Required Report - public distribution

**Date:** 10/21/2005

**GAIN Report Number:** E35202

E35202

**EU-25**

**Dairy and Products**

**Annual**

**2005**

**Approved by:**

![](media/image1.wmf)Norval E. Francis

U.S. Mission to the EU

**Prepared by:**

Yvan Polet

**Report Highlights:**

EU dairy markets are stabilizing after the accession of the ten New
Member States and new market dynamics are becoming clear. Investments to
upgrade industry to EU standards turned the Czech Republic, Lithuania
and Poland in a strong competitive position and milk production is
increasing. From MY 2006/07, the implementation of the agreed milk
production quota increases is also expected to lead to higher milk
production.

Strong domestic cheese demands are expected to drain the entire protein
content of increased milk supplies into cheese production. Changing
consumer preferences for lower fat containing dairy products threaten
the EU market with an oversupply of milkfat. Production of WMP and NFDM
is expected to stagnate for lack of available milk supplies.

Includes PSD Changes: Yes

Includes Trade Matrix: No

Annual Report

Brussels USEU \[BE2\]

\[E3\]

Table of Contents

[Executive Summary 4](#executive-summary)

[Fluid Milk 5](#fluid-milk)

[Butter 6](#butter)

[Cheese 7](#cheese)

[Whole Dry Milk 7](#whole-dry-milk)

[Non Fat Dry Milk 8](#non-fat-dry-milk)

[Policy 9](#policy)

[Decoupling of dairy aid in different Member States (MS)
9](#decoupling-of-dairy-aid-in-different-member-states-ms)

[Quota increases 9](#quota-increases)

[Changes in dairy regulations 10](#changes-in-dairy-regulations)

[Evolution of EU export refunds and concerns about Doha trade round
10](#evolution-of-eu-export-refunds-and-concerns-about-doha-trade-round)

This report was realized with the active contribution of:

Petra Choteborska from FAS Prague covering the Czech Republic

Bob Flach from FAS The Hague covering the Benelux

Michael Hanley from FAS Dublin covering Ireland

Marie-Cecile Henard from FAS Paris covering France

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 Estonia, Finland, Latvia and
Sweden

Sabine Lieberz from FAS Berlin covering Germany

Alberto Menghini from FAS Rome covering Italy

Jana Mikulasova from FAS Prague covering the Slovak Republic

Andreja Misir, from FAS Zagreb covering Slovenia

Ferenc Nemes from FAS Budapest covering Hungary

Leonor Ramos from FAS Lisbon covering Portugal and Spain

Piotr Rucinski from FAS Warsaw covering Lithuania and Poland

Stamatis Sekliziotis from FAS Athens covering Greece

# 

# Executive Summary

With accession of the 10 New Member States (NMS) well behind us, EU
dairy markets are stabilizing again and lasting market dynamics become
clearer. Milk production is increasing in the Czech Republic, Lithuania
and Poland, while in some other NMS like Hungary, Slovenia and the
Slovak Republic, which used to have higher dairy subsidy levels, the
sector still has difficulties to adapt to the changed market conditions.
Especially the Polish dairy processing sector appears to be very
efficient because of the large investments to upgrade the sector to meet
EU sanitary standards and because of the increase in milk deliveries to
the industry. These three NMS have strong dairy production potentials
and have found a vocation as sources of raw milk and semi-processed
dairy products for industries in the EU-15, at least in the short term.

In the EU-15, milk production is expected to increase from 2006 on, as
in 11 MS three previously agreed yearly consecutive 0.5 percent
production quota increases kick in. Most, if not all, of this increase
in milk supplies is expected to end up in cheese production for domestic
consumption, at least the protein content of it. Changing consumer
preferences for lower fat containing dairy products, including cheese,
threaten the EU market with an oversupply of milkfat. As a result,
pressure may build on the EU butter markets in the coming years, unless
exports can be competitive on the world market. The production and
export of Whole Milk Powder (WMP) is forecast to stagnate for lack of
milk supplies. Non Fat Dry Milk (NFDM) production is not expected to
change dramatically in the coming year, although it may vary depending
on the export demand for casein at profitable prices.

