Required Report - public distribution

**Date:** 5/14/2004

**GAIN Report Number:** E24074

E24074

**European Union**

**Dairy and Products**

**Semi-annual**

**2004**

**Approved by:**

![](media/image1.wmf)Justina Torry

U.S. Mission to the European Union, Brussels

**Prepared by:**

Karin Bendz

**Report Highlights:**

The EU-15 2003 drought actually led to an increase in milk production as
farmers compensated by increasing high quality feed. For 2004,
production is forecast to decline from last year\'s high level,
adjusting to quota levels.

In 2003, EU-15 butter and NFDM exports increased due to the limited
competition from Australia. In 2004, market conditions for butter and
NFDM are expected to deteriorate. As a result, dairy processors are
expected to increase cheese production this year. Production of WMP is
expected to increase due to exports subsidies for milk powder to Iraq.

In the 10 New Member States subsistence farming is very important. With
access to more modern feed and genetics, deliveries to dairies are
expected to grow rapidly.

Includes PSD Changes: Yes

Includes Trade Matrix: Yes

Semi-Annual Report

Brussels USEU \[BE2\]

\[E2\]

This report reflects the active contribution of:

Xavier Audran, FAS Paris

Bob Flach from FAS The Hague

Michael Hanley, FAS Dublin

####### Steve Knight, FAS London

Hasse Kristensen, FAS Copenhagen

Åsa Lexmon, FAS Stockholm

Sabine Lieberz, FAS Berlin

Alberto Menghini, FAS Rome

Diego Pazos, FAS Madrid

Yvan Polet, FAS Brussels

Enlargement of the European Union and the implementation of CAP reform
make 2004 an exceptional year. The effects on production, supply, and
demand are more difficult to forecast than usual. For all but the last
chapter, this report focuses on the EU-15.

Decoupling as agreed in the Common Agricultural Policy (CAP) Mid Term
Review (MTR) will begin in 2007, which is later than in other sectors.
However, Member States (MS) may start decoupling the dairy premiums
nationally in 2005. The European Unions new direct payments for dairy
farmers, are likely to act as an incentive to increase efficiency[^1].
Smaller, less efficient farms may loose economically while larger more
efficient units will be maintained. Fewer farms will be producing the
same amount of milk on larger and more intensive farmed units.

The dairy sector has refused reforms for many years and is the only
sector that still has five different subsidy instruments. However, the
milk quotas system will continue until 2014, but will be decreased
during that time.

# Executive Summary

The anticipated effects of the drought in summer 2003 were overestimated
and milk deliveries to dairies increased in 2003 rather than decreased
as previously expected. In 2004, EU-15 milk production is expected to
decline again, as farmers plan to avoid a production quota overshoot.

The world market demand for milk fat is high, mainly due to the reduced
competition from Oceania caused by the drought in Australia 2003, and
EU-15 production of butter has increased. However for 2004, butter
production is expected to decline due to better market conditions for
other products. Intervention storage of butter is expected to decrease
in line with falling intervention prices.

Cheese production is increasing, partly because of the decrease in
intervention subsidies on butter and Non Fat Dry Milk (NFDM), and
because of higher exports and consumption.

Production of Whole Milk Powder (WMP) is expected to increase, largely
due to the export subsidies available for production of whole milk
powder for Iraq.

The New Member States (NMS)[^2] are facing a different situation than
the EU-15 in the dairy sector. In the NMS subsistence farming is still
very big, and production is focused on commodity dairy products such as
butter and NFDM. However these countries have some competitive
advantages: cheap land, labor and locally produced feed. When these
countries obtain access to more modern feed and genetics, expectations
are that deliveries to dairies will rise substantially.

