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Dairy quota abolition on track but EU farmers concerned

28 January 2013

On 10 December 2012, the European Commission adopted its second report on the situation on the EU milk market in relation to the phasing-out of production quotas. The Commission maintained that the planned ‘soft landing’ for the milk sector was on track. In the vast majority of member states, quotas no longer limit milk production. The price of trading milk quotas between farmers is now virtually zero.

The EC report notes that in the medium to long term, the prospects for the dairy sector are seen as favourable, given ‘population growth and appetite for western diet in emerging economies’. While ‘prices show a trend towards higher levels’, short-term market fluctuations are likely. In this context, rising input costs can put a squeeze on farmers’ cash flow, but this ‘cannot hide the overall positive picture of the sector’.

The report commented on the lower price volatility in the dairy sector in 2011–12 compared to 2007–09. While milk margins declined in the first quarter of 2012, they remained ‘above those of the first quarter of 2011’. Price fluctuations now take place around higher average levels. This is stimulating milk production, which then requires price corrections, as occurred in the first half of 2012. A price recovery then took place in the second half of 2012.

Overall, price developments have meant that intervention buying has not been used since 2009. Publicly held intervention stocks of skimmed-milk powder (SMP) and butter have now been eliminated. According to the EC, this has been achieved ‘without disturbing the market’. (1,2) It is considered by the EC that the ‘milk package’ of policy measures, which entered fully into effect on 3 October 2012, ‘offers tools for operators in the dairy supply chain to adapt their supply to market demand’.

In 2010 and 2011, exports of most EU dairy products (particularly SMP) increased without any use of export refunds. This was attributed to strong import demand in emerging economies. The EU’s global share of dairy exports is falling, however, as production increased more strongly outside the EU. The EU’s milk production is projected to increase by only 8% between 2009 and 2022, although SMP production is projected to increase by 28%, with the EU’s share of global exports of SMP forecast to reach 31% by 2022.

Overall, EU milk production is seen as increasingly responding to global market signals, enabling the EU dairy sector to respond to growing global market opportunities. On the basis of the situation on the EU milk market, the EC takes the view ‘no change is required in the existing framework’ for the EU dairy sector.

EU farmers’ organisations take a somewhat different view, with the undoubted benefits of the new milk package being unevenly spread across EU dairy producers. The EU farmers’ organisation Copa-Cogeca, according to a press release in November 2012, takes the view that the current dairy package is ‘not sufficient’ to meet all the challenges faced. It has therefore called for the maintenance of intervention and private storage measures to help manage EU markets, as well as more support to farmers’ organisations to help ‘strengthen their position in the food chain against the buying power of a few retailers’. The importance of improving transparency in market functioning and price formation was also stressed. Current reform measures are not seen as sufficient in this regard. Copa-Cogeca considered that concerted EU safety-net measures would be better than ‘national schemes put together to support farmers’ liquidity and income’ – a case in point being the recent Spanish government measures to allocate single payment entitlements to dairy farmers. 

Editorial comment

The second EC review of developments in the milk sector suggests that the dairy sector reform process is proving successful in positioning EU dairy companies to take advantage of global market opportunities. While in the longer term a greater interest lies in developing exports of high-value dairy products, in the short term SMP is in the forefront of EU export growth. Since 2008, exports of SMP have risen almost fourfold. Exports of SMP are projected to remain at these elevated levels on a slightly rising trend up to 2022.

Technical know-how and this ready supply of milk powder for use in reconstituted dairy products could well facilitate the process of global expansion of European dairy companies, which is currently under way (see Agritrade article ‘ Globalisation of EU dairy companies under way’, 16 December 2012).

This process of globalisation is helped by growing interest in emerging markets in safe, high-quality dairy products. In some ACP countries, high-quality dairy products are seen as synonymous with EU dairy products, including intermediate inputs such as SMP. While this can offer scope at the national level for development of expanded dairy processing, it can pose challenges for the development of regional dairy trade flows and regional dairy trade policies (see Agritrade article ‘Nigerian and Ghanaian markets offer further growth potential for EU dairy exports’, forthcoming). The nature of these challenges, however, will vary from country to country, and region to region.

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