# Fluid Milk

+-----------------------+------+------+------+------+------+------+
| **Country:**          | #    |      |      |      |      |      |
|                       | #### |      |      |      |      |      |
|                       | ## E |      |      |      |      |      |
|                       | U-25 |      |      |      |      |      |
+-----------------------+------+------+------+------+------+------+
| **Commodity:**        | **Da |      |      |      |      |      |
|                       | iry, |      |      |      |      |      |
|                       | Mi   |      |      |      |      |      |
|                       | lk** |      |      |      |      |      |
|                       | (    |      |      |      |      |      |
|                       | 1000 |      |      |      |      |      |
|                       | Head |      |      |      |      |      |
|                       | /    |      |      |      |      |      |
|                       | 1000 |      |      |      |      |      |
|                       | MT)  |      |      |      |      |      |
+-----------------------+------+------+------+------+------+------+
|                       | **20 |      | **20 |      | **20 |      |
|                       | 04** |      | 05** |      | 06** |      |
+-----------------------+------+------+------+------+------+------+
|                       | Old  | New  | Old  | New  | Old  | New  |
+-----------------------+------+------+------+------+------+------+
| **Calendar Year       | **0  |      | **0  |      | **0  |      |
| Begin**               | 1/20 |      | 1/20 |      | 1/20 |      |
|                       | 04** |      | 05** |      | 06** |      |
+-----------------------+------+------+------+------+------+------+
| Cows In Milk          | 23   | 23   | 23   | 23   | 0    | 23   |
|                       | ,963 | ,963 | ,382 | ,398 |      | ,050 |
+-----------------------+------+------+------+------+------+------+
| Cows Milk Deliveries  | 130  | 130  | 131  | 131  | 0    | 132  |
| to Dairies            | ,825 | ,812 | ,700 | ,750 |      | ,250 |
+-----------------------+------+------+------+------+------+------+
| Other Milk Production | 4    | 4    | 4    | 4    | 0    | 4    |
|                       | ,230 | ,389 | ,300 | ,400 |      | ,410 |
+-----------------------+------+------+------+------+------+------+
| Total Milk Production | 135  | 135  | 136  | 136  | 0    | 136  |
|                       | ,055 | ,201 | ,000 | ,150 |      | ,660 |
+-----------------------+------+------+------+------+------+------+
| Extra EU25 Imports    | 2    | 2    | 3    | 2    | 0    | 2    |
+-----------------------+------+------+------+------+------+------+
| **TOTAL SUPPLY**      | **1  | **1  | **1  | **1  | *    | **1  |
|                       | 35,0 | 35,2 | 36,0 | 36,1 | *0** | 36,6 |
|                       | 57** | 03** | 03** | 52** |      | 62** |
+-----------------------+------+------+------+------+------+------+
| Extra EU25 Exports    | 167  | 170  | 150  | 150  | 0    | 150  |
+-----------------------+------+------+------+------+------+------+
| Fluid Use Dom.        | 34   | 34   | 34   | 33   | 0    | 33   |
| Consum.               | ,237 | ,306 | ,403 | ,702 |      | ,550 |
+-----------------------+------+------+------+------+------+------+
| Factory Use Consum.   | 100  | 100  | 101  | 102  | 0    | 102  |
|                       | ,653 | ,727 | ,450 | ,300 |      | ,962 |
+-----------------------+------+------+------+------+------+------+
| Feed Use Dom. Consum. | 0    | 0    | 0    | 0    | 0    | 0    |
+-----------------------+------+------+------+------+------+------+
| Total Dom.            | 134  | 135  | 135  | 136  | 0    | 136  |
| Consumption           | ,890 | ,033 | ,853 | ,002 |      | ,512 |
+-----------------------+------+------+------+------+------+------+
| **TOTAL               | **1  | **1  | **1  | **1  | *    | **1  |
| DISTRIBUTION**        | 35,0 | 35,2 | 36,0 | 36,1 | *0** | 36,6 |
|                       | 57** | 03** | 03** | 52** |      | 62** |
+-----------------------+------+------+------+------+------+------+

Sources: EU FAS Offices

EU-25 milk production is expected to be higher in 2005 and 2006,
compared to 2004. However, this masks different developments in the
individual Member States. In 2005, in the EU-15, French production is
increasing after a marked decrease in 2004. German production is also
increasing further despite large "superlevies" paid for over quota
production in 2004. Milk production in Italy is continuing its long-term
increase with farmers working to maximize their Single Farm Payment
rights. Production in Austria, the Benelux and U.K. is declining in
2005. For 2006, decreasing milk production in the Benelux and the U.K.
will expectedly be more than offset by increases in the other MS,
particularly Germany and Ireland. In milk marketing year (MY)
2006/07[^1], 11 MS from the EU-15 will receive the first of three
consecutive 0.5 percent quota increases (see policy section). For MY
2004/05, ten out of the EU-15 Member States (MS) have to pay aggregate
fines of €388 million of "superlevies" for overshooting their milk
production quota by slightly over one million MT. More than 80 percent
of this overshot came from Germany and Italy.