# Fluid Milk 

+---------------------+-------+------+-------+------+------+-------+
| Commodity:          | #     |      |       |      |      |       |
|                     | ##### |      |       |      |      |       |
|                     |  Milk |      |       |      |      |       |
|                     |  Flui |      |       |      |      |       |
|                     | d (10 |      |       |      |      |       |
|                     | 00MT) |      |       |      |      |       |
+---------------------+-------+------+-------+------+------+-------+
|                     | 2002  |      | 2003  |      | 2004 |       |
+---------------------+-------+------+-------+------+------+-------+
|                     | USDA  | P    | USDA  | P    | USDA | Posts |
|                     | off   | osts | off   | osts | offi | esti  |
|                     | icial | e    | icial | e    | cial | mates |
|                     |       | stim |       | stim |      | \[    |
|                     | \[    | ates | \[    | ates | \[o  | new\] |
|                     | old\] | \[n  | old\] | \[n  | ld\] |       |
|                     |       | ew\] |       | ew\] |      |       |
+---------------------+-------+------+-------+------+------+-------+
| Cows In Milk (1000  | 2     | 20   | 1     | 19   | 19   | 1     |
| head)               | 0,068 | ,068 | 9,750 | ,678 | ,400 | 9,387 |
+---------------------+-------+------+-------+------+------+-------+
| Cows Milk           | 11    | 115  | 11    | 116  | 115  | 11    |
| Deliveries to       | 5,600 | ,600 | 5,450 | ,509 | ,500 | 6,000 |
| Dairies             |       |      |       |      |      |       |
+---------------------+-------+------+-------+------+------+-------+
| Other Milk          | 2,368 | 2    | 2,450 | 2    | 2    | 2,600 |
| Production          |       | ,368 |       | ,501 | ,500 |       |
+---------------------+-------+------+-------+------+------+-------+
| **TOTAL SUPPLY**    | *     | **1  | *     | **1  | **1  | *     |
|                     | *117, | 17,9 | *117, | 19,0 | 18,0 | *118, |
|                     | 968** | 68** | 900** | 10** | 00** | 600** |
+---------------------+-------+------+-------+------+------+-------+
| Fluid Use Dom.      | 3     | 30   | 3     | 30   | 30   | 3     |
| Consum.             | 0,432 | ,432 | 0,450 | ,137 | ,500 | 0,000 |
+---------------------+-------+------+-------+------+------+-------+
| Factory Use Consum. | 8     | 87   | 8     | 88   | 87   | 8     |
|                     | 7,536 | ,536 | 7,450 | ,873 | ,500 | 8,600 |
+---------------------+-------+------+-------+------+------+-------+
| Feed Use Dom.       | \-    | \-   | \-    | \-   | \-   | \-    |
| Consum.             |       |      |       |      |      |       |
+---------------------+-------+------+-------+------+------+-------+
| **TOTAL             | *     | **1  | *     | **1  | **1  | *     |
| DISTRIBUTION**      | *117, | 17,9 | *117, | 19,0 | 18,0 | *118, |
|                     | 968** | 68** | 900** | 10** | 00** | 600** |
+---------------------+-------+------+-------+------+------+-------+

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

Note: *The figures in this table do not include milk that is fed to
animals directly on the farm.*

EU-15 milk deliveries in 2003 have been revised upwards mainly due to
the previous over-estimation of the impact of the drought in summer
2003. The general expectation had been that the drought would lead to
lower feed quality and quantities, which in turn would result in reduced
deliveries to dairies. Producers noticed that their individual milk
production did not decrease but increased, but they did not deem it
necessary to reduce production, as they counted on the option to balance
their overproduction with the expected underperformance of other
farmers. Therefore the danger of overshooting the quota was realized too
late to prevent the application of the super-levy.

All EU-15 countries, except France, Sweden, Spain and Italy, showed an
upward revision to data for 2003. In France, the authorities and milk
collectors put strong pressure on the dairy producers when they realized
the quota level would be exceeded. Italian production is expected to
decline following repeated government efforts to reduce above-quota
production. In 2003 the Italian Parliament approved a law for
restructuring of the national quota management system. In March 2004, a
new regulation was approved allowing subsidies for Italian farmers that
want to convert to other products (meat and milk other than cows), the
amount paid to the producer is between 0.15 and 0.30 Euros/Kilo.

The slow decline in the number of cows throughout the EU-15 reflects the
fixed milk quotas as well as increased productivity per animal.

Milk production in 2004 is expected to show a slight decline on 2003
levels. As a result of overproduction in calendar year 2003, milk
producers are expected to manage quotas by lowering production in the
first three months of 2004. German deliveries to dairies are expected to
decrease in 2004 but dairies may purchase milk from Poland.

EU-15 fluid milk use domestic consumption was revised downward
throughout most member states for 2003 and as a result of this and the
higher milk deliveries, overall EU-15 factory use of milk increased
substantially. In 2004, both fluid domestic consumption as well as
factory use is expected to decline marginally because of lower delivery
levels.

