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Required Report - public distribution

**Date:** 5/28/2003

**GAIN Report Number:** E23077

E20000

**European Union**

**Dairy and Products**

**Semi-Annual**

**2003**

**Approved by:**

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

#### US Mission to the European Union

**Prepared by:**

Justina Torry

**Report Highlights:** The EU dairy market in 2002 can be characterized
as stable, as production and exports remained stable with slight
increases in consumption. The outlook for 2003 could be less stable as a
strengthened Euro, and the potential increase in dairy quotas could
negatively affect prices of raw milk in the EU. Increased imports from
Eastern European countries are also expected in 2003 as a result of a
stronger Euro (Euro=\$1.165).

Includes PSD Changes: No

Includes Trade Matrix: No

Unscheduled Report

Brussels USEU \[BE2\]

\[E2\]

This EU consolidated dairy report was compiled with the active
contribution the following FAS EU based staff: Bob Flach (FAS The
Hague), Michael Hanley (FAS Dublin), Marie-Cecile Henard (FAS Paris),
Steve Knight (FAS London), Hasse Kristensen (FAS Copenhagen), Asa Lexmon
(FAS Stockholm), Sabine Lieberz (FAS Berlin), Diego Pazos (FAS Madrid),
Franco Regini (FAS Rome).

#### EXECUTIVE SUMMARY

The EU dairy market in 2002 can be characterized as stable, as
production and exports remained stable with slight increases in
consumption. Marginal increases in the UK and the Netherlands shows
recovery following the FMD crises in 2001. This recovery is forecast to
continue into 2003. As previously forecast, the EU cheese market
remained stable in 2002 and consumption is predicted to increase
slightly in 2003. Butter production in the EU increased more than
anticipated although household consumption of butter is still in
long-term decline due to health concerns. In 2002 skim milk powder
production increased as the EU increased the incorporation rate of
nonfat dried milk in subsidized veal feed. This increasing trend is not
expected to continue into 2003 as overall demand is declining. EU
production of whole milk powder declined in 2002 as imports from Eastern
Europe increased to certain EU countries, however this decline is
expected to turn around in 2003. Additionally, the strength of the Euro
and the potential increase of dairy quotas as debated in the Mid-term
Review could negatively affect prices of raw milk in the EU. Increased
imports from Eastern European countries are also expected in 2003 as a
result of a stronger Euro (Euro=\$1.165).

**FLUID MILK**

  ---------------------- -------- --------- -------- --------- -------- ---------
  PSD Table                                                             

  Country:               EU                                             

  Commodity:             Dairy,                                         
                         Milk,                                          
                         Fluid                                          

                                  2001               2002               2003

                         Old      New       Old      New       Old      New

  Calendar Year Begin             01/2001            01/2002            01/2003

  Cows In Milk           17815    18127     17760    17970     17500    17663

  Cows Milk Deliveries   115165   114856    115355   115130    115375   115150
  to Dairies                                                            

  Other Milk Production  2322     2299      2365     2360      2395     2400

  TOTAL SUPPLY           117487   117155    117720   117490    117770   117550

  Fluid Use Dom. Consum. 30970    30970     31050    31042     31080    31075

  Factory Use Consum.    86517    86185     86670    86448     86690    86475

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

  TOTAL DISTRIBUTION     117487   117155    117720   117490    117770   117550
  ---------------------- -------- --------- -------- --------- -------- ---------

Note: Revision of 2001 data due to revised Eurostat data

In 2002, cows milk delivered to dairies increased marginally (+ 0.3
percent) compared to 2001 levels. This figure is slightly lower than
previously forecast. The main reason for this change was due to
increased production in the UK as the industry returned to 2001 (pre FMD
levels). Whereas Dutch milk deliveries declined by 2 percent compared to
2001 levels because low cattle prices that year caused farmers to retain
cattle on the farm. Increased production of milk from sheep and goats,
continues as this milk does not fall under EU quotas and as marketing
opportunities exist for cheese from sheep and goat milk. In 2000/2001
quotas had been increased for Italy, Spain, Greece, and Northern
Ireland. Total increase of quota amounted to approximately 887,000 MT.

