EU post-quota milk production exceeds expectations

Cows with their distinctive maternal instinct take care of a newly born calf near Hesel, Germany, on Aug. 20. EU farmers are increasing milk production in response to the end of quotas.

While milk production growth is slowing in most export regions in response to falling prices, it continues to barrel ahead in Europe, particularly in Ireland and the Netherlands.

More milk supplies in response to the removal of milk quotas in early April were expected in Europe, but the growth is even greater than anticipated, Rabobank analyst Matt Johnson said during the bank’s latest market webinar.

European dairy farmers are operating in a market without production limits for the first time in 30 years, and they’ve responded with significant growth — boosting production 2.2 million tons from April through October compared to the same period in 2014, he said.

Year-over-year production increases are growing, from 2.4 percent in September to nearly 4 percent in October.

And they’re likely to come in higher in November and December compared with weaker figures, as suppliers were putting on the brakes in late 2014 to reduce over-quota super levies, he said.

Most of the growth is coming from Ireland and the Netherlands, which together accounted for 60 percent of the additional supply. Similar increases are expected in those two countries for November and December, he said.

Across Europe, post-quota investments in new barns and additional cows are coming online, and those investments have to be paid for. Milk prices are being supported above market level, with prices at an equivalent of about $13.50 per hundredweight compared with a value of closer to $11 for milk going into butter and skim milk powder, he said.

In some cases, the support is coming from co-ops selling some share holdings in PLCs and sending the money back to farmers. In others, co-op reserves are being eroded and sent to farmers at an earlier stage, he said.

Those strategies are allowing dairy farmers to generate cash to pay back investments, he said.

An additional dynamic is factoring into significant growth in the Netherlands, where environmental regulations, particularly for phosphates, are being reviewed, Johnson said.

The government is working on reference rates linked to the number of cows on the farm, so dairymen are keeping their cow numbers up, sending 22,000 fewer cows to slaughter compared with the previous year, he said.

Currency exchange rates and a weaker euro are helping exports, mitigating lost markets due to Russia’s political sanctions and preventing a buildup of stocks. European dairy exports have been performing well all year and were up 9 percent in liquid milk equivalent year over year in the third quarter, he said.

Further export incentive is in the lower buy-in for government intervention stocks, which is down $500 a ton to $1,833 for skim milk powder since March 2014, he said.

Internal demand has also been better than it has for the past several years, he said.

Some milk prices in Europe are starting to move lower, and Rabobank expects European production and export surplus to shrink in 2016, but not until the second half of the year. Lower milk prices won’t begin to affect production until the start of the next milk season about March or April, he said.

Strong year-over-year growth is expected in the first half, mainly due to weaker 2014 comparables. Exchange rates will still make exports attractive, but at some point export destinations will fill and those markets will reduce imports, he said.

Both intervention and Private Storage Aid stocks are likely to build and put some pressure on pricing despite internal consumption growth, he said.

Recommended for you