Required Report - Public distribution

**Date:** 10/19/2007

**GAIN Report Number:** E47093

E47093

**EU-27**

**Dairy and Products**

**Annual**

**2007**

**Approved by:**

![](media/image1.wmf)Eric Wenberg, for USEU

U.S. Mission to the EU

**Prepared by:**

Yvan Polet, USEU; Piotr Rucinski, Warsaw; & FAS/Europe analysts

**Report Highlights:**

The EU integrated dairy market is experiencing changes from CAP reform
and member state expansion. High global dairy product prices will not
result in a large increase in dairy production in the EU, as quota
limitations remain a strong moderating force on surpluses, but prices
will have a positive production impact. Notably, demand for cheese
inside the EU and abroad will increase its processing and use. There are
potential production and processing changes in the EU from disease, an
upcoming dairy policy \"Health Check\", and the desirability of low-fat
dairy products among consumers. This report updates USDA\'s dairy
estimates for the consolidated EU report to include Bulgaria and
Romania, reflecting their new membership status from January 1, 2007.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Brussels USEU \[BE2\]

\[E4\]

Table of Contents

[Executive Summary 4](#executive-summary)

[Milk production 5](#milk-production)

[2006 5](#section-2)

[2007 6](#section-4)

[2008 7](#section-5)

[Cheese 8](#cheese)

[2006 8](#section-6)

[2007 8](#section-7)

[2008 9](#section-8)

[Butter 10](#butter)

[2006 10](#section-10)

[2007 10](#section-11)

[2008 11](#section-12)

[Whole Dry Milk (WDM) 11](#whole-dry-milk-wdm)

[2006 12](#section-14)

[2007 12](#section-15)

[2008 12](#section-16)

[Non-Fat Dry Milk (NFDM) 12](#non-fat-dry-milk-nfdm)

[2006 12](#section-17)

[2007 13](#section-18)

[2008 13](#section-19)

[Policy 13](#policy)

[Markets drive CAP reform... 13](#markets-drive-cap-reform)

[....but CAP reform also drives markets.
14](#but-cap-reform-also-drives-markets.)

[Expectations for the 2008 Health Check
15](#expectations-for-the-2008-health-check)

[Impact of Bluetongue disease in north-west Europe
16](#impact-of-bluetongue-disease-in-north-west-europe)

[Impact of the accession of Bulgaria and Romania
16](#impact-of-the-accession-of-bulgaria-and-romania)

[Related reports from FAS EU offices
17](#related-reports-from-fas-eu-offices)

The collaboration of the following EU FAS colleagues in the member
states has been critical for the completion of this report. The authors
of this report wish to thank especially those colleagues that
participated in its report meeting to discuss the numbers and the report
content, as well as in further editing the narrative.

Dana Biasetti from FAS Rome covering Italy

Mila Boshnakova from FAS Sofia covering Bulgaria

Monica Dobrescu from FAS Bucharest covering Romania

Bob Flach from FAS The Hague covering the Benelux

Stephen Hammond from FAS Madrid covering Portugal and Spain

Michael Hanley from FAS Dublin covering Ireland

Marie-Cecile Henard from FAS Paris covering France

Petra Hrdlickova from FAS Prague covering the Czech Republic

Steve Knight from FAS London covering the United Kingdom

Roswitha Krautgartner from FAS Vienna covering Austria

Hasse Kristensen from FAS Copenhagen covering Denmark

Asa Lexmon from FAS Stockholm covering Finland and Sweden

Sabine Lieberz from FAS Berlin covering Germany

Jana Mikulasova from FAS Prague covering the Slovak Republic

Andreja Misir, from FAS Zagreb covering Slovenia

Ferenc Nemes from FAS Budapest covering Hungary

Piotr Rucinski from FAS Warsaw covering Estonia, Latvia, Lithuania and
Poland

Yvan Polet from FAS USEU covering European Commission data and policies

#  

# Executive Summary

2007 brought enormous changes to the EU dairy market. Three major
movements, reinforced by each other, were strong world demand for dairy
products, reduced supplies from Oceania as a result of Australia's
drought and the impact of CAP reform.

The decrease in intervention prices for butter and Non Fat Dry Milk
(NFDM) agreed in the 2003 CAP Reform agreement, led to a squeeze on
processor profitability. In 2006 milk production decreased for the first
time, despite a 0.5 percent increase in milk production quota. The
production decrease resulted from strict milk quota mobility rules that
prohibit the uptake of milk quota by efficient milk producers from
inefficient producers leaving the sector. This was enhanced by a
widespread summer drought throughout Europe. Drought led to increased
slaughter of cattle, including dairy cows. The end of intervention
subsidies for NFDM in September 2006 and the depletion of NFDM
intervention stocks by the end of 2006 were also remarkable milestones.

In the first quarter of 2007, EU milk production increased temporarily,
because unlike 2006, milk producers did not have to restrict production
to avoid superlevies for overshooting their individual quota. However, a
widespread drought in April 2007 led to early worries about fodder
production and milk production rapidly decreased to a lower level
compared to 2006. As milk deliveries continued to be preferentially
channeled to cheese-making, production of milk powders and butter
significantly decreased. Milk powder prices started to rally. The EU
butter production shortfall was supplemented by increased sales from EU
intervention butter stocks. When these butter stocks ran low, in order
to ease demand, the European Commission (EC) decided to halt all
subsidies for dairy products. This pushed milk powder prices up further
than normal. Profitability in cheese-making was outpaced by the
profitability of producing Non Fat Dry Milk (NFDM) + butter. As well,
input and feed costs for milk production also increased and milk
producer prices did not follow the price rally for dairy products. As a
result of long-term supply contracts with processors and retailers, milk
producers faced a disincentive and further decreased milk production in
summer 2007. The decrease occurred despite another agreed 0.5 percent
increase in milk production quota in the EU-15. FAS/Europe expects that
the increase of producer prices at summer's end, combined with EC
measures to ease feeding costs, will trigger renewed milk production
increases at the end of 2007 and the first quarter of 2008. Processors
will again focus on shifting milk to cheese again.