A slight increase in cows milk delivered to dairies is forecast for 2003
as countries continue to fill their slightly expanded quotas.

Fluid milk use for human consumption continued to increase slightly in
2002 and is expected to continue to increase slightly in 2003. The
overall EU increase in 2002 however hides regional variations. Declines
in fluid milk sales were recorded in France while Germany and Denmark
showed gains. Despite these variations fluid milk sales are expected to
increase in 2003 with a greater demand for flavored milk (particularly
in Denmark).

#### CHEESE

  ---------------------- ---------- --------- ------ --------- -------- ---------
  PSD Table                                                             

  Country:               European                                       
                         Union                                          

  Commodity:             Dairy,                                         
                         Cheese                                         

                                    2001             2002               2003

                         Old        New       Old    New       Old      New

  Calendar Year Begin               01/2001          01/2002            01/2003

  Beginning Stocks       117        117       116    116       106      106

  Production             5420       5420      5450   5470      5450     5500

  Extra EC Imports       169        169       133    140       139      155

  TOTAL SUPPLY           5706       5706      5699   5726      5695     5761

  Extra EC Exports       447        447       463    465       465      465

  Human Dom. Consumption 4858       4858      4855   4855      4855     4895

  Other Use, Losses      285        285       275    300       275      300

  TOTAL Use              5143       5143      5130   5155      5130     5195

  Ending Stocks          116        116       106    106       100      101

  TOTAL DISTRIBUTION     5706       5706      5699   5726      5695     5761
  ---------------------- ---------- --------- ------ --------- -------- ---------

Please note: Per reporting instructions, fresh cheese figures were taken
out of the PS&D table data as was done the previous report (E22116,
November 2002). Fresh cheese figures however represent a large and
dynamic segment of the cheese market in both Germany and France. Also,
these member states include fresh cheese production in their total
cheese production data reported to the EU Commission. This inconsistency
explains the discrepancy between official USDA estimates and EU
Commission estimates.

Note #2: Stocks listed above represent private storage aid (PSA) only,
as there are no intervention stocks for cheese in the EU. Additionally
commercial stocks are included in the Human Domestic Consumption\" line.

Note #3: The \"Other Use, Losses\" line includes cheese used for
processing in Germany and Italy.

The cheese market is consumption-oriented, and is the commodity driving
the dairy market, as it is the highest value-added product made with
milk. In 2002, as previously forecast, the EU cheese consumption
remained stable. This stabilization followed a significant increase in
2001 consumption levels due to the partial offset of beef with cheese,
resulting from the BSE crisis.

In 2002, EU cheese production increased by almost 1 percent, (i.e.,
slightly more than previously expected), mainly due to increased
production in Spain and Denmark. In other member states production
overall remained stable. In line with previous estimates (see report
E22116), EU cheese exports increased by 4 percent. This increase can be
attributed to increased shipments from Germany to Russia and the United
States, as well as increased shipments from the UK to Malta, the
Caribbean, North Africa, and Japan. Other member states exports were
relatively stable.

According to Danish, German and French forecasts for 2003, EU domestic
consumption of cheese is expected to increase by 1 percent. This
increase is due to improved market prospects, and is in line with
long-term upward trends. As a result, EU cheese production is expected
to increase slightly. Consequently, higher imports are expected. EU
cheese exports in 2003 are expected to remain at 2002 levels.

