COMMISSION STAFF WORKING DOCUMENT Evolution of compulsory contracts, Producer Organisations and 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: 2016-11-24
Institutions: Directorate-General for Agriculture and Rural Development, European Commission
Subjects: EU Member State, common organisation of markets, dairy industry, dairy production, export (EU), milk, organisation of production, producer organisation

EUROPEAN 
COMMISSION 

Brussels, 24.11.2016  
SWD(2016) 367 final 

COMMISSION STAFF WORKING DOCUMENT 

Evolution of compulsory contracts, Producer Organisations and 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 

{COM(2016) 724 final} 

EN 

   EN 

 
 
 
 
  
 
COMMISSION STAFF WORKING DOCUMENT 

Evolution of compulsory contracts, Producer Organisations and 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.  
THE PREVIOUS MILK PACKAGE REPORT (JUNE 2014) 

 EVOLUTION  OF  COMPULSORY  CONTRACTS  AND  PRODUCER  ORGANISATIONS  SINCE 

The situation regarding compulsory contracts in Member States has evolved since June 2014 
as follows:  

•  Contracts  in  Cyprus  are  only  compulsory  for  recognised  POs  and  APOs,  and  for  a 

minimum duration of one year. 

•  Compulsory contracts have been introduced in Slovenia and Poland since January and 

October 2015 respectively. 

•  Contracts are no longer compulsory in Latvia since April 2015. 

•  The minimum duration of contracts in Italy has been extended to one year. 

Written offers have also been compulsory in Spain since February 2015. 

Minimum  size  requirements  set  by  Member  States  for  the  recognition  of  producer 
organisations (POs) have slightly changed since the previous report:  

•  Bulgaria introduced minimum criteria (5 producers) in January 2015. 

•  Portugal changed the criterion on minimum marketable production, from a volume of 
20.000  tonnes  of  milk  per  PO  (1.000  tonnes  for  sheep/goat  milk  POs)  to  a  value  of 
EUR 8 million for cow milk POs and EUR 1 million for sheep/goat milk POs. 

•  Hungary has reduced the minimum marketable production of POs from 30.000 tonnes 

to 15.000 tonnes. 

•  Croatia has increased the minimum number of members to constitute a PO, from 5 to 7 

farmers. 

2 

 
 
 
 
The number of recognised POs has evolved as follows since 2014: 

•  11 POs were recognised in France in 2014 and 4 more in 2015. 

•  1 PO was recognised in Portugal in 2014. 

•  1 PO was recognised in Belgium in 2015. 

•  2 POs were recognised in Bulgaria in 2015. 

•  Following  a  change  in  the  national  law,  only  1  out  of  8  POs  remained  in  the  Czech 

Republic by the end of 2015. 

• 

 2  POs  were  recognised  in  Germany  in  2014  and  19  more  in  2015.  16  POs  lost  their 
recognition between 2014 and 2015. 

•  1 PO was recognised in Spain in 2015 while one existing PO lost its recognition in the 

same year. 

• 

• 

• 

• 

 2 POs have been recognised in Croatia, one in 2014 and the other one in 2015. 

 9 new POs have been recognised in Italy in 2015. 

 2 POs were recognised in Romania in 2015. 

 1 PO was recognised in the United Kingdom in 2015. 

In Germany, two associations of POs have been recognised in 2014 and 2015 resulting in a 
total  of  four.  Italy  has  reported  the  recognition  of  one  APO  in  2015  although  no  minimum 
criteria have been notified yet. 

3 

 
 
 
 
 
 
 
2.  

1
 MARKET DEVELOPMENTS TO DATE

Having  observed  historically  high  prices  reached  for  milk  and  milk  products  by  the  end  of 
2013  and  the  beginning  of  2014,  the  milk  sector  entered  a  phase  of  global  supply-demand 
imbalance. This imbalance has characterised the market throughout 2015 and the first half of 
2016.  While  world  demand  suffered  due  to  the  introduction  of  the  Russian  import  ban  in 
August  2014  coupled  with  the  slowdown  of  imports  in  China  during  the  first  half  of  2015, 
global  supply  -  fuelled  by  remunerating  prices  and  favourable  weather  conditions  -  was 
boosted. Milk production increased  in the EU,  the  US  and  New  Zealand  in  2014  and  2015, 
reaching a combined additional 15 million tonnes. However, growth in domestic consumption 
and exports barely absorbed half of that volume. 

As  projected  in  the  2014  report,  the  expected  correction  in  prices  took  place  as  a  result  of 
increase  in  milk  production  observed  across  major  exporting  countries.  This  projected 
correction occurred in the EU from early 2014 and sped up since mid-2014 onwards due to 
the Russian import ban. In the absence of a reaction on the supply side, the deterioration of 
milk prices continued for two and a half years, causing the price of milk in the EU to plunge 
by 37 % by July 2016 (compared to the historical peak of 40.3 c/kg in December 2013). Milk 
prices also dropped by 44 % in the United States and by 50 % in New Zealand. 

