EU-27. Dairy and Products Annual. Oct 2013 Nov. 10, 2013
In 2013, despite favorable world market conditions for dairy products, EU-28 milk deliveries should increase only slightly year-over-year due to higher production costs and unfavorable weather conditions earlier in the year. The latter half of the year shows an improving feed situation as reflected via rising on-farm fluid milk deliveries. High cheese demand, both domestically (EU-28) and internationally (primarily Russia), is attracting fluid milk into that sector at the expense of the Whole Dry Milk (WDM), Non Fat Dried Milk (NFDM) and butter sectors. The consequence of the short fluid milk supply early in 2013 is smaller volumes of NFDM and WDM moving into export channels. In 2014, fluid milk output is expected to increase a half percent over 2013 in response to projected lower feed costs and stronger demand for milk products in supply-tight international dairy markets. Although the majority of increased 2014 milk output is expected to be directed to the manufacturing of cheese, production of milk powders and butter should show expansion trends as well.
On July 1, 2013, the European Union (EU) enlarged with accession of Croatia. With Croatia’s addition, the 2013 EU overall milk volume deliveries is projected to increase by 0.4 percent, and the number of consumers will increase by 4.3 million people (which accounts for 0.8 percent of the total EU-28 population).
Although the overall output of milk in 2013 is expected to be only slightly higher than in 2012, the production pattern of milk can be divided into two periods. In the first six months of 2013 milk deliveries in the EU-28 were almost 2 percent lower than in the same period of 2012 as increased production costs, a long and severe winter across Europe, and a late spring moderated milk production. In the second half of the year, tightening world dairy stocks, favorable weather conditions for crops in summer/fall 2013 are leading to declining feed prices and rising farm-gate prices for fluid milk, conditions that are expected to stimulate EU-28 dairy production moving into 2014. The slight increase in milk production projected in 2013 mostly will be directed towards cheese production, which remains high in demand both domestically and internationally. For 2013, production of butter, Non-Fat Dry Milk (NFDM) and Whole Dry Milk (WDM), are expected to fall below 2012 levels as production and exports of cheeses remain more profitable. The long-term contraction trend of the EU-28 dairy herd appears to have stopped as favorable farm-gate prices for milk have begun to stabilize national dairy herd inventories. For 2013, dairy cow inventories are expected to remain stable. In 2014 higher output per cow is expected to spur an increase in total EU milk production. The EU milk quota system’s discontinuation, scheduled for April 1, 2015, is expected to encourage farmers to expand dairy herds.
The NFDM intervention stocks, built up in 2009, have been fully consumed through earlier EU food assistance programs. From March 1-August 15, 2013, 89,391 MT of butter accumulated under the Private Storage Scheme (PSA). This amount is 43 percent lower than reported in 2012, reflecting the stronger demand for butter in domestic and international markets. Year-end butter stocks are expected to be at historically low levels.
In 2013, the lower availability of dairy products resulting from decreased production should result in lower exports of milk powders (WDM and NFDM) in comparison to 2012. However, exports of cheeses are expected to increase on rising production and continuing strong demand on the world market. Despite attractive world market prices for butter, exports are expected to remain flat for 2013 into 2014 because of lower production and record low stocks. During the first seven months of 2013, exports of cheeses, the main dairy product exported by the EU-28, increased seven percent in comparison to the same period 2012; of NFDM declined by 30 percent with most of the decline recorded with Algeria, Egypt and Vietnam; and of WDM declined by 11 percent mainly because of lower exports to Algeria and Egypt. In the first seven months of 2013, exports of butter and butter oil decreased by five percent each in comparison to the same period 2012.
Dairy, Milk, Fluid
Accession of Croatia increased the overall dairy herd of EU-28 by 181,000 head (0.8 percent increase) and is expected to result in an additional 600,000 MT of milk deliveries to EU-28 dairy plants (0.4 percent increase) in 2013. After several years of decline, EU-28 dairy cow inventories (including Croatia) stabilized in 2012 and are expected to remain at the current level in 2013. Farmers maintain inventories of dairy herds in response to the favorable conditions for dairy production in 2012 and in expectation of discontinuation of the dairy quota system in the EU scheduled for April 1, 2015.
