REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Evolution of the market situation and the consequent conditions for smoothly phasing-out the milk quota system - second "soft landing" report
Date: 2012-12-10
Institutions: European Commission
Subjects: agricultural quota, dairy farm, dairy industry, dairy production, farm prices, milk

EUROPEAN 
COMMISSION 

Brussels, 10.12.2012  
COM(2012) 741 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Evolution of the market situation and the consequent conditions for smoothly phasing-
out the milk quota system - second "soft landing" report 

EN 

   EN 

 
 
 
 
  
 
TABLE OF CONTENTS 

Mandate ...................................................................................................................................... 3 

Structure ..................................................................................................................................... 3 

1. 

Evolution of the market situation for milk and milk products ..................................... 3 

1.1. 

Market developments to date ....................................................................................... 3 

1.1.1  Milk production............................................................................................................ 3 

1.1.2.  EU farm gate milk prices ............................................................................................. 4 

1.1.3.  Dairy product prices, stock levels and exports............................................................. 4 

1.1.4.  Estimated dairy farms' margins in the EU ................................................................... 4 

1.2. 

Medium term market prospects.................................................................................... 5 

2. 

2.1. 

2.2. 

3. 

Smooth phasing out of the milk quotas........................................................................ 6 

Milk production compared to quota ceilings ............................................................... 6 

Milk quota price evolution ........................................................................................... 7 

Concluding remarks ..................................................................................................... 7 

ANNEX I. MILK PRODUCTION & PRICE DEVELOPMENTS ........................................... 9 

ANNEX II. MEDIUM TERM PROSPECTS IN THE DAIRY SECTOR .............................. 10 

ANNEX III. MILK PRODUCTION VERSUS QUOTA......................................................... 13 

ANNEX IV. EU MILK QUOTA PRICE DEVELOPMENTS ................................................ 14 

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Evolution of the market situation and the consequent conditions for smoothly phasing-
out the milk quota system - second "soft landing" report 

MANDATE 

Article 184(6) of Council Regulation (EC) No 1234/2007 of 22 October 2007 establishing a 
common  organisation  of  agricultural  markets  and  on  specific  provisions  for  certain 
agricultural  products  (Single  CMO  Regulation)  provides  for  the  Commission  to  present  a 
report  before  31  December  2010  and  31  December  2012  to  the  European  Parliament  and 
Council  regarding  the  evolution  of  the  market  situation  and  the  consequent  conditions  for 
smoothly  phasing  out  the  milk  quota  system,  accompanied  if  necessary  by  appropriate 
proposals.  The  so  called  first  soft  landing  report  was  published  on  8  December  2010  under 
COM(2010) 727 final while the present one constitutes the second report of the series. 

STRUCTURE 

This  report  is  made  up  of  three  parts:  the  first  one  describes  the  evolution  of  the  market 
situation for cow milk from the middle of 2010 (end date of the first soft landing report) and 
outlines medium term prospects, the second section examines how the phasing-out of the milk 
quota system has occurred while concluding remarks are presented in the third chapter. 

1. 

EVOLUTION OF THE MARKET SITUATION FOR MILK AND MILK PRODUCTS 

1.1.  Market developments to date 

Volatility – although not to the extent observed in 2007-2009 – persisted in the dairy market 
until the end of 2010. It has somewhat receded in 2011 and in 2012 so far. Prices in 2010 and 
2011  fluctuated  at  high  levels,  leading  to  increased  production  and  a  price  correction  in  the 
first half of 2012. Prices have started to move upwards again in the third quarter of 2012. 

1.1.1  Milk production  

Cow milk collection in the EU has consistently increased over the past three years: + 1.4% in 
2010, + 2% in 2011 and some 1.5% in the first seven months of 2012 compared to the same 
period in 2011.  

Milk  output  also  expanded  in  the  main  milk  supplying  regions  of  the  world:  the  combined 
production of USA, New Zealand, Australia and Argentina increased by 5.3% during 2010-
2011. The trend is continuing in 2012, although some slowdown is observed in the USA after 
this  summer's  heat  wave.  As  compared  with  the  same  period  of  2011,  milk  production 
increased in 2012 by + 2.8% in the USA, +11.4% in New Zealand (until July only), +4.7% in 
Australia and + 5.9% in Argentina in the first eight months of 2012 (see graph 1 in Annex I). 

