Signs are emerging that European Union 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 Australia 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 across dairying regions in Victoria and Tasmania this week, Mr Johnson has been interpreting the latest trends in the EU dairy market for more than 10 years.
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. These two countries represented half of the total European milk production rise.
“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.”
He said Dutch farmers were to be subject to phosphate regulations under which permits would be linked to their number of cows as of July 2015. Mr Johnson said there was still uncertainty about details of the permits but they were potenitlly a restriction to the sustained level or growth of the country’s dairy herd.
“The shackles of quotas has been released and milk production will increase, but only until the next limiting factor including land price and availabilability in Europe,” he said.
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 Australian producers to keep a close watch on their European counterparts and their reaction to market signals.
Mr Johnson said the EU was increasingly targeting marketing opportunities in the Middle East and Sub-Saharan Africa, and would directly compete with Australian product in certain markets.
“For example, we would expect to see more competition between European and Australian players in the UHT milk market,” he said.
He said Europe’s UHT exports to China had more than doubled since 2014.
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.
He and Michael Harvey, senior dairy analyst with Rabobank Australia, said they forecast recover in dairy commodity prices in early in 2017. Mr Harvey said processors would be very cautious about their opening prices .
“The upcoming season will be tight, unless there;s a good autumn break,” he said.