It is estimated that EU-28 milk deliveries in 2013 will be only slightly higher than in 2012. The increased production costs resulting from expensive energy and feeds, a long and severe 2012/2013 winter in Europe, and a delayed spring negatively impacted pasture conditions and thus milk production in the first half of the year. As a result during the first six months of 2013 milk deliveries in the EU-28 declined by 1.9 percent in comparison to the same period of the previous year. Milk production decreases were highest in France (-3.3 percent), the UK (-4.9 percent) and Italy (-5.0 percent). Interestingly, other milk production also declined in the first half of 2013. For example in France, sheep and goat milk production had steadily increased in the past years, not being subject to production quotas, but declined for the first time in the first half of 2013, hampered by high feed prices and low quality domestically-produced forage as a result of adverse climatic conditions.
However, higher 2013 prices in the international dairy market resulted in higher export demand for dairy commodities and led to an increase of average EU-28 farm-gate milk prices. In September 2013, the average farm-gate price for milk in the EU-28 was 13 percent higher than a year ago. Although higher producer prices were not reflected in an immediate increase of production, which partly is attributed to the lagging effect of higher prices on increase of output and partly to the limitations of production in order not to exceed the milk quota and avoid paying fines by farmers, it is expected that milk deliveries in the EU-28 will increase towards the end of 2013. In the 2012/2013 quota year (April 1 – March 30) Austria, Germany, Denmark, Poland and Cyprus exceeded their national milk quota ceiling allocations by 163,700 MT and farmers in these countries will have to pay a “superlevy” penalties amounting to Euro 46 million (US$60 million). Although the one percent increase of milk quota in MY 2013/2014 will allow for further increases of milk production, higher production costs (mainly energy) and the economic downturn in certain parts of Europe are expected to constrain expansion of milk output.
In 2013, the dairy sector across the European Union is diversified, and product focus varies depending on the economic situation and weather conditions for feed production in each member state. Northern European countries, like Germany, France, Benelux (Belgium, the Netherlands, and Luxemburg), Denmark, Ireland, UK, Nordic countries, and Poland, are positioned to expand their dairy production and processing industries as apart from strong local demand their products have a following in international markets. Dairy production is expected to increase in these countries in the second half of 2013 into 2014. Southern/Central European countries, on the other hand, are constrained by less favorable climatic conditions and inefficient dairy industry structure. Their primary markets remain local. Dairy production in markets such as Austria, Romania, Bulgaria, Greece, Spain and Portugal, remain stagnant or is slightly declining.
In 2014 domestic and export demand for dairy products is expected to remain firm resulting in stronger farm-gate prices. Dairy cow numbers are expected to remain stable. Higher milk output is projected as less efficient farmers continue to exit the sector leaving animals of better genetics producing for the market. Per cow productivity should increase as a result.
In 2013, fluid milk consumption is expected to decrease in comparison to 2012 due to the effects of Europe’s slowing economy and greater disappearance to the processing industry. Recently, the Association of Chocolate, Biscuit and Confectionery Industries of Europe (Caobisco), released its opinion that given the current state of short supplies and high internal prices for dairy commodities the European Commission should introduce an emergency lifting of EU import tariffs.
In March and April 2013, Bulgarian and Romanian authorities reported aflatoxin incidents in raw milk tested by regulators. The “aflatoxin” issue led many consumers to refrain from consuming milk for several weeks. Consequently farm milk acquisition prices dropped to the discontent of farmers. Many retailers attempted to prevent further losses by selling the milk at significant discounts.
In the first six months of 2013, extra EU-28 exports increased by over 24 percent driven by strong demand by China for UHT milk France and Germany mainly satisfied. For 2013, overall external exports are expected to increase by over 20 percent due to growing foreign demand and falling domestic fluid consumption.
Please note: The definition of cheese includes the following categories of products: soft cheese, medium soft cheese, medium hard cheese, hard cheese, extra hard cheese and fresh cheese produced out of cows, ewes, goats, buffalo’s and mixed milk. It does not include processed cheese.
In 2013 EU-28 cheese production is expected to increase by a half percent due to growing exports and stable domestic demand. However, over the first seven months of 2013 cheese output declined two percent compared to same period 2012. Increasing milk production during the second half 2013 is expected to stimulate cheese production towards the end of the year. In 2014 strong world market prices for cheese and higher availability of raw milk are expected to stimulate output further. Dairy industries in Germany, France, and Italy remain the driving force behind EU-28 cheese production, supplying over 55 percent of total output. In France where high consumption already exists, production is driven by rising exports to both EU and non EU markets (principally the United Kingdom, the U.S., and Russia).