There are no quotas on other milk production: buffalo, sheep and goats.
These sectors generally produce high value cheese, which is a lucrative
and increasingly popular area.

## EU-15 milk deliveries to dairies - Total EU-15 and top 3 member states (1000MT)

  ----------------------- ----------------------- -----------------------
                          2003                    2004

  Germany                 27,563                  27,300

  France                  23,157                  22,820

  UK                      14,554                  14,450

  EU-15 Total             116,509                 116,000
  ----------------------- ----------------------- -----------------------

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

# Butter

+------------------+--------+------+--------+------+--------+------+
| Commodity:       | ####   |      |        |      |        |      |
|                  | ## But |      |        |      |        |      |
|                  | ter (1 |      |        |      |        |      |
|                  | 000MT) |      |        |      |        |      |
+------------------+--------+------+--------+------+--------+------+
|                  | 2002   |      | 2003   |      | 2004   |      |
+------------------+--------+------+--------+------+--------+------+
|                  | USDA   | P    | USDA   | P    | USDA   | P    |
|                  | of     | osts | of     | osts | of     | osts |
|                  | ficial | E    | ficial | e    | ficial | e    |
|                  |        | stim |        | stim |        | stim |
|                  | \      | ates | \      | ates | \      | ates |
|                  | [old\] | \[n  | [old\] | \[n  | [old\] | \[n  |
|                  |        | ew\] |        | ew\] |        | ew\] |
+------------------+--------+------+--------+------+--------+------+
| Beginning Stocks | 141    | 141  | 242    | 242  | 300    | 272  |
+------------------+--------+------+--------+------+--------+------+
| Production       | 1,792  | 1    | 1,890  | 1    | 1,860  | 1    |
|                  |        | ,914 |        | ,941 |        | ,900 |
+------------------+--------+------+--------+------+--------+------+
| Extra EC Imports | 115    | 115  | 120    | 141  | 120    | 140  |
+------------------+--------+------+--------+------+--------+------+
| **TOTAL SUPPLY** | **2    | *    | **2    | *    | **2    | *    |
|                  | ,048** | *2,1 | ,252** | *2,3 | ,280** | *2,3 |
|                  |        | 70** |        | 24** |        | 12** |
+------------------+--------+------+--------+------+--------+------+
| Extra EC Exports | 207    | 207  | 240    | 271  | 240    | 260  |
+------------------+--------+------+--------+------+--------+------+
| Total Domestic   | 1,599  | 1721 | 1,712  | 1    | 1,720  | 1    |
| use              |        |      |        | ,781 |        | ,780 |
+------------------+--------+------+--------+------+--------+------+
| Ending Stocks    | 242    | 242  | 300    | 272  | 320    | 272  |
+------------------+--------+------+--------+------+--------+------+
| **TOTAL          | **2    | *    | **2    | *    | **2    | *    |
| DISTRIBUTION**   | ,048** | *2,1 | ,252** | *2,3 | ,280** | *2,3 |
|                  |        | 70** |        | 24** |        | 12** |
+------------------+--------+------+--------+------+--------+------+

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

Note: Butter figures include estimates for butteroil derived from fresh
cream and milk, and exclude butteroil derived from butter.

Ending stocks include official EU-15 intervention and PSA stocks only.
Commercial stocks are included in "total domestic use".

In 2003, EU-15 butter production increased by 1.4 percent, mainly due to
increased milk production and a limited competition from Oceania, caused
by the drought in Australia. In 2004 butter production is expected to
decline to below that of both 2002 and 2003, in response to lower milk
production and to better market conditions for other dairy products.

It is expected that, with the lower intervention prices for butter in
2004, market prices will also decline. With the implementation of the
CAP reform, intervention for butter is open only between March 1 and
August 31. In 2004 the intervention for butter is limited to 70,000
tons. Intervention will continue to drop by 10,000 tons annually until
2008 when intervention will be limited to 30,000 tons per year (Council
Regulation No: 1787/2003).

German butter exports surged by 122 percent in 2003, mainly due to
higher exports to Russia and Japan. Dutch butter exports increased by 40
percent most of which went to Russia and Egypt.