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1.1.2.  EU farm gate milk prices 

Average EU farm gate milk prices constantly increased from April till November 2010. They 
stayed around 33 c/kg until April 2011 and increased again to 35.1 c/kg in November 2011 as 
a weighted average for the EU-27 (see graph 2 in Annex I). A seasonal correction appeared in 
December 2011, January and February 2012, amounting to – 2%. As a matter of comparison, 
the seasonal correction had been - 3% at the beginning of 2010 and - 1% at the beginning of 
2011. 

However, in 2012, the downward pattern continued until the summer, exceeding the seasonal 
trend and responding to pressure from increased milk supply in and outside the EU. The latest 
EU  average  farm  gate  milk  price  is  estimated  at  31.3  c/kg  for  August  2012,  which  is  9.5% 
below the average price of July 2011, but 1.2% above that of July 2010 and 27% above the 
lowest level reached in May 2009. 

The latest available spot milk prices and dairy product prices at the time of drafting the report 
were both pointing to a recovery in the near future, which should be followed at a later stage 
by higher farm gate milk prices. 

1.1.3.  Dairy product prices, stock levels and exports 

Thanks to a significant recovery in prices in 2010 and most of 2011 together with a series of 
favourable market developments, there has been no buying-in into intervention in the period 
2010-12 and public stocks are empty for both butter and skimmed milk powder. The 76 000 t 
butter and 257 000 t skimmed milk powder bought into public stocks during the 2009 crisis 
were  released  back  onto  the  market,  part  by  open  tender,  part  under  the  most  deprived 
persons' scheme, without disturbing the market. 

The recovery in dairy commodity prices in 2010 was due to increased demand, notably from 
emerging economies, and limited supplies from the Southern Hemisphere. The same situation 
prevailed  in  the  first  half  of  2011.  But  from  the  middle  of  2011  dairy  product  prices  came 
under  pressure  following  increased  availability  of  dairy  products  from  the  main  dairy 
supplying  regions  of  the  world.  Downward  pressure  continued  in  the  first  months  of  2012 
until EU dairy product prices found a bottom level around 120% of the (virtual) intervention 
price at the end of May. In June prices started to increase and developments till the date of 
drafting the present report have continued upwards, notably due to reduced milk availability 
from the US in the wake of an unprecedented heat wave and to a simultaneous drop in milk 
production  in  the  EU  as  well,  while  the  Southern  Hemisphere  was  in  its  winter  –  low 
production - season. 

EU  exports  increased  in  2010  and  2011  for  all  major  dairy  products,  with  the  exception  of 
butter/butteroil  and  whole  milk  powder.  EU  exports  have  been  particularly  dynamic  for 
skimmed milk powder. Good export performance has been confirmed in 2012 so far including 
a noticeable recovery of butter exports which, on a cumulative basis, outpaced 2011 levels in 
the first seven months of 2012. This has been achieved without export refunds. 

1.1.4.  Estimated dairy farms' margins in the EU 

Based on FADN data, during most of 2011, increasing operating costs were compensated by 
increasing  milk  prices.  In  the  1st  quarter  of  2012,  milk  margins  in  the  EU  declined  in  the 
wake of decreasing farm gate milk prices while still remaining above those of the first quarter 
of 2011. 

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According to first estimates for the second quarter of 2012, purchased feed costs increased by 
6% while total operating costs slightly decreased (- 2%) due to a significant drop in energy 
costs  (-  10%).  The  gross  margin  index  fell  by  17% due to an 8% decrease in the  farm  gate 
milk price. The gross margin index is now 24% below that of the 2nd quarter of 2011, which 
was the second highest since 2007 (year of reference for the EU-27). 

The  situation  varies  from  Member  State  to  Member  State  and  even  within  Member  States, 
depending  on  the  milk  farming  system  chosen  and  on  the  product  mix  used  by  the  dairy 
sector. 