2008 forecasts assume that world demand for dairy products remains solid
and that the market's supply response is limited and needs considerable
time to develop. Feeding costs are forecast to remain high as the zero
set aside will not yield higher feed production until harvest 2008. Much
depends also on whether the EC will agree in December 2007 on a further
quota increase for 2008/09. If the EC refuses, quota mobility
restrictions may further hamper efficient milk quota redistribution.
Another unknown is the impact of Bluetongue disease in Europe in 2008
and whether a vaccination campaign will start. For 2008, dairy prices
will depend on whether larger U.S. supplies become available for export.

January 1, 2007, Bulgaria and Romania acceded to the European Union
creating the EU-27. Bulgaria and Romania combined add two million MT of
milk deliveries. Bulgaria and Romania are experiencing major
restructuring challenges to meet EU sanitary and quality standards.
However, Bulgaria and Romania add some 30 million consumers to the
European market.

# Milk production

  ---------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------- -------------
  **Country:**     ** EU-27**                                                                                                

  **Commodity:**   **Dairy,                                                                                                  
                   Milk** (1000                                                                                              
                   Head / 1000                                                                                               
                   MT)                                                                                                       

                   **2006**                                  **2007**                                  **2008**              

                   USDA Official Post Old      Post New      USDA Official Post Old      Post New      USDA Official Post    Post New
                                 (EU-25)       (EU-27)                     (EU-25)       (EU-27)                     Old     (EU-27)

  **Calendar Year  **01/2006**                               **01/2007**                               **01/2008**           
  Begin**                                                                                                                    

  Cows In Milk     22,970        22,970        24,944        22,340        22,340        24,344        0             0       24,000

  Cows Milk Deliv. 130,400       130,400       132,206       131,500       131,500       132,600       0             0       133,400
  to Dairies                                                                                                                 

  Other Milk       4,525         4,525         4,075         4,550         4,550         4,125         0             0       4,150
  Production                                                                                                                 

  Total Milk       134,925       134,925       136,281       136,050       136,050       136,725       0             0       137,550
  Production                                                                                                                 

  Extra EU25       7             7             6             7             7             7             0             0       10
  Imports                                                                                                                    

  **TOTAL SUPPLY** **134,932**   **134,932**   **136,287**   **136,057**   **136,057**   **136,732**   **0**         **0**   **137,560**

  Extra EU25       142           142           140           135           135           155           0             0       160
  Exports                                                                                                                    

  Fluid Use Dom.   34,030        34,030        34,084        34,050        34,050        34,000        0             0       34,000
  Consum.                                                                                                                    

  Factory Use      100,760       100,760       102,063       101,872       101,872       102,577       0             0       103,400
  Consum.                                                                                                                    

  Feed Use Dom.    0             0             0             0             0             0             0             0       0
  Consum.                                                                                                                    

  Total Dom.       134,790       134,790       136,147       135,922       135,922       136,577       0             0       137,400
  Consumption                                                                                                                

  **TOTAL          **134,932**   **134,932**   **136,287**   **136,057**   **136,057**   **136,732**   **0**         **0**   **137,560**
  DISTRIBUTION**                                                                                                             
  ---------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------- -------------

Source: FAS EU offices

**Please note**: Milk production quota for direct sales are a relic of
historical milk marketing channels in Europe. EU milk production quota
consists of two parts: a quota for deliveries to the processing industry
and a quota for direct sales. This report only focuses on milk
deliveries to the processing industry and its products, thus numbers on
the production and consumption of direct sales of milk are not included.
However, cows which produce milk for direct sales quota are included in
the inventories as census numbers do not discriminate for this. As a
result, the calculated milk production per cow based on the numbers of
this report underestimate the true levels. Direct sales of milk have
marginal importance in most EU-15 countries but remain a significant
source of fluid milk and homemade dairy products in the New Member
States (NMS), especially Bulgaria, Romania, Poland, and Slovenia. From
EU-15 countries, homemade dairy products and direct milk sales mainly
still occur in Spain, Portugal, Italy and Greece. FAS/Europe expects
that as the restructuring of dairy farming in the NMS continues, most of
this milk will move off the farm and result in higher fluid milk
production by dairy plants and consumption ([GAIN
BU7026[^1]](http://www.fas.usda.gov/gainfiles/200708/146292229.pdf)).
Poland's and, in September 2007, Bulgaria's quota were already increased
by the Commission's transfer of former direct sales' quantities to their
wholesale quota.

## 

## 2006

Milk production in 2006 was adversely affected by implementation of 2003
CAP reform, due to the decoupling of support for dairy farmers and also
severe summer drought which reduced cow herds and lowered milk output. A
reduction in Other Milk Production numbers resulted from a review of
non-cow milk production numbers in Spain and Portugal.

## 

## 2007

In 2007, EU-27 dairy production is stimulated by high world market
prices for most dairy products but limited by the existing milk quota
system, despite the second of three consecutive 0.5 percent increases in
milk production quota in the EU-15. The prospect of potential loss of
market value of the milk production quota discourages efficient
producers from acquiring the quota that is released by small and
inefficient producers (see policy section below). This limits the
increase in production of raw milk and dairy products in response to
growing export demand. Due to Romania and Bulgaria's EU accession
January 1, 2007, dairy herd numbers were increased by 9 percent on
average and EU milk production quota for deliveries was enlarged by two
million MT of cow milk or just one percent of total EU production. The
milk productivity per cow is very low in Romania and Bulgaria.