The  impact  on  the  price  of  EU  milk  products  has  been  particularly  severe,  notably  for 
skimmed milk powder which experienced an overall drop of 51 %. The price of butter, after a 
significant drop (41 %), remained somewhat stable throughout 2015 owing to relative strong 
demand. The Commission has kept the safety net instruments (public intervention and private 
storage aid) in operation without disruption since September 2014. Skimmed milk powder has 
been offered to public intervention from July 2015 until September 2016. 

In  addition  to  maintaining  the  safety  instruments,  the  Commission  has  launched  three 
comprehensive  support  packages  (September  20142,  March  20163  and  July  20164)  as  a 
response to the difficult situation witnessed notably on the EU dairy market, but also in other 
agricultural sectors.   

Market  conditions  started  to  improve  in  spring  2016,  when  prices  for  EU  dairy  products 
bottomed  out.  By  September  2016,  prices  for  EU  butter,  whole  milk  powder  and  whey 
powder had recovered their levels of 2014. At the time of this report, these positive signs were 
expected to materialise into better farm gate milk prices as of August 2016.  

1 based on data available by end-September 2016 (therefore milk production updated up to July 2016 and milk 
prices up to August 2016) 

2 http://ec.europa.eu/agriculture/newsroom/231_en.htm 

3 http://europa.eu/rapid/press-release_IP-16-806_en.htm 

4 http://ec.europa.eu/agriculture/newsroom/295_en.htm 

4 

 
 
  
                                                            
2.1.  

MILK PRODUCTION  

EU  milk  deliveries  increased  by  4.5%  in  2014  (more  than  6  million  tonnes  in  one  year) 
resulting  in  148  million  tonnes  of  milk.  This  equals  the  cumulative  quantity  increase  in 
deliveries during the previous five years (during which quotas increased progressively by 1% 
annually). A slowdown was observed towards the end of 2014, in line with efforts to limit the 
milk quota surplus levy in a context of decreasing milk prices.  

The decrease in deliveries continued during the first quarter of 2015, which was particularly 
noticeable  in  Member  States  at  risk  of  exceeding  quota.  By  contrast,  deliveries  in  other 
Member  States  continued  to  substantially  increase  despite  low  milk  prices.  Milk  collection 
has surged since April 2015 in some Member States previously limited in their expansion by 
the  quota  regime.  Weather  was  extremely  mild  in  the  autumn  and  cows  fed  on  grass  much 
longer than in the previous year, resulting in 5% higher deliveries during the last quarter of 
2015  compared  to  2014.  In  addition,  in  certain  Member  States,  the  good  quantity  of  forage 
available,  affordable  feed  prices  and  low  energy  costs  encouraged  farmers  to  continue 
producing. Year 2015 closed with a 2.5% increase compared to 2014 (3.7 million tonnes more 
milk).  

Milk  production  growth  in  the  first  quarter  of  2016  was  remarkably  high  due  to  the 
combination  of  an  increase  in  deliveries,  the  extra  leap-day  in  February,  and  the  statistical 
effect of comparing with the same period in 2015 when quotas were still in place. As a result, 
milk  deliveries  in  January-March  2016  were  7.1%  higher  than  in  the  same  period  in  2015 
(+5.9% with the correction of the leap day). Monthly delivery figures converged in April-May 
2016  and  have  been  showing  a  decrease  since  June  (-2%  in  June  and  –1.4%  in  July). 
Estimates point to a continued decline through the rest of the year, which could finish with an 
overall annual increase of close to +0.6%. 

Milk production in the main exporting regions experienced also a remarkable surge in 2014 
and 2015 with a combined two-year increase of 18% in New Zealand, 10% in Australia and 
3.4%  in  the  US.  While  a  slowdown  was  observed  by  the  end  of  the  2015-16  season  in 
Oceania, monthly milk deliveries have continued to increase steadily in the US through 2016 
(+1.7% by August 2016). 

5 

 
 
 
Graph 1 

Milk collection developments 

6 

 
 
 
 
2.2. 

EU FARM GATE MILK PRICES 

EU weighted farm gate milk prices reached a record level of 40.3 EUR/100 kg at the end of 
2013. The surge in milk supply previously described, together with the weakening of global 
demand,  have  translated  into  a  downward  trend  for  EU  milk  prices  since  the  beginning  of 
2014,  which  was  exacerbated  in  August  that  year  due  to  the  introduction  of  the  Russian 
import ban. By December 2014, the EU average milk price had fallen to 33.3 EUR/100 kg, 
meaning a 18% decrease year-on year. The situation was diverse across Member States, with 
the biggest price decrease (around 30%) reported in the Baltic countries and NL, followed by 
BE, DE, LU and DK. EU raw milk prices found some stabilisation in February 2015 owing to 
the limited milk supply in the last months of the milk quota system, but the decline resumed 
from  March  onwards.  Despite  a  slight  recovery  observed  in  autumn,  EU  milk  prices 
experienced an overall drop of 8% in 2015 (-13% when comparing to a 5-year average). 