#### BUTTER

  ---------------- ----------- --------- -------- --------- -------- ---------
  PSD Table                                                          

  Country:         EU                                                

  Commodity:       Dairy,                                            
                   Butter                                            

                               2001               2002               2003

                   Old         New       Old      New       Old      New

  Calendar Year                01/2001            01/2002            01/2003
  Begin                                                              

  Beginning Stocks 121         121       141      141       220      242

  Production       1710        1710      1740     1792      1740     1760

  Extra EC Imports 115         115       108      116       100      100

  TOTAL SUPPLY     1946        1946      1989     2049      2060     2102

  Extra EC Exports 174         174       185      212       200      210

  Domestic         1631        1631      1584     1595      1599     1612
  Consumption                                                        

  Ending Stocks    141         141       220      242       261      280

  TOTAL            1946        1946      1989     2049      2060     2102
  DISTRIBUTION                                                       
  ---------------- ----------- --------- -------- --------- -------- ---------

Note: Beginning and ending stocks are official intervention and private
storage aid stocks only. Commercial stocks are included in the "Total
Domestic Use" line.

Butter Production in the EU increased in 2002 more than previously
forecast. The increase in butter production results from poor market
conditions and low prices for dairy products. These factors caused
dairies to increase their production of intervention supported products
(butter and nonfat dry milk). This increase is reflected in higher
ending stocks of butter at the end of 2002.

Household consumption of butter is in long-term decline, as consumers
move away from butter toward substitute products, (such as olive oil or
low fat spreads), due to health concerns. Surveys in the EU show that
declining butter consumption can be attributed to an overall decrease in
butter use (by those who use it) rather than fewer people using butter.
In the past, part of this decrease was compensated for by increased
industrial use of butter (for the production of ice cream or pastries).
This was not the case in 2002. Total domestic use, (which includes human
consumption, commercial stocks, other uses, and losses), declined in
2002. Some countries were able to increase their third country exports,
in particular to Russia (the Netherlands and Germany), Iran (the
Netherlands and Denmark), Syria (the Netherlands), the Czech Republic
(Germany) and Romania (Germany).

For 2003, butter production is forecast to decline as prospects for
other dairy products, namely cheese are expected to improve. As prices
are low prices and stocks high, imports are expected to decline in line
with previous forecasts. Exports are expected to remain stable. The
expected increase in 'total domestic use' reflects higher commercial
stocks, which mask the continued decline in human domestic consumption.
Intervention stocks are expected to increase further due to continued
low prices and bad market conditions, however the increase is not
expected to be as prominent as in 2002.

#### NONFAT DRIED MILK (NFDM) / SKIM MILK POWDER (SMP)

  -------------------- ---------- --------- ------- --------- ------- ---------
  PSD Table                                                           

  Country:             EU                                             

  Commodity:           Dairy,                                         
                       Milk,                                          
                       Nonfat Dry                                     

                                  2001              2002              2003

                       Old        New       Old     New       Old     New

  Calendar Year Begin             01/2001           01/2002           01/2003

  Beginning Stocks     0          0         0       0         90      140

  Production           953        953       1040    1070      990     1010

  Extra EC Imports     59         59        50      65        50      50

  TOTAL SUPPLY         1012       1012      1090    1135      1130    1200

  Extra EC Exports     137        137       150     160       150     175

  Human Dom.           330        340       300     260       290     260
  Consumption                                                         

  Other Use, Losses    545        535       550     575       550     600

  TOTAL Use            875        875       850     835       840     860

  Ending Stocks        0          0         90      140       140     165

  TOTAL DISTRIBUTION   1012       1012      1090    1135      1130    1200
  -------------------- ---------- --------- ------- --------- ------- ---------

###### In 2002, EU production of NFDM increased mainly due to the possibility of intervention. Another important outlet was the use for feed due the fact that the EC increased the incorporation rate of NFDM in subsidized veal feed from 25 to 50 percent as of January 2002 (for unsubsidized feed one can use as much or as little NFDM as they want to). EU consumption of NFDM for feed reportedly increased by 30 percent during the previous year. The increase in domestic consumption reflects a decline in commercial stocks, which were transferred into intervention stocks. Due to the global economic slowdown, NFDM exports to third countries were initially limited in 2002. During the fall of 2002, however, NFDM exports recovered partly driven by increased export restitutions and the low NFDM production in Oceania. EU exports reportedly increased to Algeria, China and South Korea. By the end of 2002, the EC reduced export restitutions.