In the New Member States (NMS), production is increasing in 2005 as
farmers benefit from increased milk prices after accession and because
of a larger portion of milk production being delivered to the dairy
industry. This is particularly true for milk production in the Czech
Republic and Poland; while production in Hungary decreases because of
lower price and support levels compared to pre-accession. Milk exports
to Switzerland, North Africa and the Middle East are decreasing
slightly. Consumption of milk is generally decreasing in the EU-15, as a
result of the general increase in cheese consumption EU-wide, while
consumption trends in the NMS vary somewhat from country to country.

# Butter

+--------------------+-------+-------+-------+-------+-------+-------+
| **Country:**       | ##### |       |       |       |       |       |
|                    | ####  |       |       |       |       |       |
|                    | EU-25 |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| **Commodity:**     | **D   |       |       |       |       |       |
|                    | airy, |       |       |       |       |       |
|                    | But   |       |       |       |       |       |
|                    | ter** |       |       |       |       |       |
|                    | (1000 |       |       |       |       |       |
|                    | MT)   |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
|                    | **2   |       | **2   |       | **2   |       |
|                    | 004** |       | 005** |       | 006** |       |
+--------------------+-------+-------+-------+-------+-------+-------+
|                    | Old   | New   | Old   | New   | Old   | New   |
+--------------------+-------+-------+-------+-------+-------+-------+
| **Calendar Year    | *     |       | *     |       | *     |       |
| Begin**            | *01/2 |       | *01/2 |       | *01/2 |       |
|                    | 004** |       | 005** |       | 006** |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Beginning Stocks   | 276   | 276   | 232   | 232   | 0     | 170   |
+--------------------+-------+-------+-------+-------+-------+-------+
| Production         | 2,150 | 2,154 | 2,145 | 2,155 | 0     | 2,160 |
+--------------------+-------+-------+-------+-------+-------+-------+
| Extra EU25 Imports | 90    | 90    | 90    | 75    | 0     | 75    |
+--------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL SUPPLY**   | **2,  | **2,  | **2,  | **2,  | **0** | **2,  |
|                    | 516** | 520** | 467** | 462** |       | 405** |
+--------------------+-------+-------+-------+-------+-------+-------+
| Extra EU25 Exports | 347   | 352   | 350   | 360   | 0     | 365   |
+--------------------+-------+-------+-------+-------+-------+-------+
| Domestic           | 1,937 | 1,936 | 1,937 | 1,932 | 0     | 1,925 |
| Consumption        |       |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Other Use, Losses  | 0     | 0     | 0     | 0     | 0     | 0     |
+--------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Dom.         | 1,937 | 1,936 | 1,937 | 1,932 | 0     | 1,925 |
| Consumption        |       |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Ending Stocks      | 232   | 232   | 180   | 170   | 0     | 115   |
+--------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL            | **2,  | **2,  | **2,  | **2,  | **0** | **2,  |
| DISTRIBUTION**     | 516** | 520** | 467** | 462** |       | 405** |
+--------------------+-------+-------+-------+-------+-------+-------+

Sources: EU FAS Offices

Butter production in the EU is expected to further increase slightly in
2005 and 2006, compared to 2004, despite the fact that cheese production
is absorbing the entire increase in milk deliveries and NFDM production
is decreasing. The reason for this is the trend for increasing
consumption of low milkfat products. At the same time butter consumption
in the EU is decreasing slightly further. Butter production is
increasing in Germany, as cream imports from NMS (and more specifically
Poland) are cheap enough to make butter production profitable. In
France, increased milk deliveries lead to higher butter production.
Increased butter production in Poland stems from increasing milk
deliveries to the industry. These increases in butter production are
partly offset by decreases in the Benelux, Ireland and the Scandinavian
countries. The decrease in butter production in Denmark is triggered by
the fact that some of the 30 thousand MT of butter imports from New
Zealand, which are repacked in Denmark before being transshipped to the
United Kingdom, end up on the domestic market.

