COMMISSION STAFF WORKING DOCUMENT Evolution of the market situation for milk and milk products Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Development of the dairy market situation and the operation of the "Milk Package" provisions
Date: 2014-06-13
Institutions: European Commission
Subjects: cheese, dairy production, designation of origin, market intervention, organisation of production, price fluctuation, producer organisation













EUR-Lex - 52014SC0187 - EN











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52014SC0187

COMMISSION STAFF WORKING DOCUMENT Evolution of the market situation for milk and milk products Accompanying the document REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Development of the dairy market situation and the operation of the "Milk Package" provisions /* SWD/2014/0187 final */









COMMISSION STAFF WORKING DOCUMENT
Evolution of the market situation for
milk and milk products
Accompanying the document
REPORT
FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL
Development of the dairy market situation
and the operation of the "Milk Package" provisions.
1.             market developments to date[1] 
Together
with price volatility, the weather has played a significant role in the milk
market developments during the years 2012 and 2013. Indeed, a severe drought in
the US and in certain EU Member States in the summer 2012 led to a sharp
increase in feed prices, and put EU dairy farms highly dependent on purchased
feed under pressure. 
The
first half of 2013 was characterised, on the contrary, by a cold and wet
weather in the EU, which conditioned the quality and volume of pastures and
forages, leading to a lower milk output. At the same time Oceania was hit by
the worst drought in 30 years. As a result, the global milk supply was
unexpectedly tight.
1.1.         milk production 
Cow
milk collection in the EU observed a correction in the second half of 2012,
following the boost experienced in 2011 and the beginning of 2012. In June
2012, the cumulated milk collection in the EU-27 was 2% over the same period in
2011. As a reaction to narrowing margins, the sector slowed down milk output,
managing to reduce the cumulated production increase down to 0.6% by the end of
the year.
The
cold spring compromised EU milk production in the first half of 2013. The
cumulated milk collection up to June 2013 was 1.9% below 2012 levels. Favourable
weather conditions, high price levels thanks to strong global demand, and the improved
margins pushed milk production in the second half of the year, leading to month
on month increases by 4% in October, November and December (the strongest
quarter in the last ten years). Year 2013 eventually closed with a 0.7%
increase compared to 2012. Provisional figures for January 2014 suggest a
continuation of this upward trend, with a 4.7% increase compared to January
2013.