Despite lower prices it is anticipated that EU-15 butter exports in 2004
will be slightly lower than last year. This decline takes into account
an expected slow return of competition from Oceania during the second
half of 2004. An uncertain factor, which could further reduce butter
exports in 2004, is the expiry of the EU-15 veterinary agreement with
Russia. Following EU-25 enlargement, Russia considers the existing
veterinary agreement with the EU-15 as expired, therefore negotiations
for a new agreement between EU-25 and Russia are ongoing.

In addition to EU-15 butter exports increasing, butter imports also
increased. In 2003 butter imports increased by 23 percent, this increase
is mainly attributable to increased Dutch butter imports from New
Zealand (nearly 70,000 MT), which is near the annual tariff quota volume
of 76,700 MT for butter imports from New Zealand. New Zealand's butter
exports to The Netherlands increased mainly during the last quarter of
2002 and the first quarter of 2003. During the remainder of the year,
competition from Oceania on the world market weakened, due to the
drought in Australia.

In 2003, domestic use of butter increased. This increase is mainly a
consequence of the higher availability of butter, therefore higher
unsubsidized commercial butter stocks built up in the EU-15.

## EU-15 butter production - Total EU-15 and top 3 member states (1000MT)

Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.

# Cheese

+--------------------+-------+-------+-------+-------+-------+-------+
| Commodity          | ##    |       |       |       |       |       |
|                    | ####  |       |       |       |       |       |
|                    | Chees |       |       |       |       |       |
|                    | e (10 |       |       |       |       |       |
|                    | 00MT) |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
|                    | 2002  |       | 2003  |       | 2004  |       |
+--------------------+-------+-------+-------+-------+-------+-------+
|                    | USDA  | Posts | USDA  | Posts | USDA  | Posts |
|                    | off   | esti  | off   | esti  | off   | esti  |
|                    | icial | mates | icial | mates | icial | mates |
|                    |       | \[    |       | \[    |       | \[    |
|                    | \[    | new\] | \[    | new\] | \[    | new\] |
|                    | old\] |       | old\] |       | old\] |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Beginning Stocks   | 116   | 116   | 121   | 126   | 125   | 130   |
+--------------------+-------+-------+-------+-------+-------+-------+
| Production         | 5,520 | 5,520 | 5,550 | 5,520 | 5,580 | 5,550 |
+--------------------+-------+-------+-------+-------+-------+-------+
| Extra EC Imports   | 146   | 146   | 160   | 156   | 155   | 160   |
+--------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL SUPPLY**   | **5,  | **5,  | **5,  | **5,  | **5,  | **5,  |
|                    | 782** | 782** | 831** | 802** | 860** | 840** |
+--------------------+-------+-------+-------+-------+-------+-------+
| Extra EC Exports   | 466   | 466   | 485   | 478   | 490   | 490   |
+--------------------+-------+-------+-------+-------+-------+-------+
| Human Dom.         | 4,895 | 4,895 | 4,931 | 4,900 | 4,960 | 4,930 |
| Consumption        |       |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Other Use, Losses  | 300   | 295   | 290   | 294   | 285   | 290   |
+--------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Use          | 5,195 | 5,190 | 5,221 | 5,194 | 5,245 | 5,220 |
+--------------------+-------+-------+-------+-------+-------+-------+
| Ending Stocks      | 121   | 126   | 125   | 130   | 125   | 130   |
+--------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL            | **5,  | **5,  | **5,  | **5,  | **5,  | **5,  |
| DISTRIBUTION**     | 782** | 782** | 831** | 802** | 860** | 840** |
+--------------------+-------+-------+-------+-------+-------+-------+

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

In 2003 EU-15 production of cheese was unchanged from 2002, although
there were some differences between MS. Production in the UK and Italy
declined, while Germany and The Netherlands experienced increased
production. Higher milk production did not lead to higher production
levels of cheese types included in this report[^3], production of fresh
cheese in EU-15 increased significantly. In 2004 cheese production is
expected to increase, as a reaction to the decrease in intervention
subsidies for butter and NFDM.

Cheese imports in 2004 are forecast to slightly increase, following the
long-term trend line for use in processed products.

In 2003 overall EU-15 cheese exports increased compared to 2002. Dutch
exports increased, mainly to Russia. Increased German exports went to
Russia and Japan, while French exports remained stable, although exports
to the U.S. decreased as a result of the strong Euro exchange rate.

