The European Dairy Sector in a new Era

25th Annual Conference of the Austrian Society of Ag Econ

&Agrarian Perspectives XXIV

Prague 16 18 Sept 2015

Trevor Donnellan & Michael KeaneIreland

1

Overview

• Current Global & EU Dairy Situation

• Heterogeneity of EU Dairy Production

• Milk production profit margins across the EU

• Post Quota Production at EU and Member State level– What factors will be important drivers?

– Regions with opportunities

– Regions facing challenges

• Is quota elimination more or less important that

other issues facing the EU dairy sector?

2

Global perspective on Dairy over the next decade

• Strong consumption growth trends– population

– incomes

– increasing meat and dairy consumption (outside EU)

– limited range of consumption substitutes for dairy

• Consumption of dairy growing globally– regions globally where production is not traditional

• Continuing export opportunities for regions

with surplus milk production – EU, US, Oceania

3

EU dairy sector no longer insulated from world market

• Only 7% of world milk production is traded – Milk is most is consumed in country of origin

• Structure of world dairy trade differs from grain market– makes international dairy prices prone to volatility

• Small changes in world milk production or world consumption – Can lead to large changes in volume available for world

dairy trade

Changing times for EU Dairy Sector

• Removal of EU Milk Quota System in 2015

• Created mixed sentiment across the EU

– growth opportunity in some Member States (MS)

– a threat for dairy sector in some MS

• Concern for international market volatility

– Volatile milk prices and volatile farm production costs

– Some concern that quota elimination will exacerbate

volatility

5

European Dairy Sector in “Crisis” in 2015

Volatile milk prices and feed costs

7

200

200

200

200

200

200

201

201

201

201

201

201

201

201

201

201

201

201

0

5

10

15

20

25

30

35

40

45

0

50

100

150

200

250

300

EU Average Milk Price (Left Axis)

German Common Wheat Price (Right Axis)

Mil

k C

ent

per

Kg

Wh

eat

Eu

ro p

er t

onn

e

Recent Trends in EU Milk Production

• MS milk quotas were increased in run up to 2015

• But production static or declining in some MS for

several years– BU, HR, EL, HU, PT, RO, SK, SI, SE, UK

• Failure to fill quota due to – farmer exits,

– lack of new entrants,

– limited production growth from the remaining producers

• EU dairy consumption is flat– contrasts with the growing demand globally

8

EU 27 Milk Production and Consumption

Milk Deliveries Milk Equivalent Consumption110

115

120

125

130

135

140

145

2008 2009 2010 2011 2012

Mill

ion

Ton

nes

Cow

s’ M

ilk

9

Complexity of EU dairy sector

• EU dairy sector is quite diverse across the MS– in terms of both farm sector & processing sector

• MS milk prices across a wide range– 25 to 40 cent/kg in 2014

• MS production costs differ

• Strong variations in MS average dairy farm size– between 3 and 141 dairy cows (2011 data)

10

EU dairy processing sector• 91 % of milk production is delivered for processing

– but, in BU and RO, most milk production is used on farm

• Specialised dairy products vs generic commodities– High value added and lower value added dairy products

– eg. specialist cheeses vs commodity butter

• EU15 modern, larger, more efficient milk processing

facilities that rest of EU28

• All of these factors suggest that quota elimination

will not have a uniform impact across the EU

11

Contrast in scale and intensity of dairy farms across the EU

• EU-15 average specialised milk farms – 54 dairy cows milk yield of 7,337 kg/cow

– 385,000 litres of milk/year

• EU-10 average specialised milk farms – 19 dairy cows milk yield of 5,695 kg/cow

– 105,000 litres of milk/year

• EU-2 average specialised milk farms – 5 dairy cows milk yield of 3,445 kg/cow

– 15,500 litres of milk/year12

Share of EU27 Milk Production 2013

DE FR UKNE PL IT ES IE DK BE AT SE CZ FI PT HU LT ROSK LV ES EE SI BU LU CYMT0%

5%

10%

15%

20%

25%

13

Production share only partly associated with the size of the MS.

Countries across a central latitude in the EU where grassland is prevalent tend to have a disproportionately large share of milk production relative to their sizee.g FR, DE, NE, IE, DK

75% of EU milk production in just 6 countriesFR, DE, UK, IT, ES & PL

5 year average Milk Price selected countries (2009-2013)

BE BU CZ DK DE IE EL ES HR LT LU NE AT RO FI SE UK20

25

30

35

40

45

euro

cen

t p

er k

g3.

7% f

at

14

The EU Dairy Market:A few important things to remember

• Mainly dependent on concentrate feed, with

cows housed for much/all of the year

• Except where grass is main portion of the

diet– Such regions typically have lower production costs

– Since grass is a cheaper feed than concentrates

• Production to expand where costs are lower– i.e. regions that favour grass production

– But the milk price farmers receive is also a critical

consideration

15

Low costs for EU’s Grassland Regions

Darker green implies greater concentration of grassland

Favours Mid range latitudes in Europe with higher rainfall levels

16

Post Quota Milk Production Levels:What factors will be important?

• Farm milk price in the MS

• Costs of production at farm level: influenced by– the production system in the MS (concentrates vs grass)

– rate of tech adoption by farmers

• Farm size (in terms of milk volume)– Small farms will remain under pressure

• Milk processing industry– modern plants can process milk at lower costs

– can farmers benefit from these efficiencies ?

– higher farm milk prices vs additional processor profits ?

17

Post Quota Milk Production Levels:What factors will be important?