1.2.  Medium term market prospects  

Medium-term  market  prospects  for  the  EU  have  been  simulated  with  a  modified  version  of 
the  Aglink-Cosimo  model  and  assume  no  changes  in  the  CAP  following  the  Health  Check 
decisions and no changes in trade policies. This outlook is not intended to constitute a forecast 
of future market developments, but rather to describe what would happen under a specific set 
of  assumptions  and  circumstances,  which  were  judged  plausible  at  the  time  of  projections. 
Moreover projection results presented in this report are provisional and may differ from final 
values, which are to be published by November 2012. 

The world market and policy environment is based on the OECD-FAO Agricultural Outlook 
2012-2021, adapted to more recent macro-economic projections as of September 2012. Some 
of the most important drivers of the market projections are the EU GDP growth prospects (a 
slight decline in 2012, followed by economic recovery thereafter), the assumed depreciation 
of the Euro during the first three years of the projection period followed by an appreciation in 
2014  and  2015,  and  an  update  of  OECD-FAO  world  market  price  projections  for  dairy 
commodities  that  incorporates  the  impact  of  the  2012  drought  in  US  and  some  European 
countries.  If  any  of  these  projections/assumptions  do  not  materialise,  this  would  affect  the 
resulting projections significantly. Furthermore, as in any other medium to long term model, 
greater price volatility expectations are not incorporated into the Aglink-Cosimo model. 

Based  on  these  projections,  medium-term  prospects  for  dairy  markets  appear  favourable. 
Continued  expansion  of  world  demand,  resulting  from  global  population  and  economic 
growth, combined with increasing preference for dairy products (also as a result of growing 
per  capita  consumption)  are  expected  to  be  the  main  drivers.  Sustained  import  demand, 
particularly  from  emerging  countries,  would  have  a  positive  impact  on  dairy  commodity 
prices,  thus  fuelling  EU  export  potential.  Nevertheless,  EU  market  shares  are  projected  to 
slightly deteriorate for most dairy products, as a result of a higher rate of increase in exports 
from other countries  

EU  milk  production  is  projected  to  continue  increasing  from  2012  onwards  at  a  moderate 
growth rate but to remain below the potential growth rate provided by the phasing-out of the 
milk quota regime (see graph 3 and 4 in Annex II). EU milk production is projected to register 
a cumulative increase of about 8% from 2009 to 2022, while milk delivered to dairies would 
increase by around 10%. By the last quota year (2014-15), EU milk deliveries are projected to 
be some 6% below quota. The expiry of the milk quota regime is projected to have a limited 
impact on milk deliveries at the aggregate EU level. 

Projections for cheese and fresh dairy products are quite positive (see graph 5 in Annex II). 
EU  production  of  fresh  dairy  products  (including  drinking  milk,  cream,  yogurts,  etc)  is 
projected to increase by almost 8% (from 2009 to 2022) and cheese by almost 10%. Demand 

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prospects on both the domestic and world markets look positive, and despite a strengthening 
EUR  towards  the  second  part  of  the  projection  period,  substantial  demand  on  the  world 
market would allow for a progressive increase of EU exports. However, due to more dynamic 
developments in the world market the EU will gradually lose world market share, though it 
still account for around 31% of global exports in 2022. 

Whole milk powder production in the EU is expected to stay relatively stable over the short 
term (see graph 6 in Annex II). The medium term prospects for exports are supported by an 
increase in world demand, led by China. The EU share in global exports is expected to decline 
gradually to 14% by 2020 (from 25% in 2009). 

EU skimmed milk  powder production  is projected to increase by  about 28% throughout the 
outlook  (see  graph  7  in  Annex  II).  A  strong  global  import  demand  would  contribute  to  a 
balanced  market,  driving  a  favourable  outlook  for  exports.  The  EU  would  see  its  world 
market share reaching almost 31% of global exports in 2022. 

The  outlook  indicates  continued  market  stability  for  butter,  resulting  from  positive  market 
conditions  over  the  projection  period,  with  prices  at  relatively  high  levels  and  firm  EU 
demand (see graph 8 in Annex II). 

2. 