EU-15 cheese exports in 2004 are also expected to increase slightly,
resulting from increased exports by France and Italy not being offset by
decreasing exports by Germany. France is hoping to regain lost market
share in the U.S., while German exporters fear disruptions of exports to
Russia caused by the expiration of the veterinary agreement.

Consumption is forecast to increase because of increasing cheese use for
processed products.

EU-15 Ending stocks are expected to remain unchanged as no changes in
the Private Storage Aid program are foreseen for this year. The future
of the PSA schemes for cheese will be revised and decided on by the end
of 2004.

## EU-15 cheese production - Total EU-15 and top 3 member states (1000MT)

  ----------------------- ----------------------- -----------------------
                          2003                    2004

  Germany                 1,206                   1,220

  France                  1,166                   1,145

  Italy                   916                     970

  EU-15 Total             5,520                   5,550
  ----------------------- ----------------------- -----------------------

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

# Non-Fat Dry Milk (NFDM)

+----------------------+-------+-------+-------+-------+-------+-------+
| Commodity            | ##### |       |       |       |       |       |
|                      | # NFD |       |       |       |       |       |
|                      | M (10 |       |       |       |       |       |
|                      | 00MT) |       |       |       |       |       |
+----------------------+-------+-------+-------+-------+-------+-------+
|                      | 2002  |       | 2003  |       | 2004  |       |
+----------------------+-------+-------+-------+-------+-------+-------+
|                      | USDA  | Posts | USDA  | Posts | USDA  | Posts |
|                      | off   | esti  | off   | esti  | off   | esti  |
|                      | icial | mates | icial | mates | icial | mates |
|                      |       | \[    |       | \[    |       | \[    |
|                      | \[    | new\] | \[    | new\] | \[    | new\] |
|                      | old\] |       | old\] |       | old\] |       |
+----------------------+-------+-------+-------+-------+-------+-------+
| Beginning Stocks     | \-    | 0     | 140   | 140   | 180   | 194   |
+----------------------+-------+-------+-------+-------+-------+-------+
| Production           | 1,107 | 1,107 | 1,090 | 1,083 | 1,060 | 1,030 |
+----------------------+-------+-------+-------+-------+-------+-------+
| Extra EC Imports     | 69    | 69    | 90    | 93    | 90    | 90    |
+----------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL SUPPLY**     | **1,  | **1,  | **1,  | **1,  | **1,  | **1,  |
|                      | 176** | 176** | 320** | 316** | 330** | 314** |
+----------------------+-------+-------+-------+-------+-------+-------+
| Extra EC Exports     | 161   | 161   | 240   | 224   | 260   | 250   |
+----------------------+-------+-------+-------+-------+-------+-------+
| Human Dom.           | 320   | 320   | 320   | 325   | 325   | 325   |
| Consumption          |       |       |       |       |       |       |
+----------------------+-------+-------+-------+-------+-------+-------+
| Other Use, Losses    | 555   | 555   | 580   | 573   | 580   | 559   |
+----------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Domestic Use   | 875   | 875   | 900   | 898   | 905   | 884   |
+----------------------+-------+-------+-------+-------+-------+-------+
| Ending Stocks        | 140   | 140   | 180   | 194   | 165   | 180   |
+----------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL              | **1,  | **1,  | **1,  | **1,  | **1,  | **1,  |
| DISTRIBUTION**       | 176** | 176** | 320** | 316** | 330** | 314** |
+----------------------+-------+-------+-------+-------+-------+-------+

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

*Note: Ending stocks are EU-15 intervention stocks only.*

Production of NFDM decreased by 2 percent in 2003 compared to 2002.
However, this masks regional differences. Production increased in the
U.K. and Belgium but this was not high enough to compensate for the
decreases in France, Ireland and Spain. The latter was due to lower milk
deliveries and/or higher production of casein, which left less skimmed
milk available for NFDM production. Increased casein production resulted
from good market conditions and increased EU-15 production support
between May 12, and December 19, 2003. For 2004, a further production
decrease for NFDM of 5 percent is expected, as a result of the high
intervention stocks and lower milk deliveries to dairies.

In 2003 NFDM imports increased by 35 percent. Most of the imports
originated from New Zealand and the new MS, namely Poland. The
Netherlands and Germany are the major recipients of third country NFDM
imports, while limited amounts are imported into France and Belgium. For
2004, imports are expected to be slightly below 2003 levels as world
market prices are expected to increase more than prices in the EU-15.