In 2003 NFDM is forecast to decline as export restitutions combined with
lower export demand and a low USD/EURO exchange rate affect export sales
of NFDM. It is also anticipated that NFDM production will decline if
export demand for higher value dairy products improves. In 2003
intervention is expected to remain an attractive market outlet for fresh
production. Sales from intervention stocks are forecast to be sustained
by increased subsidy levels for use in animal feed.

#### WHOLE MILK POWDER (WMP)

  ----------------- ----------- --------- -------- --------- -------- ---------
  PSD Table                                                           

  Country:          EU                                                

  Commodity:        Whole Milk                                        
                    Powder                                            
                    (WMP)                                             

                                2001               2002               2003

                    Old         New       Old      New       Old      New

  Calendar Year                 01/2001            01/2002            01/2003
  Begin                                                               

  Beginning Stocks  0           0         0        0         0        0

  Production        840         840       840      800       850      810

  Extra EC Imports  10          10        10       15        10       15

  TOTAL SUPPLY      850         850       850      815       860      825

  Extra EC Exports  469         469       500      475       490      485

  Human Dom.        381         381       350      340       370      340
  Consumption                                                         

  Other Use, Losses 0           0         0        0         0        0

  TOTAL Use         381         381       350      340       370      340

  Ending Stocks     0           0         0        0         0        0

  TOTAL             850         850       850      815       860      825
  DISTRIBUTION                                                        
  ----------------- ----------- --------- -------- --------- -------- ---------

Note: Beginning / ending stocks under the new columns now only reflect
intervention stocks, for which there is no official scheme. Furthermore,
losses were incorporated into total use, which is now defined as
disappearance.

WMP production in 2002 decreased compared to previous forecast in all
countries except Germany and Ireland. Production decreased in 2002
compared to 2001 in all countries except the UK. This was due stock
reductions resulting from unusually high stocks at the beginning of
2002. Consequently consumption figures dropped as these figures now
include commercial stocks. The decrease in consumption figures only
reflects stock reduction and not decreased consumption. WMP imports in
2002 from Eastern Europe increased to the Netherlands and Germany. In
2002 exports from the Netherlands to Kuwait, and from France to Turkey,
Poland and Algeria increased.

WMP production is forecast to increase slightly in 2003 (particularly in
the Netherlands). This corresponds to increases in export opportunities
resulting from decreased production and drought in New Zealand and
Australia.

WMP exports are forecast to increase in 2003 due to less competition
from Australia and New Zealand in consequence to the drought in those
countries.

**MID-TERM REVIEW**

For more than a year the debate on CAP reform and the various scenarios
of how to best reform the dairy sector have been debated in various EU
settings. The Commission however, is still faced with the challenge to
find a solution that will allow the EU dairy sector the flexibility to
expand, while at the same time remain in line with international
commitments. To meet these challenges the Commission is proposing a 2
step approach: first to line up the Agenda 2000 dairy reform with the
CAP reform proposals in general, then implement more progressive
increases in quota accompanied by cuts in intervention prices and
further compensatory payments. The Commission feels with this approach
and gradual increases in quota, the lowering of prices and extra
compensatory payments would not have a dramatic or sudden effect on the
structure of the EU dairy industry. Additionally, the EU feels that with
this arrangement EU exports would be less subsidy dependent, and would
allow the EU dairy sector to prepare for the enlargement process.

Visit 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 and laws
and allows easy access to USEU reports, trade information and other
practical information.

You can also e-mail us at: Aguseubrussels@usda.gov

Previous EU dairy reports:

  ---------- ------------------------------------------------------------
  E22116     EU 2002 Annual Dairy and Report

  E22073     EU 2002 Semi-Annual Dairy Report

  E22058     EU 2002 Annual Dairy Report Trade Policy Report
  ---------- ------------------------------------------------------------