SMOOTH PHASING OUT OF THE MILK QUOTAS  

2.1.  Milk production compared to quota ceilings 

Further to the decision to increase milk quotas by 2% on 1 April 2008, the Health Check deal 
of November 2008 resulted in an annual increase in milk quotas by 1% over five consecutive 
years,  beginning  on  1  April  2009,  plus  an  adjustment  of  the  fat  correction  factor  which 
resulted  in  a  further  de  facto  1%  increase  in  quotas.  There  remains  one  1%  annual  increase 
(on 1 April 2013) until the expiry of the quota system on 1 April 20151. 

Year  on  year,  milk  quotas  are  gradually  becoming  less  relevant,  as  actual  milk  output  falls 
short  of  these  ceilings  in  a  majority  of  Member  States.  In  quota  year  2010-11,  only  five 
Member States exceeded their milk quota, while overall EU production was 6% below quota. 
According to notifications received from Member States, the 2011-12 quota year is estimated 
to have ended with EU milk deliveries approximately 4.7% under quota and only six Member 
States  exceeded  their  national  quotas  (see  Annex  III).  The  number  of  Member  States 
exceeding their quotas remains limited and the concerned surplus production accounts for less 
than 0.2% of all milk delivered or covered by direct sales. 

After  a  slight  contraction  of  milk  deliveries  in  2009,  favourable  farm  gate  milk  prices  and 
good weather conditions prompted increased production levels in both 2010 and 2011. When 
increased production – not only in the EU but in all milk supplying regions around the world 
– exerted downward pressure on farm gate milk prices, milk production started to respond by 
slowing down in the subsequent months. Those developments show that production response 
is  gradually  shaping  according  to  market  signals  but  also  that  weather  conditions  are  a  true 
player in the dairy market. 

1 

Except for Italy for which the cumulative 5% increase was frontloaded on 1 April 2009. 

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With  milk  quotas  becoming  less  and  less  relevant,  EU  milk  supply  can  better  respond  to 
market opportunities, farmers' response to price signals is less distorted and efficiency gains 
can be achieved through restructuring. 

2.2.  Milk quota price evolution 

The  milk  quota  price  should  be  decreasing  with the shortening  life of the quota regime and 
this is actually the case in a majority of Member States where the quota price is very low or 
equal to zero (see Annex IV). 

In  Member  States  whose  milk  deliveries  are  well  below  quota  ceilings,  the  quota  price  is 
already very low or equal to zero, and no fundamental changes are expected before the expiry 
of the quotas regime. 

However, in Member States whose milk deliveries are close to the quota ceilings and in the 
limited number of Member States whose milk deliveries exceed their ceilings, the quota price 
depends on the expectation of a surplus levy. In the future, quota purchases are projected to be 
further declining towards zero, with fluctuations due to occasional surplus production under 
favourable weather conditions and remunerating milk prices. 

3. 

CONCLUDING REMARKS 

Medium and long  term prospects are favourable for  the dairy sector in line with population 
growth and appetite for western diet in emerging economies. This does not however prevent 
short  term  market  fluctuations.  Price  developments  since  the  publication  of  the  first  soft 
landing report show a trend towards higher levels with some ups and downs along the curve. 
Within  the  latter,  the  current  difficulties  endured  by  dairy  farmers  in  certain  areas  more 
severely hit by the hike in the price of feedstuffs cannot hide the overall positive picture of the 
sector.  

In the long run, the balance between supply and demand depends on a large variety of factors, 
ranging  from  economic  parameters  to  policy  decisions.  In  this  respect,  the  so-called  Milk 
Package2  which  has  been  fully  applicable  from  3 October  2012  offers  tools  for  operators  in 
the dairy supply chain to attune their supply to the market. 

Both the evolution of milk production versus milk quotas, and the downward trend in quota 
prices show that “soft landing” is on track. In the vast majority of Member States, quotas are 
no longer relevant to limiting production and the quota price has already reached zero or is 
approaching it. 

Against this analysis, the Commission is of the view that no change is required in the existing 
framework, which has been providing certainty to milk producers since 2008 and is proving 
its efficiency in securing a smooth phasing-out towards a quota free environment. 