EU-15 NFDM exports increased by 39 percent in 2003 compared to 2002.
This was the result of the limited availability of NFDM on the
world-market, due to the drought in Australia. However, the increase in
exports was not as high as previously expected. The top exporters of
NFDM were Germany, the Netherlands, France, the U.K., Belgium and
Ireland. Major destinations for NFDM were East Asia (especially
Indonesia, Vietnam, and the Philippines), Mexico, and Nigeria. For 2004,
exports are expected to continue to increase, as the supply on the world
market continues to be tight.

EU-15 total domestic use increased in 2003 mainly due to the higher
ice-cream production during the hot summer of 2003, and due to the build
up of commercial stocks. For 2004, total domestic use is expected to
fall short of 2003 levels, but still exceed 2002 levels.

EU-15 ending stocks (i.e. intervention stocks only) increased by 39
percent compared to 2002. This increase was higher than previously
anticipated, as the increase of exports was not as strong as previously
predicted. For 2004, a reduction in intervention stocks is forecast as a
result of the good export prospects in combination with the reduced
intervention price set by the EU-15 CAP MTR. The 2004 intervention for
NFDM is limited to 104,000 tons. The Commission states there might be
the same kind of reduction for NFDM as for butter intervention however a
decision has not yet been reached.

## EU-15 NFDM production - Total EU-15 and top 3 member states (1000MT)

  ----------------------- ----------------------- -----------------------
                          2003                    2004

  Germany                 324                     310

  France                  273                     260

  UK                      116                     100

  EU-15 Total             1,083                   1,030
  ----------------------- ----------------------- -----------------------

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

# Whole Milk Powder (WMP)

+----------------------+-------+-------+-------+-------+-------+-------+
| Commodity:           | ####  |       |       |       |       |       |
|                      | ## WM |       |       |       |       |       |
|                      | P (10 |       |       |       |       |       |
|                      | 00MT) |       |       |       |       |       |
+----------------------+-------+-------+-------+-------+-------+-------+
|                      | 2002  |       | 2003  |       | 2004  |       |
+----------------------+-------+-------+-------+-------+-------+-------+
|                      | USDA  | Posts | USDA  | Posts | USDA  | Posts |
|                      | off   | esti  | off   | esti  | off   | esti  |
|                      | icial | mates | icial | mates | icial | mates |
|                      |       | \[    |       | \[    |       | \[    |
|                      | \[    | new\] | \[    | new\] | \[    | new\] |
|                      | old\] |       | old\] |       | old\] |       |
+----------------------+-------+-------+-------+-------+-------+-------+
| Beginning Stocks     | 0     | 0     | 0     | 0     | 0     | 0     |
+----------------------+-------+-------+-------+-------+-------+-------+
| Production           | 800   | 800   | 800   | 809   | 800   | 820   |
+----------------------+-------+-------+-------+-------+-------+-------+
| Extra EC Imports     | 18    | 18    | 20    | 11    | 20    | 10    |
+----------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL SUPPLY**     | **    | **    | **    | **    | **    | **    |
|                      | 818** | 818** | 820** | 820** | 820** | 830** |
+----------------------+-------+-------+-------+-------+-------+-------+
| Extra EC Exports     | 493   | 493   | 495   | 478   | 495   | 500   |
+----------------------+-------+-------+-------+-------+-------+-------+
| Human Dom.           | 325   | 325   | 325   | 342   | 325   | 330   |
| Consumption          |       |       |       |       |       |       |
+----------------------+-------+-------+-------+-------+-------+-------+
| Other Use, Losses    | 0     | 0     | 0     | 0     | 0     | 0     |
+----------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Use            | 325   | 325   | 325   | 342   | 325   | 330   |
+----------------------+-------+-------+-------+-------+-------+-------+
| Ending Stocks        | 0     | 0     | 0     | 0     | 0     | 0     |
+----------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL              | **    | **    | **    | **    | **    | **    |
| DISTRIBUTION**       | 818** | 818** | 820** | 820** | 820** | 830** |
+----------------------+-------+-------+-------+-------+-------+-------+

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

In 2003, EU-15 production was slightly higher than previously expected,
but compensated by slightly lower imports, leaving total supply nearly
unchanged. For 2004, EU-15 production is forecast to increase in
reaction to anticipated food aid contracts for delivery to Iraq.