In 2013, the increase in cheese output is expected to be diverted mostly into export channels. Within the EU-28, domestic cheese consumption is expected to increase marginally due to the economic slowdown and growing demand in export markets. In several EU member states the economic downturn has led to changes in the consumption pattern of cheese. Consumers are switching to less expensive brands of hard cheese or are substituting with fresh cheese, while higher quality and more expensive brands of European cheeses are exported. In 2014, growing supplies and improving economic situations in some member states are expected to stimulate cheese consumption further leading to an increase in overall consumption relative to 2013.
In 2013, EU-28 cheese exports are expected to continue on an upward growth curve, mainly due to higher demand from Russia. During the first six months of 2013, EU-28 cheese exports to Russia increased by eight percent, supplied mostly by the Netherlands, Lithuania, and Germany. Export growth is expected to be limited by domestic availability of cheese.
Major external markets for EU-28 cheeses include Russia, the United States, Switzerland, Japan, and Algeria. Cheese imports are projected to remain within the established import quotas.
In 2014 strong export growth is expected as domestic output gears up to meet continuing demand on the world market.
For 2013, EU-28 butter output is projected to decline in comparison to 2012 due to limited supplies of raw milk. Rising world prices for butter stemming from higher demand and limited availability resulted in nearly a 40 percent increase in the EU28 price for butter (July 2013 versus July 2012). Participation in the 2013 Private Storage Scheme (PSA) decreased considerably. In 2014 continuing firm export and domestic demand coupled with record low stocks are expected to stimulate production to the 2012 level. However, overall production will be limited by availability of raw milk and competition with more profitable cheese production.
Despite lower output in 2013, EU-28 domestic butter consumption should remain flat over the 2012 level due to reductions in stocks and stable export markets. In 2014 domestic butter consumption should increase slightly in parallel with increased production. Although health concerns are still a factor limiting butter consumption, economic considerations are playing a greater role in consumer buying decisions.
In 2013, exports of butter are expected to remain at the previous year’s level. In the first six months of 2013, EU28 exports of butter and butter oil decreased by 5 percent each in comparison to the same period of 2012. Decrease of exports of butter to Saudi Arabia and Morocco were partly offset by 14 percent increase of exports of butter to Russia and a seven percent increase in exports of butter oil, mainly to Saudi Arabia. Exports of butter are forecast to remain strong towards the end of 2013 through the first half of 2014 as world market prices for butter remain strong due to limited global supplies. The EU import quota of 77,400 MT set aside for New Zealand is not expected to be filled because of higher prices. In the first six months of 2013, total imports from New Zealand amounted to 14,909 MT, 60 percent less than in the comparative period 2012.
Butter stocks, built through the 2013 PSA program (March 1-August 15, 2013), amount to 89,391 MT. The PSA program amount is 43 percent lower than recorded for 2012 indicating market demand for butter domestically and internationally. For 2013 PSA subsidy was fixed at Euro 14.88/MT for fixed storage costs and Euro 0.25/MT per day for variable storage costs. Butter stocks are expected to remain at historically low levels at the end of 2013 into 2014. 133,000 MT of butter were taken off the market during 2012 PSA intervention, up 25 percent in comparison to the 2011 season.
On September 19, 2013, butter's weighted average price stood at 421 Euros per 100 kilograms, well above the EU intervention price set at 221.75 Euros per 100 kilograms.
Dairy, Milk, Nonfat Dry
In 2013, NFDM output is expected to decrease because of limited supplies of raw milk and reduced export demand. In the first 6 months of 2013 output of NFDM declined almost 10 percent than in same period 2012. Despite strong world market prices processing milk into NFDM remains less attractive compared to the more profitable production and export of cheeses. For 2014 output of NFDM should increase marginally in response to larger supplies of raw milk and to increasing demand in export markets.
In 2012 the level of consumption of NFDM was partly supported by use of intervention stocks built up in 2009 for domestic assistance programs. In 2013 and 2014, consumption of NFDM is expected to remain stable at the level of 2012, resulting in a decrease in exports.
In 2013, exports of NFDM are expected to decrease due to lower availability of product in comparison to 2012 resulting from reduced stocks. In the first six months of 2013, exports of NFDM were 31 percent lower than in the same period of 2012. Shipments to Algeria, which is the number one export destination, were down significantly due to continued unrest in that country.
NFDM intervention stocks fell to zero by the end of 2012 as product was consumed through food assistance programs.