Graph.1               Milk collection
developments
Different
milk output patterns were observed in the main milk supplying regions of the
world during this period: in Oceania, milk production in New Zealand kept on growing through the second half of 2012, and closed the year with an
8.5% increase compared to 2011. Then the region was hit by the heat wave and
milk production dramatically fell from February to July 2013 (cumulate milk
output during these months was 19% lower than in previous year). The 2013-2014
season started with good weather perspectives, which were confirmed by a
rebound in milk production towards the end of the year. Cumulated production in
the first six months (June-December 2013) was 5.4% higher than in the previous
season (although 2013 production was 1.8% lower than in 2012).
Fluctuations
were less accentuated in Australia, where milk production closed the year 2012
with a relatively modest 2.5% increase compared to 2011. Milk output has been
persistently lower - month on month - between December 2012 and November 2013,
due to the prolonged droughts, thus leading to a yearly decrease of 4.9% in
2013. In the first seven months of current the season (July 2013 to January 2014)
milk production was still 2.1% below the previous one. 
In
the US, despite contraction in farms' margins in 2012, milk output only slowed
down moderately in three months (August-September 2012), and the cumulated
figure for the whole year was 2.1% higher than in 2011. Contrary to what
happened in the EU and Oceania, the US was the only region keeping the pace in
the first months of 2013 and showing month on month increases already as from
April. Milk production unexpectedly weakened in Q4, reaching in November and
December similar volumes as in the previous year. The overall milk production
in 2013 was 0.4% higher than in 2012. In the first month of 2014, milk
production in the US increased by 0.9% compared to 2013.
1.2.        eu farm gate milk prices
Following
two years of high farm gate milk prices and milk production expansion, a price
correction took place in the first half of 2012. The seasonal downward pattern,
which usually occurs by the end of each year, was prolonged in 2012 until the
summer responding to pressure from increased milk supply in and outside the EU.
Milk prices fell to 30.9 c/kg in June 2012, a 10% decrease in the first six
months of the year. Prices then started to move upwards with the only exception
of two small corrections in February and March 2013, leading to record high
figures from April 2013 onwards.
Graph.2               Milk price
developments
The
EU average farm gate milk price reached an historical peak (statistics available
since 1977) of 40.35 c/kg in December 2013. A slight correction by -0.5% has
been observed in January 2014 (17% higher than in January 2013) following the
seasonal patterns, and possibly also induced by higher milk output since the
beginning of the season. 
A
correction in milk prices throughout 2014 (notably in the second half of the
year) can not been discarded, given the current production behaviour in the
main regions of the world. However, the strong global demand is expected to
support prices at reasonably firm levels.
1.3.        dairy product prices, stock levels and
exports
A
strong increased demand, notably from emerging economies, and limited supplies
from all main producing regions in the first half of 2013, pushed upwards dairy
commodities prices which have steadily increased since mid-2012 up to historical
levels. In October 2013 EU average butter price hit an all-time record of 423
€/100 kg. Similarly, EU average cheddar cheese prices reached an unprecedented
level of 407 €/100 kg in February 2014. All the main dairy products' prices
increased throughout 2013 by more than 20% (23% for butter, 22% for SMP, 27%
for WMP and 20% for cheddar cheese).
Some
pressure has been observed in the butter price during the first weeks of 2014,
although prices for all dairy products have generally remained firm. 
Graph.3               Dairy products
price developments
Thanks
to the positive price developments previously described, there has been no
buying-in into intervention in the period 2012-13 and public stocks are empty
for both butter and skimmed milk powder.
Good
export performance was observed throughout 2012 for most of EU dairy products,
although a downward adjustment took place by the end of the year, as a
consequence of reduced milk production. Cheese was once again the most dynamic
product, registering a 13.6% increase compared to year 2011 (which was already
a remarkably good year in terms of cheese exports). Needless to say, all
exports were carried out without export refunds.
The
unavailability of products to trade conditioned European exports during 2013. By
September 2013, SMP production was 7.7% below last year's level, while exports
were down by 31%. Similarly, butter production decreased by 1.4%, and exports
by 5% in the same period. A hindmost upsurge by the end of the year lead to a cumulated
decrease of SMP exports by 21%, and a modest increase of butter exports by
0.3%. Cheese exports registered positive figures throughout the whole year, and
closed with a +2.6% compared to 2012.
1.4.        estimated dairy farms' margins in the eu
Milk
margins in the EU shrank in the first three quarters of 2012, as a consequence
of falling milk prices and rising of operating costs, notably feed costs.
According to the model developed in DG AGRI, the margin index would have
decreased by 27% between Q1 and Q3 2012, as a result of a diminution in the
milk price index by 7% and an increase of the operating cost index by 5%.
The
trend clearly reversed since then, triggered by an uninterrupted improvement in
milk price and an easing of feed prices. The milk price index would have
increased by 27% between Q3 2012 and Q4 2013, and the operative cost index only
by 1.7%. Gross margin index would have improved, as a consequence, by 84% in
the same period.
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.
Graph.4               Gross margin
evolution
2.            medium term
market prospects 2013-2023
The
medium-term prospects for milk and dairy commodities are favourable on both the
world and domestic markets. World demand remains dynamic (especially in the
emerging economies), despite the slowdown in economic growth, with a higher
proportion of middleclass households, dairy products are featuring more
prominently in people’s diets. On the supply side, feed prices are projected at
lower levels than those observed since 2010. These positive drivers will
maintain prices at relatively high levels and boost EU milk production. 
Some
dairy farmers may switch to crop production and in Germany silage maize