As a result of this increase in butter production, increases in
butterfat exports have to keep the EU butter balance in control, while
butter imports are decreasing. In the first half of 2005, strong export
demands for butter (+12%) and butteroil (+10%) allowed to dispose of
excess butter. Export expectations for the second half of 2005 are
dimmer because of the decrease in export refunds and because butter from
Oceania is becoming available to world markets again. However, overall
butter and butteroil exports in 2005 should exceed 2004 exports, thus
helping to decrease butter intervention stocks. For 2006, a further
increase in butter exports is forecast in anticipation of new butter
price cuts and the resulting improved competitive market situation. This
will expectedly allow to further decrease butter intervention stocks.

# Cheese

+--------------------+-------+-------+-------+-------+-------+-------+
| **Country:**       | ###   |       |       |       |       |       |
|                    | ####  |       |       |       |       |       |
|                    | EU-25 |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| **Commodity:**     | **D   |       |       |       |       |       |
|                    | airy, |       |       |       |       |       |
|                    | Che   |       |       |       |       |       |
|                    | ese** |       |       |       |       |       |
|                    | (1000 |       |       |       |       |       |
|                    | MT)   |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
|                    | **2   |       | **2   |       | **2   |       |
|                    | 004** |       | 005** |       | 006** |       |
+--------------------+-------+-------+-------+-------+-------+-------+
|                    | Old   | New   | Old   | New   | Old   | New   |
+--------------------+-------+-------+-------+-------+-------+-------+
| **Calendar Year    | *     |       | *     |       | *     |       |
| Begin**            | *01/2 |       | *01/2 |       | *01/2 |       |
|                    | 004** |       | 005** |       | 006** |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Beginning Stocks   | 0     | 0     | 0     | 0     | 0     | 0     |
+--------------------+-------+-------+-------+-------+-------+-------+
| Production         | 6,345 | 6,430 | 6,420 | 6,500 | 0     | 6,550 |
+--------------------+-------+-------+-------+-------+-------+-------+
| Extra EU25 Imports | 102   | 106   | 105   | 100   | 0     | 100   |
+--------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL SUPPLY**   | **6,  | **6,  | **6,  | **6,  | **0** | **6,  |
|                    | 447** | 536** | 525** | 600** |       | 650** |
+--------------------+-------+-------+-------+-------+-------+-------+
| Extra EU25 Exports | 500   | 515   | 510   | 485   | 0     | 500   |
+--------------------+-------+-------+-------+-------+-------+-------+
| Domestic           | 5,947 | 6,021 | 6,015 | 6,115 | 0     | 6,150 |
| Consumption        |       |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Other Use, Losses  | 0     | 0     | 0     | 0     | 0     | 0     |
+--------------------+-------+-------+-------+-------+-------+-------+
| TOTAL Dom.         | 5,947 | 6,021 | 6,015 | 6,115 | 0     | 6,150 |
| Consumption        |       |       |       |       |       |       |
+--------------------+-------+-------+-------+-------+-------+-------+
| Ending Stocks      | 0     | 0     | 0     | 0     | 0     | 0     |
+--------------------+-------+-------+-------+-------+-------+-------+
| **TOTAL            | **6,  | **6,  | **6,  | **6,  | **0** | **6,  |
| DISTRIBUTION**     | 447** | 536** | 525** | 600** |       | 650** |
+--------------------+-------+-------+-------+-------+-------+-------+

Sources: EU FAS Offices

Cheese production in 2004 turned out to be higher than we had previously
anticipated, as did exports and domestic consumption. This resulted from
revised estimates of Greek data. Cheese production is expected to
further increase in 2005 and 2006 driven by increases in domestic
consumption. Cheese production in 2005 is mainly increasing in Germany,
Denmark, United Kingdom, and Italy as Italian cheeses benefit from
protection as Geographical Indicators (GI's) and increased volumes under
storage aid. By contrast, French cheese production is on the decline in
2005, depressed by domestic demand. Consolidation of processing
facilities is continuing in Ireland resulting in the closure of a cheese
production plant. Cheese production, including cheese for further
processing, is increasing in Poland because of strong EU demand. It
should be noted that increased EU cheese production mainly means higher
milk protein use and to a lesser extent increased butterfat use, because
of increasing consumer preferences for low fat cheeses.