• Economic performance of dairy sector vs agricultural

sectors and vs wider economy– In some regions dairy will face competition

– competition for land from other agricultural sectors

– competition for labour from other sectors of the wider economy

• Dairy will persist in some higher cost regions– Where no other agricultural or non agricultural opportunities exist

• Environmental constraints – Intensification limited by GHGs/nitrates policy

18

Post 2015: Likely Outcomes (1)

• Volatility is likely to continue– milk prices, production costs and farm margins

• Quota elimination to have relatively minor

implications at EU28 level– EU milk production will grow slowly

• At MS & regional level within MS impacts

could be more appreciable– Milk production will reorientate towards regions to

better reflect comparative advantage

19

Post 2015: Likely Outcomes (2)

• Movement of production to latitudes which

have mild, short winters– Long grass growing seasons

• Grass growing regions – Part of IE/UK

– coastal regions in Northern Europe

– areas with milder climates, higher rainfall

20

Post 2015: Likely Outcomes (3)

• Expansion in milk production needs to be managed

– the milk quota will be replaced by other limiting factors

– issues at the farm level and beyond the farm

• Difficulties with access to land, labour and capital

– will impede expansion for some producers

• Processing, storage, distribution, marketing

– Needs forward planning

– e.g. 3 year time horizon required to commission, design and build new

processing plant

– Need to secure new markets for additional product

21

Post 2015: Likely Outcomes (4)

• Increased competition for milk between

processors in some regions– especially if production growth rate differ in

neighbouring regions

• Implications for milk trade between countries– processors may find more milk locally

– reducing milk or dairy product import requirements

– Increasing milk or dairy production export capacity

22

Post 2015: Likely Outcomes (5)

• Processors moving up value chain

• Reflect fact that EU dairy market is mature– Growth cheese, fresh products and specialist dairy

products (e.g. infant formula, athlete performance drinks)

• Exporters need opportunities outside the EU

• Commodities a bargain basement business?– Possibly not, strong demand in developing countries

23

German Milk Production to 2020

• Largest milk producer in EU– 30 million tonnes, over 4 million dairy cows. – Production concentrated in North West & Bavaria – Mix of bulk commodity & specialised local products– Growing trend towards housing cows in some regions

• Cows number rising in last couple of years• Positive outlook• Expectations of 1 per cent increase p.a.

– Strongest growth rate in coastal regions and in the lower Rhine and in mountain areas

French Milk Production to 2020

• 2nd largest milk producer in EU– 24 million tonnes milk, 4 million dairy cows – Strong tradition of mixed farms

• Average dairy herd size is slightly smaller than Ireland– Drive to increase farm size, particularly herds > 100 cows

• Profitability suggest expansion in some regions– but competition from the crop sector for land

• Parts of processing sector uninterested in processing additional volumes of local milk– Multinational food businesses content to grow internationally

• Jury out on whether French production will expand– but some experts reckon that expansion of 2% p.a. is possible

UK Milk Production to 2020• 3rd largest milk producer in EU

– 13.5 million tonnes (10 percent below quota) – Driven by rapidly contracting producer numbers

• Feed use increasing due to land constraint• Evolving two tier milk price system

– those with contract to supply supermarkets directly– and those without

• Two tiers of milk price and profitability– Margin over cost vs market determined price

• Stable to slightly contracting production outlook

Dutch Milk Production to 2020

• 4th largest milk producer in EU– 12 million tonnes milk production, 1.5 million dairy cows– densely populated & intensively farmed

• High productivity and low feed prices– but very high land prices – shift towards housing

• Strong export orientation (~ 70% exported)– efficient highly concentrated processing sector

• High profitability suggest expansion possible – but environmental factors are an area for concern– need to process animal manure

• Netherland to expand by about 1.5 percent p.a.– with environmental constraints hindering faster growth rate

Polish Milk Production to 2020

• 5th largest milk producer in EU– 10 million tonnes, 2.5 million dairy cows– low yields and small farms– but developing rapidly– deliveries increasing as a share of production

• Consolidation improving the competitiveness of processing sector

• Farmer and industry sentiment is quite positive – Like Ireland well over quota in 2014/15

• Production to expand 2 to 4 % p.a.

Ireland

• 7th largest milk producer in EU– Production of 5.5 million– Low yields– Low costs

• Grassland based– But only 20-25% of grassland is currently dairy

• Very ambitious expansion plans– Production likely to increase by >10% in 2015

• Strong growth to continue over next decade• Long term aim to become NZ of northern hemisphere

Other EU MS

• Represent ~ 25% of current production – MS where national quota no longer filled

• Some increase in MS with small quota share

• Elsewhere future production static/declining– Removal of quota will have no direct impact

• But these MS could face greater competition – from MS which are expanding their production and their

export capacity

Additional Milk Production by 2020

Rest of EU

DE

FR

UK

NE

PL

IE

EU28

-4 0 4 8 12

Scenario 1

Million Tonnes

Rest of EU

DE

FR

UK

NE

PL

IE

EU28

-4 0 4 8 12

Scenario 2

Million Tonnes

EU Milk Production Outlook to 2025

• Contraction in production in high costs regions

• Expansion is low cost regions

– not constrained by environmental factors

• EU28 production to exceed “quota” pre 2020

• With potential to increase further

– if market conditions allow

• Shift in the relative shares produced by MS

– Higher share likely in IE, DK, DE, UK, FR, PL, AT,

– Lower share in MS in Southern and Eastern Europe

32

Conclusions• Many challenges ahead for dairy

• Volatility to continue

• Quota elimination is a lesser concern

• International pressures – to increase scale at both farm and processing level

– Improve farmer skills set (technology adoption)

• But also Opportunities for EU– Higher value added products

– High animal health and food hygiene standards

– Requires investment at both farm and processing level33