EU-27 milk production is expected to increase in 2007, but to remain
below the 2005 level, due to growth of export demand and higher domestic
consumption. Cow inventories are expected to decrease in 2007 due to
restructuring of the dairy industry in the NMS and further decreases in
cow-herds in the EU-15 countries due to the decoupling process of CAP
reform. However, growing animal productivity is expected to offset lower
inventories. Raw milk production is expected to grow slowly in the NMS
and slightly decrease in the EU-15 countries. Among EU-15 nations, milk
production is expected to increase in Germany, Ireland and Italy. France
and the United Kingdom are expected to decrease milk production in 2007.
Among the NMS, milk production is expected to increase mainly in Poland
due to its favorable feed supplies and the increase of its wholesale
milk quota. Production numbers for the first semester of 2007 suggest a
0.7 percent increase in cow milk deliveries. However, the increase was
exclusively in the first quarter. It was largely a result of fewer
farmers having to slow down milk output at the end of the quota year in
order to avoid superlevies. In the second quarter (first quarter of the
2007/08 quota year) milk deliveries show a year to year decrease of 0.6
percent. This is only partly explained by the lower fat content of milk
deliveries in several larger Member States. Decreases in milk deliveries
compared to the first quarter of the 2005/06 quota year are observed in
France, the United Kingdom, the Iberian Peninsula, wildfire stricken
Greece and the Scandinavian countries Finland and Sweden, but also in
NMS-10 countries Hungary, Poland and the Slovak Republic. Early reports
announce further drops in year to year deliveries for July and August in
many Member States. France is facing difficulties adjusting to favorable
world market conditions. In the United Kingdom, the decoupling of dairy
aid from milk production has lowered supply from some less efficient
producers. The hot summer and subsequent drought have impacted forage
supplies and hence milk production in Southeastern Europe (Bulgaria,
Romania, Hungary, Italy and Greece). High world market and increased
consumer prices for milk are only slowly being passed on to the farmer
through higher producer prices, because dairy wholesale prices only
increased after long-term contracts with retailers expired. In the mean
time high grain and feed prices are adversely affecting the
profitability of milk production in 2007 ([GAIN
FR7626[^2]](http://www.fas.usda.gov/gainfiles/200708/146292220.pdf)). So
far this season, growing raw milk prices have lagged the increasing
costs of milk production and dairy farmers struggle to maintain their
profit margin. This is less true for Member States where milk production
is mainly based on grazing like the Benelux countries, Denmark, parts of
Germany, Ireland and Poland. Other milk production is also expected to
continue to expand as increases in ewe and goat milk production across
the EU are offsetting the decreased production in Greece as a
consequence of this summer's wildfires ([GAIN
GR7016[^3]](http://www.fas.usda.gov/gainfiles/200710/146292608.pdf)).

Higher raw milk output will enable higher factory use, while fluid milk
consumption remains stable. In 2007, high world dairy product prices led
to changes in intra EU raw milk trade flows. For example, in the first
six months of 2007, Polish exports of raw milk for further processing to
Germany decreased by 40 percent. This trend is also occurring in other
EU Member States. On December 31, 2006, the transition period ended for
Polish dairy processors who at accession did not meet EU sanitary
standards. Currently, all Polish dairy plants fulfill EU sanitary
requirements regarding raw milk and milk processing. Bulgaria and
Romania requested a transitional period until December 31, 2009, to
modernize milk processing plants and to organize milk collection centers
to comply with the EU requirements. Products from establishments subject
to transitional arrangements can not be sold to other Member States and
must be clearly identified (labeled) ([GAIN
BU7023[^4]](http://www.fas.usda.gov/gainfiles/200707/146291846.pdf)).

## 2008

EU milk production is forecast to continue to grow in 2008. A third and
final 0.5 percent increase in production quota in the EU-15, as agreed
in the 2003 CAP reform, will enable further increase of milk production
in 2008. Continuously growing EU domestic consumption and continued
strong export demand for certain dairy products through the first half
of 2008 are forecast to generate about half a percent increase in EU
milk production. Increased or stable milk production is forecast in
almost all EU-27 Member States except the United Kingdom. However,
considerable uncertainty exists about the evolution of the profitability
of dairying as feed cost is expected to remain high in 2008 and the
first reports about dairy processors decreasing producer milk prices
again have already been published. Concern is also growing that the
impact of the epidemic of Bluetongue disease in the midst of Europe may
have some impact on milk cow productivity in 2008 (see policy section
below). Consumption of fluid milk is forecast to increase mainly due to
increased NMS' consumption, but the majority of the additional milk
supply is forecast to flow to increased factory use. Speculation also
exists on whether the EC will agree on a further quota increase for
2008/09 in December 2007 in response to a dairy market report ahead of
the 2008 Health Check. If not, quota mobility restrictions may further
hamper efficient milk quota redistribution.

# Cheese

  ---------------- ------------- ----------- ----------- ------------- ----------- ----------- ------------- ------- -----------
  **Country:**     **EU-27**                                                                                         

  **Commodity:**   **Dairy,                                                                                          
                   Cheese**                                                                                          
                   (1000 MT)                                                                                         

                   **2006**                              **2007**                              **2008**              

                   USDA Official Post Old    Post New    USDA Official Post Old    Post New    USDA Official Post    Post New
                                 (EU-25)     (EU-27)                   (EU-25)     (EU-27)                   Old     (EU-27)

  **Calendar Year  **01/2006**                           **01/2007**                           **01/2008**           
  Begin**                                                                                                            

  Beginning Stocks 0             0           0           0             0           0           0             0       0

  Production       6,580         6,580       6,801       6,700         6,700       6,870       0             0       6,940

  Extra EU25       101           101         99          100           100         105         0             0       110
  Imports                                                                                                            

  **TOTAL SUPPLY** **6,681**     **6,681**   **6,900**   **6,800**     **6,800**   **6,975**   **0**         **0**   **7,050**

  Extra EU25       529           529         561         550           550         600         0             0       620
  Exports                                                                                                            

  Domestic         6,152         6,152       6,339       6,250         6,250       6,375       0             0       6,430
  Consumption                                                                                                        