Cheese exports have reportedly been decreasing in the first half of 2005
by 30,000 tons, mainly because of the decrease in export refunds but
they are expected to recover in the second half of 2005 as cheese prices
may decrease. Domestic consumption of cheese is continuing its
increasing trend in most MS throughout the whole EU. Interestingly,
cheese is partially replacing meat and sausages in consumers diet in
Germany and Poland. Demand for cheese is expected to further increase as
cheese prices decrease. Consumption and production of soft and
blue-veined cheeses in France is decreasing in 2005. For 2006, both
consumption and production are forecast to continue to increase,
EU-wide.

# Whole Dry Milk

  --------------------- ------------- --------- ------------- --------- ------------- ---------
  **Country:**          **EU-25**                                                     

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

                        **2004**                **2005**                **2006**      

                        Old           New       Old           New       Old           New

  **Calendar Year       **01/2004**             **01/2005**             **01/2006**   
  Begin**                                                                             

  Beginning Stocks      0             0         0             0         0             0

  Production            850           857       840           860       0             855

  Extra EU25 Imports    3             3         3             2         0             2

  **TOTAL SUPPLY**      **853**       **860**   **843**       **862**   **0**         **857**

  Extra EU25 Exports    510           514       500           495       0             490

  Domestic Consumption  343           346       343           367       0             367

  Other Use, Losses     0             0         0             0         0             0

  TOTAL Dom.            343           346       343           367       0             367
  Consumption                                                                         

  Ending Stocks         0             0         0             0         0             0

  **TOTAL               **853**       **860**   **843**       **862**   **0**         **857**
  DISTRIBUTION**                                                                      
  --------------------- ------------- --------- ------------- --------- ------------- ---------

Sources: EU FAS Offices

Production of WMP is expected to slightly increase in 2005 despite a
reported decrease of 21,000 MT in exports in the first half-year.
Increases in WMP production are being recorded in The Benelux, Denmark
and mainly Sweden, where a NFDM production unit has been transformed and
upgraded to produce WMP for exports. In Poland, WMP production is also
increasing for exports. Decreases in WMP production mainly occur in the
U.K. and France. Increasing WMP exports from Argentina and Oceania to
Africa/Algeria and the Middle East are depressing European WMP exports.
The increase in domestic consumption figures reflects some changes in
commercial stock levels. WMP production and exports in 2006 are forecast
to remain flat.

# Non Fat Dry Milk

  --------------------- ------------- ----------- ------------- ----------- ------------- -----------
  **Country:**          **EU-25**                                                         

  **Commodity:**        **Non Fat                                                         
                        Dried Milk**                                                      
                        (1000 MT)                                                         

                        **2004**                  **2005**                  **2006**      

                        Old           New         Old           New         Old           New

  **Calendar Year       **01/2004**               **01/2005**               **01/2006**   
  Begin**                                                                                 

  Beginning Stocks      218           218         77            77          0             5

  Production            1,090         1,066       1,090         1,050       0             1,060

  Extra EU25 Imports    26            25          25            20          0             20

  **TOTAL SUPPLY**      **1,334**     **1,309**   **1,192**     **1,147**   **0**         **1,085**

  Extra EU25 Exports    285           282         270           225         0             200

  Domestic Consumption  972           950         922           917         0             885

  Other Use, Losses     0             0           0             0           0             0

  TOTAL Dom.            972           950         922           917         0             885
  Consumption                                                                             

  Ending Stocks         77            77          0             5           0             0

  **TOTAL               **1,334**     **1,309**   **1,192**     **1,147**   **0**         **1,085**
  DISTRIBUTION**                                                                          
  --------------------- ------------- ----------- ------------- ----------- ------------- -----------

Sources: EU FAS Offices

Final 2004 production of NFDM was somewhat lower than we had previously
anticipated, as was domestic consumption. Overall 2005 NFDM production
is expected to decrease as a result of the cuts in intervention prices
that were agreed in the 2003 CAP reform. While casein production was
still increasing in the first half of 2005, the sharp reduction in the
casein processing aid is expected to decrease casein production
significantly in the second half of 2005. The reduction in export
refunds is already hampering casein exports. As a result, more skimmed
milk will be available for NFDM production in the second half of 2005.
Another factor for the decline in NFDM production is the conversion of a
Swedish production plant to WMP production. A milk powder plant in
Denmark is reportedly closing down as a result of the new plant in
Sweden too. Together with the depletion of intervention stocks, the
reduction in NFDM production already resulted in a 35% percent decrease
in export levels at mid 2005, compared to the same period of 2004. As a
result, we lowered our previous NFDM export forecast.

