Ready to milk the markets

An increase in the general population and growth opportunities related to milk consumption per capita in the BRICS and developing countries are driving global dairy demand. Because of quality and cultural heritage, these countries will mostly be looking to traditional export regions to fulfil their supply needs.

As global consumption growth shifts towards the developing world, it is incumbent on suppliers of milk and dairy produce to keep pace with this demand. Between 2011 and 2013, milk supply remained slightly ahead of demand, but between 2014 and 2017, that supply will start lagging behind, despite the post-2015 situation in the EU, and growth in New Zealand and the US.

Experts believe that after 2017 rising milk prices may boost production in new areas or choke off demand in price-sensitive regions. Although the gap in the cost of milk production between the EU and New Zealand is decreasing, it still compares less favourably with other export regions. European dairy chains should not fear the post-2015 era, but instead see it as an opportunity. The recent European Parliament vote in favour of supply management measures in times of crisis could turn out to be a hindrance when European dairy processors try to build long-term relationships with global buyers.

Rather than relying on supply management measures, EU dairy farmers and processors will have to learn to deal with the vicissitudes of the global markets; their partners, including banks and cooperatives, can guide them in coping with this volatility.

The quota-free future

According to the results of a member survey carried out by the European Dairy Association (EDA), it appears that dairy processors across Europe are actively preparing for a future without quotas. The need for strategic planning is being taken seriously and individual dairy companies are already embarking on a range of initiatives.

Different processors face different situations. Companies need to use communication tools in the shape of forecasts and market development information, as well as regular dialogue with producers about supply prospects.

This communication can take the form of local/regional meetings and assemblies, company publications for producers, individual discussions, regular contact with in-field advisers, online tools, and conferences featuring representatives of governments, producers and processors. Open communication and interaction is crucial, because processors want to contribute to a stable market and need to plan their output to meet demand.

Another important tool is contracting. Half of the respondents to the EDA survey, including cooperatives, already have contracts in place containing agreements realting to volume. These take the form of processor exclusivity contracts with farmers (volume bonuses) and can be as long as 12 years. The EDA survey also revealed that almost none of the processors are using futures contracts to mitigate future price volatility.

The research carried out by the EDA indicates that the large majority of processors require producers to issue supply forecasts, and that contracts today stipulate that penalties or bonuses may be applied if production differs significantly from these predictions.

The survey also shows clearly that, while dairy processors are preparing themselves for a future without quotas, they want stability, predictability and transparency when it comes to EU policies. EDA members also accept the need to encourage new suppliers in order to keep pace with the growth in demand. The supply management measure, as voted by the European Parliament, will be counter-productive in this respect.

New suppliers and legislation

At a recent EDA conference in Brussels, it was pointed out that the average age of European dairy farmers is high, highlighting the need to attract new entrants to the sector.

Current EU policy proposals could lead to a situation in which dairy farmers are penalised if they increase production by more than 5%. This is discouraging new dairy farmers and may be a barrier to new suppliers investing in the sector.

The EDA believes dairy farmers need to be given confidence and supported in their transition to a quota-free EU environment, but that there are better way to do this than via a crisis supply management system. The Dairy Package needs to be given time to do its work and yield results. Furthermore, tools aimed at enabling dairy farmers to cope with extreme price volatility such as hedging and futures markets must be examined, along with timely and accurate analysis of market data. Milk cooperatives and the dairy industry also have important roles to play, as do other stakeholders such as banks, which should be flexible when structuring loans for dairy farmers.

The EDA continues its efforts to grant the EU dairy industry access to world markets, but in order to maintain the sector's competitiveness, the EDA will need to cope with a number of policy developments, including the effective reintroduction of supply management.

Eventual derogations on competition laws that effect producer organisations and the move to flat-rate direct payments are other developments that may harm the EU dairy industry. The EDA will continue defending the interests of the industry in the context of the CAP2020 reform, but calls for stability and predictability in relation to EU policy. This is a necessary condition to allow the EU dairy industry to prepare and adapt itself for the 2015 post-quota era and the expected growth in demand.

As international trade strongly determines profitability in the EU dairy sector, the EU has to secure adequate market access for European dairy products, especially the BRICS nations. In order to ensure optimal participation in the world market, the EDA will follow in detail the free trade agreements that the EU signs with specific countries.

The future for the EU dairy industry looks bright and global dairy demand is expected to grow. As an industry we need to prepare ourselves for this promising future. Major policy developments – CAP reform, price volatility – should therefore be stable, transparent and predictable. Unforeseen and counter-productive policy decisions such as supply management are not the way to go.