  Other Use,       0             0           0           0             0           0           0             0       0
  Losses                                                                                                             

  TOTAL Dom.       6,152         6,152       6,339       6,250         6,250       6,375       0             0       6,430
  Consumption                                                                                                        

  Ending Stocks    0             0           0           0             0           0           0             0       0

  **TOTAL          **6,681**     **6,681**   **6,900**   **6,800**     **6,800**   **6,975**   **0**         **0**   **7,050**
  DISTRIBUTION**                                                                                                     
  ---------------- ------------- ----------- ----------- ------------- ----------- ----------- ------------- ------- -----------

Source:FAS EU offices

## 2006

Output of cheese in 2006 increased in comparison to 2005 despite lower
milk supplies. Higher output was due to growing domestic consumption,
increasing exports and withdrawal of subsidies for export of butter and
non fat dry milk (NFDM). The accession of Romania and Bulgaria is
responsible for the increase in this report's cheese production numbers.

## 2007

EU cheese production continues its upward trend in response to EU-wide
growth in cheese consumption. Higher cheese output is further enabled by
an expected increased output of raw milk and high export demand for
dairy products. Germany, France, Italy and The Netherlands are the major
producers of cheese in the EU market. As the CAP dairy program continues
to phase out support for butter and milk powder, there is also a greater
incentive to increase cheese production. Europe's dairy industry
continues to invest in cheese production capacity and believes that EU
cheese will remain competitive on the world market. Cheese production is
increasing EU-wide in both EU-15 and NMS. The increase in cheese
production amounted to 2.6 percent in the first half of 2007. During the
spring, cheese production slowed down because of a processing
profitability gap compared to the NFDM+butter complex. Due to the
limited cheese production, cheese prices rose significantly during the
end of July and August.

![](media/image2.wmf){width="6.581944444444445in"
height="4.950694444444444in"}Source: EC DGAgri Management Committee
meeting from September 27, 2007

Higher cheese consumption is expected as well, satisfied by higher
output. However, consumption increases in the NMS are slower than in the
EU-15 as higher cheese output in NMS is directed mostly for exports to
former EU-15 countries. High domestic prices make Germany an attractive
destination for cheese exports, particularly from other EU Member
States. Production of cheeses from sheep and goat milk also show growth.

EU cheese imports are expected to increase slightly, mainly from
Australia and New Zealand. EU cheese exports are expected to grow seven
percent in 2007 despite the phase out of all export subsidies as of June
15, 2007. Major exporting countries are Germany, France, Italy and the
Netherlands. Major export destinations are Russia, United States and
Japan. Exports of cheese in the fourth quarter of 2007 will depend on
the relationship of profitability margins for butter and NFDM processing
in comparison to the margins of processing cheese for exports. It seems
that world market prices for butter and NFDM already have reached their
ceiling and may decline again towards the end of the year. If so, EU
exports of cheese may increase further, if world market prices hold
firm.

## 2008

Cheese consumption in the EU is forecast to continue growing in 2008,
stimulating cheese output, especially as it is expected that the
profitability of NFDM+butter will fall below profitability of cheese
processing again. However, increases in cheese production and
consumption are forecast to slow down in 2008 from recent trends due to
high domestic and world market prices. Cheese imports are forecast to
increase slightly but remain at a low level due to growing domestic
supplies. Exports will depend on prices, however, it seems that a strong
market for cheese exports will continue in the first half of 2008 due to
growing demand in Russia and despite some concern that the high €/\$
exchange rate and a slowing economy might put a brake on U.S. branded
cheese imports from Europe.

## 

# Butter

  ---------------- ------------- ----------- ----------- ------------- ----------- ----------- ------------- ------- -----------
  **Country:**     **EU-27**                                                                                         

  **Commodity:**   **Dairy,                                                                                          
                   Butter**                                                                                          
                   (1000 MT)                                                                                         

                   **2006**                              **2007**                              **2008**              

                   USDA Official Post Old    Post New    USDA Official Post Old    Post New    USDA Official Post    Post New
                                 (EU-25)     (EU-27)                   (EU-25)     (EU-27)                   Old     (EU-27)

  **Calendar Year  **01/2006**                           **01/2007**                           **01/2008**           
  Begin**                                                                                                            

  Beginning Stocks 185           185         185         122           122         122         0             0       50

  Production       2,055         2,055       2,035       2,055         2,055       2,040       0             0       2,045

  Extra EU25       84            84          84          85            85          88          0             0       88
  Imports                                                                                                            

  **TOTAL SUPPLY** **2,324**     **2,324**   **2,304**   **2,262**     **2,262**   **2,250**   **0**         **0**   **2,183**

  Extra EU25       254           254         248         260           260         260         0             0       240
  Exports                                                                                                            

  Domestic         1,948         1,948       1,934       1,952         1,952       1,940       0             0       1,903
  Consumption                                                                                                        

  Other Use,       0             0           0           0             0           0           0             0       0
  Losses                                                                                                             

  TOTAL Dom.       1,948         1,948       1,934       1,952         1,952       1,940       0             0       1,903
  Consumption                                                                                                        

  Ending Stocks    122           122         122         50            50          50          0             0       40

  **TOTAL          **2,324**     **2,324**   **2,304**   **2,262**     **2,262**   **2,250**   **0**         **0**   **2,183**
  DISTRIBUTION**                                                                                                     
  ---------------- ------------- ----------- ----------- ------------- ----------- ----------- ------------- ------- -----------

Source:FAS EU offices

## 2006

Butter PS&D estimates were updated from previous reports. Output of
butter and exports ended slightly below previous estimates and resulted
in lower butter consumption than previously anticipated.

## 2007

Despite higher milk supplies in 2007 EU butter production is expected to
remain virtually unchanged at the 2006 level, despite the fact that
processors in several Member States switched to butter+ NFDM production
because of the aforementioned higher profitability over cheese
production. This is partly explained by the fact that the lower fat
content in raw milk reported in Germany and several other Member States
is limiting the butter output ([GAIN
GM7038[^5]](http://www.fas.usda.gov/gainfiles/200708/146292042.pdf)).
The increasing consumer preference for low fat dairy products is
increasing the amount of milk fat for butter production. Butter output
is expected to remain stable EU-wide. Butter imports are expected to
increase slightly. Butter imports from New Zealand under the NZ specific
butter TRQ have been facing some quota fill problems due to the
implementation of the new license application procedures from the new
[Commission Regulation (EC) No
2020/2006[^6]](http://eur-lex.europa.eu/LexUriServ/site/en/oj/2006/l_384/l_38420061229en00540060.pdf)
as the consequence of a European Court of Justice verdict, which
declared the former restrictive import regulation discriminating for
other interested importers. The tripling of EU butter prices since
January 2007 have allowed butter imports of U.S. origin. Butter exports
are expected to increase slightly as well, due to high world prices and
strong demand from Egypt and Russia. EU domestic butter consumption is
expected to remain stable, despite the fact that the food processing
industry is looking at alternatives for high-priced butter after the EC
abolished the aid for incorporation of butter at its June 14 Management
Committee meeting, and high export prices encourage a reduction in
stocks. The EC announced the sales of the remaining intervention butter
stocks at the end of March 2007 and EU intervention stocks physically
ran empty by the end of August 2007 for the first time since the
inception of butter intervention in 1964. In 2007, only 437 MT of butter
were sold to intervention in March from Spain[^7]. EU butter ending
stocks in 2007 are forecast down by 70,000 MT and will only consist of
butter under the Private Storage Scheme.

## 2008

EU butter production is forecast to remain almost at the 2007 level,
because the increase in 2008 milk production will be used mostly for
cheese production again. Imports are forecast to remain stable as they
are limited by TRQs. Domestic consumption is forecast to decrease
despite stable household consumption. However, the food processing
industry is forecast to decrease its butter use as a result of the end
of EU subsidies for the incorporation of butter in bakeries and ice
cream, as well as to explore the use of vegetal oil as a substitute for
the high priced butter. Stable output of butter and an expected decline
of export prices in 2008 are forecast to lead to a decrease in butter
exports. EU butter exports are forecast to lose some of its market
position because of the end of export refunds and strong competition in
butter from Oceania. However, this position may be reversed if exports
of butter from Australia are reduced due to drought.

# 

# Whole Dry Milk (WDM)

  ---------------- ------------- --------- --------- ------------- --------- --------- ------------- ------- ---------
  **Country:**     **EU-27**                                                                                 

  **Commodity:**   **Dairy,                                                                                  
                   Whole Dry                                                                                 
                   Milk** (1000                                                                              
                   MT)                                                                                       

                   **2006**                          **2007**                          **2008**              

                   USDA Official Post Old  Post New  USDA Official Post Old  Post New  USDA Official Post    Post New
                                 (EU-25)   (EU-27)                 (EU-25)   (EU-27)                 Old     (EU-27)

  **Calendar Year  **01/2006**                       **01/2007**                       **01/2008**           
  Begin**                                                                                                    

  Beginning Stocks 0             0         0         0             0         0         0             0       0

  Production       810           810       800       805           805       770       0             0       770

  Extra EU25       2             2         3         2             2         3         0             0       2
  Imports                                                                                                    

  **TOTAL SUPPLY** **812**       **812**   **803**   **807**       **807**   **773**   **0**         **0**   **772**

  Extra EU25       430           430       422       430           430       395       0             0       395
  Exports                                                                                                    

  Domestic         382           382       381       377           377       378       0             0       377
  Consumption                                                                                                

  Other Use,       0             0         0         0             0         0         0             0       0
  Losses                                                                                                     

  TOTAL Dom.       382           382       381       377           377       378       0             0       377
  Consumption                                                                                                

  Ending Stocks    0             0         0         0             0         0         0             0       0

  **TOTAL          **812**       **812**   **803**   **807**       **807**   **773**   **0**         **0**   **772**
  DISTRIBUTION**                                                                                             
  ---------------- ------------- --------- --------- ------------- --------- --------- ------------- ------- ---------

Source: FAS EU offices

## 2006

The decrease of whole dry milk (WDM) production in 2006 resulted from
lower milk output and higher production of cheese. Reduced supplies
adversely affected exports in 2006 but did not impact domestic WDM
consumption.

## 2007

WDM production in 2007 is expected to decrease slightly from 2006. This
outcome is expected because of the lower profitability compared to other
products. The end of export refunds for WDM exports at the beginning of
2007 has resulted in a decrease in demand on the Central- and
West-African market. WDM sales to Algeria and the whole Middle-East
remain firm, while exports to Asian destinations is increasing as a
result of a temporary lack of supplies from Oceania. The EU domestic
market for WMP shows little or no elasticity. The Netherlands, France
and Germany are the major producers and suppliers of WDM on the EU
market.

## 2008

WMP production, consumption and trade in the EU are forecast to remain
almost unchanged in 2008.

# Non-Fat Dry Milk (NFDM)

  ---------------- ------------- ----------- --------- ------------- --------- ----------- ------------- ------- -----------
  **Country:**     **EU-27**                                                                                     

  **Commodity:**   **Dairy, Non                                                                                  
                   Fat Dry                                                                                       
                   Milk** (1000                                                                                  
                   MT)                                                                                           

                   **2006**                            **2007**                            **2008**              

                   USDA Official Post Old    Post New  USDA Official Post Old  Post New    USDA Official Post    Post New
                                 (EU-25)     (EU-27)                 (EU-25)   (EU-27)                   Old     (EU-27)

  **Calendar Year  **01/2006**                         **01/2007**                         **01/2008**           
  Begin**                                                                                                        

  Beginning Stocks 8             8           8         0             0         0           0             0       0

  Production       975           975         955       975           975       975         0             0       980

  Extra EU25       19            19          21        20            20        25          0             0       25
  Imports                                                                                                        

  **TOTAL SUPPLY** **1,002**     **1,002**   **984**   **995**       **995**   **1,000**   **0**         **0**   **1,005**

  Extra EU25       88            88          88        100           100       170         0             0       155
  Exports                                                                                                        

  Domestic         914           914         896       895           895       830         0             0       850
  Consumption                                                                                                    

  Other Use,       0             0           0         0             0         0           0             0       0
  Losses                                                                                                         

  TOTAL Dom.       914           914         896       895           895       830         0             0       850
  Consumption                                                                                                    

  Ending Stocks    0             0           0         0             0         0           0             0       0

  **TOTAL          **1,002**     **1,002**   **984**   **995**       **995**   **1,000**   **0**         **0**   **1,005**
  DISTRIBUTION**                                                                                                 
  ---------------- ------------- ----------- --------- ------------- --------- ----------- ------------- ------- -----------

Source: FAS EU offices

## 2006

NFDM production was lower in 2006 than 2005 due to a decrease in milk
supplies and higher production of cheese. The end of EU subsidies for
the use of NFDM in feed and the end of export refunds for NFDM in the
summer of 2006 resulted in a decrease in NFDM consumption and exports.

## 2007

NFDM production is expected to increase because of the high
profitability of NFDM+butter production and high export prices.
Production is expected to grow in EU-15 countries with adequate milk
supplies, mainly Germany and Ireland, while output in NMS is expected to
remain stable. France, Germany, Poland and the Benelux are the major
producers of NFDM in the European Union. In EU-15 countries, human
consumption of NFDM remains stable, while feed processors decreased use
of NFDM to a minimum. Increased production of NFDM in EU-15 countries is
expected to supply external export due to its high world market price.
However, NFDM production in the EU-15 is expected to level off again
towards the end of 2007 as increased cheese processing profitability is
expected to divert more milk supplies to cheese production again. In the
NMS, milk surpluses will be directed rather for higher cheese production
than NFDM because of continuous import demand of cheese from EU-15
countries. Total EU 2007 NFDM exports are expected to double in
comparison to 2006 because of decreased NFDM availability for exports
from the United States and low stocks in Oceania. This is occurring
despite the elimination of export refunds for NFDM and high world market
prices, although NFDM prices started to decrease again in the second
half of August. The return of NFDM supplies to the market from Oceania
are expected to lead to a decrease in exports from Europe again towards
the end of 2007. EU domestic NFDM consumption is expected to decrease,
especially in the EU-15, because of lower feed use as EU subsidies for
feeding NFDM were phased out. Because of good export opportunities,
intervention was not used for NFDM in 2007[^8]; hence ending stocks will
remain zero.

## 2008

##  

NFDM production is forecast to increase slightly in 2008, in line with
small increases in butter production and overall growth of raw milk
output. NFDM exports are forecast to continue to decrease in the spring
of 2008 as a result of the competition from Oceania, which is expected
to result in a decline in world market prices. If NFDM prices in the EU
decrease enough, domestic consumption of NFDM is forecast to increase in
2008, with excess NFDM being soaked up by the feed industry. No stocks
are anticipated to build in the EU in 2008.

# 

# Policy

## Markets drive CAP reform...

If EU CAP reform has mainly been driven by public concerns about
disproportional EC budgetary outlays for agricultural support and
international political pressure to decrease the EU's trade distorting
agricultural subsidies, market signals are playing an important role as
well. With EU dairy prices at record levels and milk production trailing
2006, which were also below production quota, in many EU member states
(MS), a Polish request to already increase milk production quota for the
2008-2009 quota year received support from 20 EU members at the European
Council meeting from September 26, 2007. France, Germany and the United
Kingdom objected as they prefer to wait for an EU dairy market report
which is due in December. Austria, Finland and Malta, did not vote for
the expansion because they fear adverse effects on their Less Favored
Areas. Commissioner Fisher-Boel indicated that she wanted to wait for
the market report before deciding. The Commissioner argued that a speedy
decision-making procedure could still be finalized before the start of
the next quota year of April 1, 2008, just as has happened with the
recent set-aside derogation decision. If a positive decision is taken at
the end of 2007 to increase the 2008-2009 milk quota between 3-5
percent, this should probably be seen to anticipate further milk quota
increases in the Health Check. Industry observers expect that a 3
percent increase in milk production quota would lead to increased milk
production of not more than 1-1.5 percent. This is because only a
limited number of MS are in a position to profitably expand milk
production capacity without facing environmental restrictions. The most
important member states set to expand production are Poland, Spain,
Italy and the Baltic states, while Denmark, Ireland, the Netherlands and
some parts of Germany could also increase milk production. Bulgaria and
Romania might also be listed with these countries if they were not still
hampered by their restructuring problems after EU accession.

If optimal dairy processing profitability returns to cheese-making soon,
contrary to the current NFDM+butter best return option, this increase in
EU milk production is not expected to influence international markets
much. The continuing increase in European domestic consumption of cheese
and fresh dairy products like yogurts is expected to absorb this
increased production. Butter production might also increase to soak up
extra butterfat because of the continuing consumer trend for low fat
dairy products. It can be expected that such an increase in EU
production will decrease prices of all dairy products.

In its September 26, 2007, meeting, the European Council adopted the
so-called [Dairy
Mini-package[^9]](http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/1404&format=HTML&aged=0&language=EN&guiLanguage=en)
including simplification of the school milk scheme, which will allow the
same aid for all fat contents; standardization on the protein content of
milk powders and condensed milk; harmonization of butter quality
definitions, and greater flexibility on the marketing of drinking milk
with varying fat content.  While this "mini-package" is not expected to
generate major changes to the EU dairy market, the implied change to the
butter/NFDM subsidy balance suggests some future higher disappearance of
butter versus NFDM. That should help the EC to better control EU butter
markets. See also GAIN
[E47016[^10]](http://www.fas.usda.gov/gainfiles/200703/146280314.pdf).