The deterioration of farm gate milk prices continued throughout 2016 owing to the oversupply 
situation, with a cumulated drop of 17% by July, to 25.5 EUR/100 kg, the lowest EU average 
price  level  reached  since  August  2009.  The  reaction  in  milk  deliveries  observed  since  June 
2016, together with the sharp recovery of dairy product prices initiated in May, makes hopeful 
of a change in the trend of raw milk prices to materialize as of August 2016. 

Similar milk price developments occurred in the US and New Zealand over the period 2014-
2016. The price fall has been deeper in these two  countries (-44% in the US, -50% in New 
Zealand) but the recovery started already in May 2016 (+22% in the US and +29% in New 
Zealand between May and July 2016).  

7 

 
 
Graph 2 

Milk price developments 

2.3. 

DAIRY PRODUCT PRICES, STOCK LEVELS AND EXPORTS 

Dairy product prices  experienced increasing  downward pressure in years 2014, 2015 and in 
the first half of 2016. EU butter prices started suffering the effects of the oversupply situation 
early  2014,  followed  by  SMP  prices.  Prices  stabilised  and  even  increased  after  the  seasonal 
production  peak  in  spring  but  the  abrupt  introduction  of  the  Russian  import  ban  in  August 
2014  changed  dramatically  the  trend.  While  the  first  immediate  impact  of  the  ban  was 
observed  on  cheese  exports  and  prices  (being  the  product  most  traded  with  Russia), 
processors diverted more milk into butter and SMP production, thus increasing the pressure 
on these commodities. By the end of 2014, EU butter and SMP prices had decreased by 30% 
and  43%  respectively  while  cheddar  prices  dropped  by  22%,  with  most  of  these  price 
decreases taking place after the Russian ban was introduced. 

Despite the Russian ban, EU exports in 2014 outpaced previous year's level for most dairy 
products,  with  the  only  exception  of  cheese.  The  loss  of  the  Russian  market  for  butter  was 
partially compensated by increasing exports to the US and Saudi Arabia. As regards cheese 
exports, the share of Russia in EU exports decreased from 33% to 18%, and the US became 
the main outlet for the EU in the second half of the year. SMP was, by far, the most dynamic 

8 

 
 
 
export  product  in  2014,  with  a  year-on-year  increase  of  62%  and  Algeria  as  the  main 
destination followed by China, Egypt and Indonesia.  

The slowdown in EU milk supply in the first quarter of 2015 had a positive effect on market 
sentiment  and  EU  dairy  prices  benefited  from  a  temporary  recovery  (+12%  for  butter  and 
+7%  for  SMP  by  mid-April).  The  downward  trend  resumed  once  signals  of  overproduction 
became  more  evident  and  dairy  prices  declined  throughout  spring  and  summer.  SMP  prices 
hit  public  intervention  levels  in  July  2015  and  offers  have  been  being  submitted  ever  since 
until September 2016 with the only exception of one week in November 2015, in line with a 
temporary  rally  in  prices.  EU  dairy  price  drops  ranged  from  -3%  for  WMP  to  -34%  for 
wheypowder.  Only  butter  prices  remained  firm,  with  even  a  4%  increase,  thanks  to  robust 
global demand (notably in the US). 

EU exports of dairy products performed well in 2015, benefitting from the reinforcement of 
certain outlets (Egypt, the US, Japan, Saudi Arabia, South Korea) and the recovery of China's 
imports which became evident in the last quarter of the year. EU exports increased in volume 
for  most  dairy  products,  except  for  cheese  whose  exports  remained  overall  stable  (they 
overtook 2014 levels from August, and increased year-on-year for all EU outlets, except for 
Russia). 

Despite this recuperation in global demand, it was largely outstripped by the production pace. 
The surge in EU milk deliveries during the spring flush translated into increased volumes of 
SMP (+18%) and butter (+12% by May). EU SMP prices remained supported by the public 
intervention  mechanism  throughout  2016.  Since  mid-August  prices  have  started  to  pick  up 
and volumes offered to intervention to recede. By the third week of September 2016, when no 
more  offers  to  public  intervention  were  reported,  a  total  volume  of  334  000  tonnes  was 
applied for in 20165 (in addition to some 40 000 tonnes offered in 2015). The level of public 
stocks of SMP by the end of July 2016 was reported to be at 327 000 tonnes.  

In  addition  to  public  intervention,  private  storage  aid  has  remained  available  without 
disruption  for  butter  and  SMP  since  the  introduction  of  the  Russian  ban  (for  SMP  with  the 
possibility  of  an  enhanced  scheme  since  October  2015,  with  higher  aid  rates  and  longer 
storage periods). By the end of July 2016, subsidized private stocks were reported at 53 000 
tonnes for SMP and at 102 000 tonnes for butter.  

A private storage aid scheme for cheese was put in place for a few weeks in September 2014. 
It covered some 83 500 t. Another one was introduced in October 2015. