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Following a difficult year for EU producers, a tight dairy market and rising prices are expected in 2013

18 February 2013

Analysis from Rabobank published on 24 December 2012 described 2012 as ‘a difficult year’ for EU dairy farmers. Poor weather conditions increased feed needs at a time of rising feed prices, and the rising production costs were a factor in ‘reduced production in all of the main European dairying states in the second half of the year’. This trend is expected to continue in 2013.

According to the European Milk Board (EMB), in the second half of 2012 there was considerable variation in producer prices between member states and also between companies within member states. There were also divergent milk price trends across member states. The highest recorded milk prices were offered by the Dutch farmer-owned cooperative FrieslandCampina, where prices were nearly 33% higher than the price received by Italian milk farmers, which was the lowest milk price recorded in the EMB Milk Price Review.

Price volatility on global and EU dairy markets led the Spanish government in December 2012 to call for the maintenance of milk quotas beyond 2015. While the Spanish government focused on the maintenance of milk quotas, European farmers’ organisations have been emphasising better organisation of dairy farmers into cooperatives. In November 2012, Copa-Cogeca highlighted the findings of an EC study, which confirmed that ‘when cooperatives have a high market share, milk prices to farmers are also higher and volatility can be reduced.’ Copa-Cogeca called for the future CAP Common Market Organisation to ‘allow dairy cooperatives to increase their size, gain countervailing power and contribute to a more balanced food supply chain’.

At the global level, ‘dairy prices finished 2012 on a broadly positive note.’ Average dairy product prices increased by 1.1% during the last GlobalDairyTrade auction of 2012, with only whole-milk powder prices declining. This took overall dairy prices to within 2% of where they started 2012, but with considerable price volatility experienced throughout the year.

While dairy prices were projected to make a firm start in 2013, Rabobank maintained that the price recovery was losing momentum in the face of ‘weaker than anticipated’ consumer demand and high stock holdings by processors. Milk production growth in key export regions is expected to continue to fall in the first half of 2013, leaving production levels below those prevailing in the corresponding period of 2012 at least through the first quarter of 2013. A ‘substantial reduction in exportable surpluses in early 2013’ is projected. Subsequently, a modest increase in demand could then tighten the market situation and support prices. The strength of consumer demand for dairy products, along with production levels, during the northern hemisphere spring will be critical to price trends.

Editorial comment

Global price volatility and the increased levels of price transmission to EU markets are likely to lead to a growing focus on the future of dairy sector market management measures. While the Spanish government has focused on traditional market management tools, EU farmers’ organisations are increasingly looking at what can be done to strengthen the position of EU milk producers within the supply chain. The importance attached to supporting better farmer organisation through cooperatives is highlighted by the divergent producer prices reported by the EMB in 2012: the strong price performance of the Dutch farmer-owned cooperative FrieslandCampina stands out, and this potentially holds important lessons for dairy sector development in ACP countries, in terms of the importance of strengthening the organisation of milk producers. The issue goes beyond the traditional approach to ACP dairy sector developments, which focused on supporting input provision and capital investment.

Attention also needs to be paid to the regulatory framework for the management of supply relationships in the dairy sector, including imports of skimmed-milk powder. This takes on particular importance, given reports in the Danish press of plans to launch a major export drive to Africa in light of the impending need to find a market for an additional 1 to 2 billion litres of Danish milk production.

In some regions, such as West Africa, this will need to include clear and coherent policies on the management of imported skimmed-milk powders to be reconstituted into dairy products. In other regions, such as Eastern and Southern Africa, while expanded milk-powder export through Djibouti will also need to be taken into account, the management of trade in UHT milk – particularly via the rules of origin applied – is likely to be an issue of considerable importance.

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