Surge in EU milk production not “opening of floodgates”

Media release April 29, 2016

Surge in EU milk production not “opening of floodgates” – European dairy expert

Signs are emerging that EU milk production growth is finally slowing, indicating the recent post-quota surge in production is a “one-off adjustment rather than an opening of the floodgates”, according to a visiting expert on the European dairy sector.

Rabobank Netherlands-based senior dairy associate Matt Johnson, who is in New Zealand delivering a series of industry presentations, said after exhibiting significant growth in the first year after liberalisation, EU milk production growth was “finally starting to taper off”.

“The removal of milk quotas on April 1, 2015 signified the end of more than three decades of regulation in the European dairy industry,” he said. “While the subsequent surge in milk production across many EU member states was anticipated, the fact that this growth has been sustained – despite the slump in global dairy prices – has taken everyone by surprise.”

Mr Johnson said there had “effectively been the perfect storm in global dairy markets, with the removal of quotas encouraging European dairy farmers to increase production to maintain their cash flows. And this just happened to coincide with weaker demand (particularly out of China) – which has prolonged the slump in global prices.”

Presenting to dairy farmers at Rabobank client events in the Canterbury, Waikato, Taranaki, and Manawatu regions this week, Mr Johnson has been interpreting the latest trends in the EU dairy market for more than 10 years. With a key interest in the changing milk supply map across Europe, he is a close observer of how European farmers are adapting to the new marketplace post the removal of quotas.

Mr Johnson said European producers had been buffered from some of the downturn in global dairy prices – at least initially – by the favourable Euro exchange rate and slightly lower feed costs. “However, the cost of production is now below break-even for many European producers, and we are starting to see this translate into an increased focus on cost-saving rather than expansion,” he said.

Mr Johnson said while the ‘economics’ would invariably slow milk production growth, the slow-down would not be uniform across the EU, with production showing no signs of abating in Ireland and expected to remain strong in the Netherlands.

“The Irish industry has been given a helping hand, with Irish dairy cooperatives supporting members throughout 2015 to the tune of around EUR 100 million,” he said.

“Production also remains strong in the Netherlands, as uncertainty over environmental regulations has caused confusion, encouraging farmers to hold on to cows they would have normally slaughtered.”

Meanwhile, production growth is set to remain muted in the two largest milk-producing countries, Germany and France, which only posted a respective 1.3 and 1.2 per cent increase in production since quotas were removed.

Operating in an unregulated marketplace, EU producers would now be “more reactive to market signals”, Mr Johnson said. And he advised New Zealand producers to keep a close watch on their European counterparts.

“Producers in New Zealand will need to keep an eye on what is happening in the EU, particularly Ireland and the Netherlands, as farmers in Europe will produce more if they are incentivised by markets to do so,” he said. “And we have not seen market signals dictate production in Europe before, like it does here in New Zealand.”

Mr Johnson said the EU was increasingly targeting marketing opportunities in the Middle East and Sub-Saharan Africa, and would directly compete with New Zealand product in certain markets. “For example, we would expect to see more competition between European and New Zealand players in the skim milk market,” he said.

Throughout 2016, Mr Johnson said, dairy consumption growth would remain relatively stable, but there would be renewed import demand out of China and South-East Asia.

“As we see demand start to pick-up, and production growth slow in the EU, the global dairy market will slowly re-balance. This will see global dairy prices improve, but it will take most, it not all, of 2016 for the global market to return to equilibrium,” he said.

Responsible for analysing the dairy sector for Rabobank in the EU, Mr Johnson previously spent 10 years at DairyCo – a UK levy organisation working on behalf of farmers.

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