For 2006, NDFM production is expected to increase, in line with butter
production. NFDM export and domestic consumption are forecast to further
decrease, as no stocks will be available anymore to compensate for the
lack of production. NFDM use in feed has decreased significantly because
of the reduction of subsidies for the incorporation of NFDM in milk
replacers and its substitution by whey powder.

# Policy

###### Decoupling of dairy aid in different Member States (MS)

Decoupling of dairy aids from production was decided in the 2003 CAP
reform. EU-15 MS could choose to decouple dairy aids between 2005 and
2007 at the latest. The implementing time of decoupling for different MS
is available at
<http://europa.eu.int/comm/agriculture/markets/sfp/ms_en.pdf>. As a
result of the decoupling of dairy aids and the decrease in milk prices
caused by lower intervention prices, small unprofitable dairy producers
are expected to leave the sector. This is already materializing in
several MS through an increase in quota mobility. However, with milk
production remaining limited by quotas, which are not transferable
between MS, the impact of decoupling on milk production is expected to
be limited. Within MS, decoupling of dairy aid is expected to lead to a
consolidation in milk production and the dairy processing industry. This
consolidation in the EU dairy industry is reportedly necessary to
generate the cost savings from economies of scale to compensate for the
cuts in EU intervention prices of 15 percent for NFDM by 2006 and 25
percent for butter by 2007, and the reduced maximum ceilings for butter
intervention of 30.000 MT by 2008.

In the NMS, consolidation is occurring as subsistence farms stop
marketing milk on the farm and investments have to be made to meet EU
sanitary standards for milk deliveries to the dairy industry. The Polish
dairy sector is very efficient because of large investments that were
made in the run-up to accession and the need to comply with EU sanitary
standards. Dairies in the other NMS also had to upgrade to meet EU
sanitary standards. This process is already on its way in Bulgaria and
Romania also, as they will join the EU in 2007. Bulgaria has already
called for a 6-month extension of the transition period for Bulgarian
dairies to meet EU sanitary legislation.

###### Quota increases

As part of the CAP reform three consecutive yearly 0.5 percent quota
increases were agreed in [Regulation
1788/2003](http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_270/l_27020031021en01230136.pdf): (establishing
a milk levy)[^2] for those 11 MS that didn't receive quota increases
under Agenda 2000 (Austria, Belgium, Denmark, Finland, Germany, France,
Luxemburg, Netherlands, Portugal[^3], Sweden and the United Kingdom)
starting in 2006/07. Greece, Ireland, Italy and Spain had already
increased production quota in previous years. While this increase in
milk quota will expectedly be entirely absorbed by increases in domestic
consumption, the EU will continue to be a net exporter of dairy
products. The July 2005 update of the EU [Prospects for agricultural
markets and income
2005-2012[^4]](http://europa.eu.int/comm/agriculture/publi/caprep/prospects2005/tabdairy.pdf)
increased the production forecast for cheese but also for butter for the
coming years, while NFDM production forecast was lowered.

###### Changes in dairy regulations

The EC has proposed a new butter regulation, which will consolidate all
existing butter regulations. This consolidation is reportedly aimed at
making the whole butter Common Market Organization (CMO) more
transparent and to allow better control. A few butter regulations for
special domestic use schemes will be repealed, as they have not been
used anymore in the past decade. EU industry sources are not expecting
any significant market impact from this new, yet unpublished, regulation
when approved.

###### Evolution of EU export refunds and concerns about Doha trade round

EU export refunds have been decreased significantly as an indirect
result of the 2003 CAP Reform[^5]. However, especially for butter
substantial export refunds remain necessary for EU butter to compete on
the world market.

  -------------- ------------- -------------- -------------- -----------------
  EC Export      March 11,     March 10, 2005 October 13,    Oct2005/Mar2004
  Refunds        2004                         2005           

  Butter 82 %    €168/100kg    €136.5/100kg   €98.75/100kg   -41%

  SMP            €54.5/100kg   €31/100kg      €12.49/100kg   -77%

  WMP            €93/100kg     €0/100kg       €0/100kg       -100%
  -------------- ------------- -------------- -------------- -----------------

Concerns are rising in Europe that the EU market could be swamped by
dairy imports as a result of tariff concessions in the Doha trade talks.