On September 19, 2013, the weighted average EU-28 price for NFDM amounted to 321 Euros per hundred kilograms, well above the EU-27 intervention price set at Euros 170/100 kg.
Dairy, Dry Whole Milk Powder
In 2013, WDM production is expected to decrease as limited supplies of raw milk will favor manufacturing of cheese over production of milk powders and butter. Strong competition for raw milk supplies in the first half of 2013, resulting from delayed spring flush, limited WDM production. In the first six months of 2013 production of WDM was one percent lower than in the first half of 2012. High price and limited supply of WDM on the world market should stimulate production in 2014.
In 2013, domestic use of WDM is expected to decrease slightly in response to reduced availability. However, in 2014 domestic consumption is expected to recover to the slightly higher 2012 level due to greater availability on the market.
In 2013, lower production is expected to result in reduced EU-28 exports. In the first six months of 2013, EU-27 exports of WDM were 14 percent below the previous year’s level, mainly due to lower shipments to Algeria and Oman.
In the first six months of 2013 EU-27 exports of infant formula increased by 14 percent in comparison to the same period of previous year. During this period exports of infant formula to China increased by 45 percent following a 50 percent increase in 2012. The Netherlands and France are the major suppliers of infant formula to China and Hong Kong. Rising EU exports of infant formula to China can be explained by the boom in demand after recent public health scandals related death of babies to locally-produced baby formula. The increase of exports from the EU resulted in a shortage of baby formula on the domestic market, in several markets including the Netherlands, Germany, and Great Britain. The exports of infant formula are not included in the EU-28 export refund programs, so the product has to compete on the world market on the equal basis with other suppliers. In response to growing export demand France built three new plants producing baby formula. The Dutch dairy sector is also planning to open three factories for producing infant formula which will enable them to double their export to China during the next three years (for more information see the GAIN Report NL3010 - Dutch Dairy Processors Gear Up for Chinese Demand and France’s GAIN report FR9145, dated August 9, 2013: France’s dairy market situation – Perspectives on EU policy and on TTIP).
1. Croatia became the 28th EU Member State as of July 1, 2013.
On July 1, 2013, Croatia became a member of the European Union. Croatia was assigned a milk production quota of 765,000 MT for the two remaining quota years 2013/14 and 2014/15. Exceptional measures for the marketing on the domestic market of milk produced not in compliance with EU standards have been agreed through December 31, 2015. Commission Implementing Regulation (EU) No 286/2013 details the transitional measures that will apply to the trade in agricultural products.
2. Dairy Package Showing Mixed Result
The Dairy Package, which introduced new tools to the EU-27 dairy sector as the quota system is nearing its expiration date in March 2015, was implemented on October 3, 2012. Early reports indicate that up to half of the MS may introduce compulsory contracts between farmers and dairy processors, with France, Spain, and Italy on the forefront of this development. However, cooperative processors were already operating under a contractual basis. All MS seem to have created the possibility for the creation of producer organizations, while several MS also provide for the creation of inter-branch organizations.
The main impact from the Dairy Package so far seems to be that all parties in the EU dairy market are finally realizing that the post-quota market will be a different game than they had anticipated.
3. Impact of Dairy Quota Termination on the EU-Dairy Market
On September 24, 2013 the EC organized a conference in Brussels to discuss consequences for the European dairy industry of dairy quota abolition. The discussion based on the presentation of a special report on dairy sector development beyond 2015 prepared by Ernst & Young indicated that quota abolition is expected to have a relatively reduced impact in the short and medium term and cause only minor changes in the development of the dairy sector across the European regions. According to the report, elimination of the milk quota after April 1, 2015 will cause an increase of milk output not higher than 5 percent, while farm-gate price decrease will not exceed 10 percent. All experts agree that price volatility constitutes one of the greatest problems that dairy producers will have to face after quota abolition. According to the report lower prices and higher quantities of milk will result in higher output of dairy commodities and higher availability of products destined for export which is likely to induce a decrease in world prices for dairy products. The report quotes the projection of DG Agri (2012) which provides a forecast of dairy exports until 2022. The best prospects are expected for cheese and skim milk powder (SMP), with the European export share on world total reaching 32 percent. The share of EU in trade of whole milk powder (WMP) is expected to decrease partly due to the increased competitiveness from Oceania. European exports of butter are expected to remain uncompetitive because of the existing gap between EU and world price