production for biogas is especially competing with dairy farming. Furthermore;
production development will also have to adapt to the pace of consumption
increase in both the EU and on the world market. In addition, the EU will face
competition on the world market from Oceania but also from the US and Argentina whose exports are expected to increase.
2.1.        market prospects in the eu
These
projections assume normal weather conditions, but it has to be borne in mind
that weather is a strong determinant of milk production growth – not only in Europe. Dairy production in the EU (especially from grass-fed systems) is affected not only
by droughts implying higher compound feed costs, but also by wet and cold
weather.
Graph.5               EU-28 milk deliveries and dairy herd
developments, 2005-2023
*  In Romania, Bulgaria and Croatia for the years prior
to accession the quota is set at the level of the first year of accession 
Milk
deliveries are projected at 150 million tonnes in 2023 i.e. 9.6 million
tonnes more than in 2012. Most of the growth will take place in the EU-15; the
EU-N13 could produce an additional 1.2 million tonnes. This increase will
come from further yield improvements to 8 500 kg/cow in the EU-15 in 2023
and 6 050 kg/cow in the EU-N13.
Production
increases can be expected in those Member States currently restricted by the
quota (e.g. the Netherlands, Denmark, Germany, Austria and Cyprus).
By
the end of the projection period, the annual growth in milk deliveries is
expected to slow down because of narrower operating margins. Given the strong
world demand for dairy commodities and feed price projections 15 % below
2010‑12 levels, the nominal EU milk price should be quite stable, but
steady increases in other operating costs (especially for energy) are likely to
squeeze margins. In addition, as already mentioned environmental constraints
and competition for land with other sectors will limit production expansion in
some Member States.
It is expected that the cheese sector will be
boosted by a dynamic world market and steady growth in domestic demand. Cheese
production is therefore expected to absorb most of the additional milk
delivered to dairies.
The
additional milk produced will allow the EU increasing its exports to the world
market and maintain a share in world exports close to 60% for whey powder and
around 30% for cheese and SMP. 
Graph.6               EU share in world exports (%)
2.2.        projected milk deliveries by member state
When
the EU milk quota system is abolished, the milk and dairy sector is likely to
expand in the most competitive countries, while contracting elsewhere.
Nevertheless, the development of the production at Member State level is
uncertain because milk markets have been constrained by quotas for many years
in the EU. 
In
order to project the change in milk marketable production in 2023 compared to
2012, JRC-IPTS has used the ESIM model. This modelling exercise accounts for
farmers reaction to price developments, milk margins, observed trends in milk
deliveries during the phasing out of the quota system, environmental
constraints and information available on the recent investments in the dairy
sector. 
By
2023, milk marketable production is projected to increase by more than 20% in Ireland, more than 15% in Germany and the Netherlands, more than 10% in Denmark, France, Austria, Estonia, Cyprus and Poland. The projected increase in Belgium and the United Kingdom is below 5%. By contrast, production could decrease in Greece, Finland, Sweden, Czech Republic, Slovakia, Hungary, Bulgaria, Romania and Croatia. A relatively stable production is projected in Italy, Spain, Portugal, Latvia, Lithuania and Slovenia.
Graph.7               %
change in milk deliveries in 2023 compared to 2012 projected by JRC-  IPTS with
ESIM model
However,
a modelling exercise can not include all the market expertise available, which
takes into account other types of information and expectations about the future
than the assumption described above. In some cases, these projections may seem
optimistic. For example, contrary to the stability in the Spanish and
Portuguese milk deliveries simulated by the model (explained by strengthening
dairy prices on world markets), many market experts rather expect a decrease of
milk deliveries due the structure of the milk production and processing in
these two countries. In France, the increase in deliveries could be smaller
because some major private companies have announced their willingness to
restrain milk collection expansion and to concentrate their activity in value
added products without producing powders.
In
other cases, they might be seen to be too pessimistic. Irish authorities
announce 50% higher milk deliveries by 2020, other experts bet more on a less
important increase, between 30% and 40%. This modelling exercise concludes on a
lower increase because of possible
environmental constraints and also because cold and wet weather conditions
similar to those observed in 2012/13 could repeat once or twice over the projection
period and affect the milk production increase achieved by 2023. Certain market
experts argue that milk deliveries in the United Kingdom could increase more,
given recent investments in the dairy industry. Another example is the
projected decrease in Bulgaria and Romania, which is based on past observation.
However, the decrease in milk deliveries in these two countries could slow down
if part of the decline in subsistence farming is compensated by farmers working
with dairies. Given the recent developments observed in Estonia and market opportunities in neighbouring countries, deliveries could increase more
in that country but anyhow are not likely to not translate into major
additional quantities on the EU market. The performance of Estonia will affect particularly the neighbouring countries - Lithuania and Latvia - where stable deliveries are projected. The decrease in milk deliveries in Hungary could be lower, if Poland performs less than projected.
Last
but not least, the effect of environmental constraints and their implementation
by national authorities implies a significant uncertainty on the development of
milk deliveries in particular in the Netherlands, France (Brittany) and Italy. In the latter, milk valorisation is good because of the importance of cheese
production for which prospects are positive. Nevertheless, some domestic milk
could be displaced by imported milk.
For
more information on the medium term market prospects, the projected milk
deliveries by Member State and details on the methodology and the macroeconomic
assumptions please see:  http://ec.europa.eu/agriculture/markets-and-prices/medium-term-outlook/index_en.htm

[1] based
on data available till mid-March 2014