Aside  from  the  very  concept  of soft  landing,  some  concerns  are  voiced  with  regard  to  rural 
areas in which milk production is playing a central role, in particular in the context of milk 
quota expiry. In this respect, the inclusion of the milk sector in the so-called "new challenges" 

2 

Regulation  (EU)  No 261/2012  of  the  European  Parliament  and  of  the  Council  of  14 March  2012 
amending Council Regulation (EC) No 1234/2007 as regards contractual relations in the milk and milk 
products sector 

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under the second pillar of the CAP is providing further support to dairy farmers in preparing 
for the end of quotas. 

The  CAP  reform  proposals  contain  instruments  that  could  mitigate  potential  impacts. 
Furthermore,  the  Commission  has  issued  an  open  call  for  tenders  for  an  analysis  by 
independent experts of future developments in the milk sector from 2015 onwards, and will 
report to the European Parliament and the Council by 30 June 2014 on the concrete operation 
of  the  Milk  Package  provisions3,  assessing,  in  particular,  the  effects  on  milk  producers  and 
milk  production  in  disadvantaged  regions  in  connection  with  the  general  objective  of 
maintaining  production  in  such  regions,  and  covering  potential  incentives  to  encourage 
farmers to enter into joint production agreements.  

Annexes: 

I. 

II. 

Milk price development 

Medium term prospects in the dairy sector 

III.  Milk production versus quota 

IV. 

EU milk quota price developments 

3 

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See point 9 of Article 184 of the single CMO Regulation 1234/2007, as inserted by the so-called Milk 
Package Regulation 261/2012. 

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ANNEX I.  MILK PRODUCTION & PRICE DEVELOPMENTS 

Graph.1 

Milk collection developments 

Graph.2 

Milk price developments 

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ANNEX II.  MEDIUM TERM PROSPECTS IN THE DAIRY SECTOR 

Graph.3 

Cow's milk supply and dairy herd developments, 2000-2022 

Graph.4 

Milk deliveries and quota utilization for cow's milk 

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Graph.5 

Cheese market developments, 2000-2022 

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10,0

9,0

8,0

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Cheese

EU-15

EU-25

EU-27

Production

Consumption

Exports

Imports

2,2

2,0

1,8

1,6

1,4

1,2

1,0

0,8

0,6

0,4

0,2

0,0

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2
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Graph.6 

WMP market developments, 2000-2022 

EU-15

EU-25

EU-27

WMP

Production

Exports

Consumption (incl. Stocks)

Imports

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Graph.7 

SMP market developments, 2000-2022 

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EU-25

EU-27

Production

SMP

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Intervention Stocks

Imports

Consumption

Commercial Stocks

1,4

1,2

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0,6

0,4

0,2

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Graph.8 

Butter market developments, 2000-2022 

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Butter

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Consumption

Private Stocks

Exports

Imports

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ANNEX III.  MILK PRODUCTION VERSUS QUOTA 

EU Deliveries Overshoot/Under use (in % of quota) 

AT CY IE LU NL DE DK IT BE PL ES FR LV EE PT SI UK CZ

FI MT SK SE LT EL HU RO BG

%
2
,
4
+

%
3
,
2
+

%
1
,
1
+

%
5
,
0
+

%
5
,
0
+

%
1
,
0
+

%
2
,
0
-

%
4
,
0
-

%
5
,
0
-

%
1
,
2

-

%
1
,
3

-

%
6
,
3
-

2009/10

2010/11

2011/12

%
8
,
7
-

%
6
,
8
-

%
7
,
9

-

%
8
,
9

-

%
8
,
9

-

%
2
,
3
1
-

%
5
,
3
1

-

%
4
,
7
1

-

%
9
,
0
2

-

%
1
,
1
2
-

%
4
,
1
2
-

%
8
,
3
2
-

%
6
,
7
2

-

+ 10%

+ 5%

- 0%

- 5%

- 10%

- 15%

- 20%

- 25%

- 30%

- 35%

- 40%

- 45%

- 50%

- 55%

- 60%

- 65%

%
4
,
3
4

-

%
6

,

2
5
-

y
t
i
t
n
a
u
Q
e
b
a

l

l
i

a
v
A

f
o
%
n

i

EN 

13 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX IV.  EU MILK QUOTA PRICE DEVELOPMENTS 

EN 

14 

   EN