8 January 2008

3 minute read

The EC expects the need for an additional supply of about 8 million MT of milk in the EU between 2007 and 2014. Most of this new milk supply would go to increased cheese production with the remainder going to other value added fresh dairy products.

On December 12, 2007, the European Commission (EC) released a report "Market Outlook for the Dairy Sector1”, in which it advises the European Council to implement a two percent milk production quota on April 1, 2008.

This quota increase was part of the EC CAP 2003 reform proposal, but was made dependent on a market assessment, due out in 2007 or 2008 in the final dairy reform agreement. The report compares a baseline scenario for the EU dairy market trends between 2007 and 2014 from DGAgri’s July 2007 "Prospects for agricultural markets and income in the European Union 2007–20142" with a scenario in which milk production quota increase by two percent on April 1, 2008 (quota year 2008/09).

In its Agricultural Outlook 2007, the Food & Agricultural Policy Research Institute (FAPRI), in the World Dairy Section3, indicates that the EU dairy exports will loose market share on world markets because of the anticipated increase in domestic consumption under unchanged milk production.

A two percent in additional milk production quotas would add 2.84 million MT of additional milk quota to the EU-27 total milk quota of 142 million MT. If this additional quota were fully used, the scenario expects the price of milk in the EU to fall by 4 percent, compared to an increase by 7 percent foreseen in the baseline. Skimmed Milk Powder (SMP) production is expected to increase significantly under this scenario, as should the production of butter.

However, both for butter and SMP, the extra production should allegedly be possible without further market support. The real impact on production would likely be more limited because current milk production is below quota in several EU Member States (MS).

Implementation of the quota increase During 2006 and 2007, the EU dairy market has evolved from a situation where butter intervention stocks were still a concern to a situation where EU milk supply shortfalls to meet demand and favorable world market developments have led to a price boom. Milk production in most EU MS has, however, been slow to take advantage of this price hike. This is because prices to the producers have mostly lagged increases in production input prices, mainly for feed. The development of the Bluetongue disease across Western Europe in 2007 has not been helpful either as it has negatively affected cow productivity increases. As a result, the European dairy industry has increasingly been asking for an increase in milk production quota, especially in MS like Ireland and Poland.

Agriculture Commissioner Fisher-Boel has long resisted these requests as a further reform of the EU dairy regime. A “soft landing” of the production quota system in 2015 through the incremental increase in milk quota has been repeatedly announced as part of the upcoming Health Check (See also GAIN E47100).

If the EU approves the proposal to increase in the milk production quota by two percent in 2008, this will de facto anticipate the Health Check, which is due for implementation from 2009 on.

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