In 2003 EU-15 WMP exports decreased. However this masks regional
variations. In France and Belgium there was a sharp decrease in WMP
exports, especially to North Africa (Algeria). The export decrease was
partly compensated by increased exports from The Netherlands and
Ireland.

In 2004 the EU-15 WMP exports are expected to increase mainly due to
anticipated exports to Iraq. There are export refunds available for some
40,000 tons of WMP exports to Iraq. According to the Commission this
quantity may be increased during 2004. Producers are already preparing
to produce more WMP, in most cases by switching over from NFDM, if
additional contracts can be secured.

## EU-15 WMP production - Total EU-15 and top 3 member states (1000MT)

  ----------------------- ----------------------- -----------------------
                          2003                    2004

  France                  206                     220

  Germany                 154                     155

  Netherlands             116                     110

  EU-15 Total             809                     820
  ----------------------- ----------------------- -----------------------

*Source: FAS EU-15 Posts. The numbers for 2004 are forecasts.*

# 

# New Member States

On May 1 2004, 10 new Member States (NMS) became members of the European
Union, increasing the current membership from 15 to 25.

The situation in the 10 NMS is somewhat different than that in the EU-15
regarding farm size, production and the rate of subsistence farming.

Following communism-period most of these countries did not have funds
for statistics, therefore making industry primarily responsible for
statistics. The best statistics available were from the industry.
However, statistics are now becoming more readily available.

# 

Subsistence farming has a much bigger role in the NMS, but the situation
is changing rapidly. Milk consumption by the farm family, or direct
marketing to local inhabitants, plays a much greater role than in the
EU-15. Also the number of farms is very high. In 2002 there were some
1.6 million farms producing milk, which is more than twice the EU-15
number.

In EU-15 about 95 percent of the milk is delivered to dairies while the
proportion in the NMS averages only 72 percent. In Poland the rate of
subsistence farming has changed from 60 percent to 40 percent during the
last five years. The average size of a farm in Poland is 2-5 cows. In
Hungary the situation is similar, whereas in other countries more milk
is delivered to dairies. In Slovenia the situation is very different
with milk prices higher than in the EU-15 and with a very high quality
of milk.

The Commission has given 18 million tons of milk quotas to the NMS. Of
these 18 million tons, 50 percent went to Poland, followed by the Czech
Republic. Hungary is expected to be a net milk importer.

In the NMS, dairy production is more focused on commodity products such
as butter and NFDM. In the short-term, the NMS will be able to sell
their butter and NFDM into intervention. As a result of lower quality,
low fat levels and high bacteria levels, only a small part of the milk
can be sold to dairies. There will probably be a lot of dairy imports
from EU-15, especially of higher quality products such as cheese, and of
standard products such as yogurt since yogurt has become a fashionable
drink for young people in some of the NMS. Yogurt imports are expected
to be imported from Germany and France.

Over the longer-term, the NMS are expected have some competitive
advantages, and more milk should become suitable for export. In the NMS,
land is still "cheap", labor is cheaper and feed is still cheap and
often produced on the local market, when these countries obtain access
to more modern feed and genetics, expectations are that deliveries to
dairies will rise substantially.

## Production in the new Member States\* - (1000MT)

  ----------------------- ----------------------- -----------------------
  Commodity               2003                    2004

  Milk fluid              20 600                  22 900

  Butter                  286,3                   353

  Cheese                  700                     700

  NFDM                    187,9                   259,2

  WMP                     No numbers available    60
  ----------------------- ----------------------- -----------------------

The numbers for 2004 are forecasts.

*\*Source: The EU-15 Commission and the German Central Market and Price
Reporting Agency (ZMP).*

**Visit our website:** our website
**[www.useu.be/agri/usda.html]{.underline}** 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

**Related reports from USEU Brussels:**

  ------------------------------------------------------------ ------------------------------------ ------------------
  **Report Number**                                            **Title**                            **Date Released**

  E24041                                                       Dairy Management Committee Decides   3/2/04
                                                               on export refund rules               

  E24028                                                       New EU Dairy payments will boost     2/12/04
                                                               milk production.                     

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

[^1]: GAIN E24028

[^2]: Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania,
    Malta, Poland, Slovakia, Slovenia

[^3]: Cheese reported does not include cottage cheese, other soft curd
    fresh cheese or yogurt.