## ....but CAP reform also drives markets.

If the current record prices for dairy are mainly the result of booming
world demand and stagnating production in the EU and Oceania, stagnating
milk production in the EU is a direct result of the Agenda 2000 and 2003
CAP reforms. These reforms lowered the safety net of intervention buying
for NFDM and butter, and the resulting producer milk price, while
compensating producers through decoupled payments. This led to lower
processing margins for NFDM and butter and depleted intervention stocks.
The lower producer milk price has stripped profitability from less
performing milk producers, while giving them an opportunity to leave the
market at minimal income loss. The increase in the cost of feed and
other inputs is enhancing this trend. However, if CAP reform is driving
inefficient producers out of the market, efficient and profitable dairy
producers have little possibilities to take on extra milk quota. Quota
mobility restrictions do not allow regional shifts of milk production
between cost effective and less favorable areas. Also, uncertainty about
the short term and longer term fate of the milk quota regime discourages
farmers from investing in high priced milk quota. They know that this
investment will most likely be a complete loss by 2015 at the latest.
Meanwhile, the European milk producers and processors are losing
competitiveness on the world market, because of unused production and
processing capacity and the lack of new investments. The United Kingdom
and France have already been producing below quota for several years,
while the Benelux countries may face below quota production in 2007.
Dairy farmers in many EU-15 MS are also frustrated by how slow high
dairy product prices trickle down to raise producer milk prices. On the
contrary, increased feed prices in the past year have driven more milk
producers into operating losses and this provoked several moves by milk
producers to break up contracted deliveries to their current processor.
This has put processors under supply constraints to meet their long term
delivery contracts to retailers.

## Expectations for the 2008 Health Check

[European Agriculture Commissioner
Fisher-Boel[^11]](http://ec.europa.eu/commission_barroso/fischer-boel/speeches/index_en.htm)
on numerous occasions has hinted at her goals for the 2008 Health Check.
Some of these target the EU dairy regime, although few believe that milk
production quota will be abolished before their currently agreed end
after 2014/15. There is widespread understanding between EU dairy market
players that the EC will agree on a "soft landing" scenario for milk
production quota in the 2008 Health Check by gradually increasing the
quota, but it is unclear how large these quota increases should be. The
EC also is expected to further liberalize the dairy market by fully
decoupling the remaining coupled payments, except maybe for the suckling
cow premium. Critical in this move is whether the EC will also change
quota mobility rules. Until now EU MS can unilaterally decide to remove
quota trading restrictions on their territory, although not many are
considering it. With the beginning of quota year 2007/08, Germany has
moved from 21 to only 2 geographical areas for dairy quota trading. Milk
production quota exchange between EU MS is not possible at present and
this is not perceived as politically feasible. The idea of reducing the
superlevy on quota milk production overshoots to a lower level has also
been floated. A lower and variable superlevy could be used as a brake on
milk production through which the most cost efficient milk producer
could continue beyond quota depending on the market situation. This
could be combined with a modified intervention system as a market
management tool. Another difficult problem is how the EC will make sure
the dairy industry maintains a role as an agricultural activity in least
favored and mountainous areas. Full decoupling will put these areas in a
poor position. The answer is expected to come through enhanced and
tailor made Pillar 2 Rural Development subsidies, but the problem is
that this support needs to remain decoupled from dairy production.
Another idea that has been floated in
[Agrafacts[^12]](http://www.agrafacts.com/) from September 22, 2007, is
to adjust the current Article 69 option of [Council Regulation (EC) No
1782/03[^13]](http://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_270/l_27020031021en00010069.pdf)
to make it more flexible. With mountain dairy farming in mind, Article
69, which allows Member States to siphon off up to 10% of their
SPS/coupled payments and rechannel the funds "for specific types of
farming which are important for the protection or enhancement of the
environment of for improving the quality & marketing of agricultural
products", could be altered to allow the money to be targeted at certain
production areas in a Member State rather than applicable to the whole
sector in that country. The uncertainty about the outcome of the Doha
negotiations makes this Health Check exercise for the dairy sector even
more difficult. Any change to the dairy quota regime agreed under the
Health Check will not be implemented before the 2009 milk quota year.

The following tentative agenda for the Health Check has been put in
place:

-   A Health Check communication is expected for November 2007.

-   A dairy market outlook report should follow in December 2007.

-   A formal Health Check proposal is expected in April/May 2008.

-   An agreement on the Health Check is anticipated in December 2008
    under the French EU Presidency.

## 

## Impact of Bluetongue disease in north-west Europe

The rapid spread of the Bluetongue Serotype 8 through Europe into the
United Kingdom and northern and eastern parts of Germany could take a
toll on milk production. In total, there have already been 23,500
outbreaks of the BTV-8 strain across northwest Europe by the end of
September 2007. Scientists are working hard to produce a vaccine for
this strain and the EC is working on the necessary legislation to
implement comprehensive vaccination programs in the infected MS.
Bluetongue is known to decrease productivity in cattle, but it has high
mortality rates in sheep flocks. Unless susceptible animals in infected
MS are vaccinated, further proliferation of this BT outbreak could lead
to decreasing milk output from cows and sheep in infected areas in 2008
and beyond.

