particularly whole-milk powder) from exporters in Oceania.

From an ACP perspective, the most significant area of EU dairy sector development relates to skimmed-milk powder (SMP). EU SMP exports are projected to sustain the growth in exports that has been under way since 2009, although at slightly reduced levels compared to the 618,000 tonnes exported in 2012. However, from 2016 export volumes are forecast to exceed 2012 peak levels and increase steadily, until they reach 678,000 tonnes in 2022, 9.7% above the 2012 figure (and almost three times the volume of exports prevailing in 2009). This needs to be seen against the background of declining domestic EU consumption of SMP, which is projected to fall by 1% between 2011 and 2022, and 11% since 2009.

Skimmed-milk powder: EU production, consumption, exports and ending stocks 2009–22 (tonnes)

  Production Consumption Exports Ending stocks
2009 1,015,000 720,000 231,000 278,000
2010 927,000 621,000 379,000 209,000
2011 1,065,000 644,000 518,000 113,000
2012 1,164,000 630,000 618,000 30,000°
2013 1,212,000 628,000 580,000 35,000
2014 1,222,000 624,000 600,000 35,000
2015 1,234,000 624,000 611,000 35,000
2016 1,250,000 629,000 622,000 35,000
2017 1,258,000 634,000 625000 35,000
2018 1,261,000 629,000 633,000 35,000
2019 1,272,000 633,000 640,000 35,000
2020 1,286,000 638,000 649,000 35,000
2021 1,301,000 638,000 664,000 35,000
2022 1,315,000 638,000 678,000 35,000

 ° entirely in private storage from 2012 onwards

Source: EC, ‘Prospects for agricultural markets…’, December 2012, Table 7.21

Editorial comment

In response to price volatility the EU is pursuing two distinct policy responses: strengthening the functioning of dairy supply chains, and expanding the scope of safety net measures.

EU policy initiatives to strengthen the functioning of supply chains could hold important lessons for ACP countries, including with regard to the EC’s emerging policy on avoiding unfair trading practices (see Agritrade article ‘ EC policy developments on addressing unfair trading practices’, 4 March 2013). Recent developments in Barbados, where calls have been made for the formation of milk producers’ cooperatives to strengthen their position in negotiations with the sole dairy processing company, and in Fiji, where milk suppliers have complained of lower net prices following privatisation of the main dairy processing company, are illustrative in this respect (see Agritrade article ‘ Privatisation raises hopes for Fijian dairy sector but issues remain’, 25 March 2013).

For this reason, careful monitoring of the application of the EU’s safety net policy to avoid ‘adjustment displacement’ may well be required.

However, the most significant area for development in ACP–EU dairy sector relations lies in the evolution of the global corporate strategies of EU dairy sector companies. This is particularly the case in countries where production quota abolition will lead to substantial increases in national milk production. Companies such as the Danish Arla Foods are already articulating strategies focused on Africa, where EU exports have traditionally dominated (see Agritrade article ‘ Globalisation of EU dairy companies under way’, 16 December 2012).

ARLA’s initial focus is likely to be on establishing turnkey milk-powder-based reconstitution operations in areas of West and East Africa, capitalising on the food safety reputation of Danish milk powders. However, it is recognised that the long-term sustainable development of dairy markets in Africa will require the development of local milk production and processing.

This suggests a need for proactive government policies in ACP countries to ensure that short-term increases in SMP imports take place within the framework of strategic partnerships, designed to promote increased local milk production and value-added processing to meet growing national and regional demand.

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