**Visit our website:** our website
[**www.useu.be/agri/usda.html**](http://www.useu.be/agri/usda.html)
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**

**USEU**

+------------+-----------------------------------------------+--------+
| **Report   | **Title**                                     | #      |
| number**   |                                               | ###### |
|            |                                               | # Date |
+------------+-----------------------------------------------+--------+
| [E35       | European Dairy Association against            | 5/2    |
| 102](http: | eliminating export refunds in WTO talks       | 6/2005 |
| //www.fas. |                                               |        |
| usda.gov/g |                                               |        |
| ainfiles/2 |                                               |        |
| 00506/1461 |                                               |        |
| 29984.pdf) |                                               |        |
+------------+-----------------------------------------------+--------+
| [E35       | Dairy Semi-annual                             | 5/1    |
| 092](http: |                                               | 3/2005 |
| //www.fas. |                                               |        |
| usda.gov/g |                                               |        |
| ainfiles/2 |                                               |        |
| 00505/1461 |                                               |        |
| 19664.pdf) |                                               |        |
+------------+-----------------------------------------------+--------+
| [E35       | New EU Common Agricultural Policy starts in   | 1/     |
| 001](http: | some EU countries                             | 3/2005 |
| //www.fas. |                                               |        |
| usda.gov/g |                                               |        |
| ainfiles/2 |                                               |        |
| 00501/1461 |                                               |        |
| 18406.pdf) |                                               |        |
+------------+-----------------------------------------------+--------+

**United Kingdom**

+-------------+----------------------------------------------+--------+
| **Report    | **Title**                                    | #      |
| Number**    |                                              | ###### |
|             |                                              | # Date |
+-------------+----------------------------------------------+--------+
| [UK5017](   | UK dairy output forecast to sharply decline  | 8/2    |
| http://www. |                                              | 3/2005 |
| fas.usda.go |                                              |        |
| v/gainfiles |                                              |        |
| /200508/146 |                                              |        |
| 130621.pdf) |                                              |        |
+-------------+----------------------------------------------+--------+

**Germany**

+-------------+----------------------------------------------+--------+
| **Report    | **Title**                                    | #      |
| Number**    |                                              | ###### |
|             |                                              | # Date |
+-------------+----------------------------------------------+--------+
| [GM5028](   | German dairy farmers face \$163 million in   | 8/1    |
| http://www. | superlevies for                              | 2/2005 |
| fas.usda.go |                                              |        |
| v/gainfiles | MY 2004/05                                   |        |
| /200508/146 |                                              |        |
| 130548.pdf) |                                              |        |
+-------------+----------------------------------------------+--------+

**Italy**

+-------------+----------------------------------------------+--------+
| **Report    | **Title**                                    | #      |
| Number**    |                                              | ###### |
|             |                                              | # Date |
+-------------+----------------------------------------------+--------+
| [IT5017](   | EU protected cheeses in Italy - Production,  | 5/2    |
| http://www. | storage aids and trade measures              | 3/2005 |
| fas.usda.go |                                              |        |
| v/gainfiles |                                              |        |
| /200505/146 |                                              |        |
| 129756.pdf) |                                              |        |
+-------------+----------------------------------------------+--------+

**France**

+-------------+----------------------------------------------+--------+
| **Report    | **Title**                                    | #      |
| Number**    |                                              | ###### |
|             |                                              | # Date |
+-------------+----------------------------------------------+--------+
| [FR5007](   | Reportedly Butter Stocks at Dangerous Levels | 5/1    |
| http://www. | due to 2003 CAP Reform                       | 1/2005 |
| fas.usda.go |                                              |        |
| v/gainfiles |                                              |        |
| /200505/146 |                                              |        |
| 119617.pdf) |                                              |        |
+-------------+----------------------------------------------+--------+

  -----------------------------------------------------------------------
  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]: The EU marketing year for milk runs from April through March.

[^2]: <http://europa.eu.int/eur-lex/pri/en/oj/dat/2003/l_270/l_27020031021en01230136.pdf>

[^3]: Portugal already received a quota increase in 2005 for Madeira and
    the Azores

[^4]: <http://europa.eu.int/comm/agriculture/publi/caprep/prospects2005/tabdairy.pdf>

[^5]: Export refunds are designed to compensate EU exporters for the
    lower price on the world market compared to the EU market and are
    established depending on market forces. The cuts in intervention
    prices that were fixed in the 2003 CAP reform led to lower prices on
    the EU market, and consequently to a smaller difference between the
    EU and world market price.