## Impact of the accession of Bulgaria and Romania

Bulgaria and Romania are striving to implement EU sanitary and hygiene
legislation after their EU accession at the start of 2007. Few dairy
processors have received full EU approval and both Bulgaria and Romania
obtained extensions of the grace period for local meat and dairy
establishments to meet the EU sanitary and hygiene standards until 2009.
While Bulgaria already obtained a switch of milk quota for direct sales
to increase the quota for deliveries to 90 percent of the total quota,
Romanian milk quota is 2/3 for direct sales and 1/3 only for deliveries.
Worse, because of the small scale production with the large majority of
dairy producers only milking one or two cows, only about 1/3 of milk
deliveries from both countries meets EU milk sanitary quality standards.
Because processors must process quality and substandard milk separately
under EU hygiene legislation, many processors only receive substandard
milk, limiting them in their processing options and creating problems
with marketing these products. As a result, new and rapidly growing
European retailers in urban areas in Bulgaria and Romania prefer to
import dairy products and not use local products. Despite government
programs with European sponsorship to improve this situation, this
retail trend risks suffocating local production. Expectations are that
most small farms, which received a milk production quota, will not be
able to upgrade their milk quality to EU sanitary standards and
therefore will be shut down in 2008. While, over the long term, Bulgaria
and Romania should have comparative advantages for milk production, it
is clear that this is likely to take several years. See also GAIN
[BU7023[^14]](http://www.fas.usda.gov/gainfiles/200707/146291846.pdf)
and
[BU7026[^15]](http://www.fas.usda.gov/gainfiles/200708/146292229.pdf).

Visit our website: our website
[**http://useu.usmission.gov/agri/**](http://useu.usmission.gov/agri/)
provides a broad range of useful information on EU import rules and food
laws and allows easy access to USEU reports, trade information and other
practical information.

**E-mail**: <AgUSEUBrussels@usda.gov>

# Related reports from FAS EU offices

+--------+-----------------------------------------------------+-------+
|        |                                                     | ####  |
|        |                                                     | ####  |
+--------+-----------------------------------------------------+-------+
| E47079 | [EU Midyear 2007 BSE                                | 09/   |
|        | update](http                                        | 14/07 |
|        | ://www.fas.usda.gov/gainfiles/200709/146292344.pdf) |       |
+--------+-----------------------------------------------------+-------+
| E47041 | [Update on the EU dairy                             | 06/   |
|        | market](http                                        | 05/07 |
|        | ://www.fas.usda.gov/gainfiles/200706/146291270.pdf) |       |
+--------+-----------------------------------------------------+-------+
| E47016 | [European Commission Simplifies Milk                | 03/   |
|        | Regime](http                                        | 06/07 |
|        | ://www.fas.usda.gov/gainfiles/200703/146280314.pdf) |       |
+--------+-----------------------------------------------------+-------+
| FR7626 | [Impacts of Abnormally High Dairy Prices in         | 08/   |
|        | France](http                                        | 31/07 |
|        | ://www.fas.usda.gov/gainfiles/200708/146292220.pdf) |       |
+--------+-----------------------------------------------------+-------+
| GM7045 | Bluetongue Update: Disease continue to Spread in    | 10/   |
|        | Germany                                             | 19/07 |
+--------+-----------------------------------------------------+-------+
| GM7038 | [Background on Higher Prices For Dairy Products in  | 08/   |
|        | Germany](http                                       | 17/07 |
|        | ://www.fas.usda.gov/gainfiles/200708/146292042.pdf) |       |
+--------+-----------------------------------------------------+-------+
| GM7028 | [Update on Bluetongue Disease in                    | 07/   |
|        | Germany](http                                       | 13/07 |
|        | ://www.fas.usda.gov/gainfiles/200707/146291646.pdf) |       |
+--------+-----------------------------------------------------+-------+
| BU7026 | [Dairy - Sector                                     | 09/   |
|        | Update](http                                        | 03/07 |
|        | ://www.fas.usda.gov/gainfiles/200708/146292229.pdf) |       |
+--------+-----------------------------------------------------+-------+
| BU7023 | [A cup of hot milk for Bulgarian dairy              | 08/   |
|        | reform](http                                        | 01/07 |
|        | ://www.fas.usda.gov/gainfiles/200707/146291846.pdf) |       |
+--------+-----------------------------------------------------+-------+
| GR7016 | [Wildfires scourge                                  | 10/   |
|        | Greece](http                                        | 09/07 |
|        | ://www.fas.usda.gov/gainfiles/200710/146292608.pdf) |       |
+--------+-----------------------------------------------------+-------+
| UK7028 | Bluetongue outbreak adds to the UK's Foot & Mouth   | 10/   |
|        | Disease woes                                        | 08/07 |
+--------+-----------------------------------------------------+-------+

  -----------------------------------------------------------------------
  These reports can be accessed through our website
  <http://useu.usmission.gov/agri/> or through the FAS website
  <http://www.fas.usda.gov/scriptsw/attacherep/default.asp>.

  -----------------------------------------------------------------------

[^1]: <http://www.fas.usda.gov/gainfiles/200708/146292229.pdf>

[^2]: http://www.fas.usda.gov/gainfiles/200708/146292220.pdf

[^3]: http://www.fas.usda.gov/gainfiles/200710/146292608.pdf

[^4]: <http://www.fas.usda.gov/gainfiles/200707/146291846.pdf>

[^5]: <http://www.fas.usda.gov/gainfiles/200708/146292042.pdf>

[^6]: <http://eur-lex.europa.eu/LexUriServ/site/en/oj/2006/l_384/l_38420061229en00540060.pdf>

[^7]: The 2003 CAP Reform limited intervention buying to between March
    1, and August 31, each year.

[^8]: The 2003 CAP Reform limited intervention buying to between March
    1, and August 31, each year.

[^9]: <http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/1404&format=HTML&aged=0&language=EN&guiLanguage=en>

[^10]: <http://www.fas.usda.gov/gainfiles/200703/146280314.pdf>

[^11]: <http://ec.europa.eu/commission_barroso/fischer-boel/speeches/index_en.htm>

[^12]: <http://www.agrafacts.com/>

[^13]: This is the 2003 CAP Reform
    <http://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_270/l_27020031021en00010069.pdf>

[^14]: <http://www.fas.usda.gov/gainfiles/200707/146291846.pdf>

[^15]: <http://www.fas.usda.gov/gainfiles/200708/146292229.pdf>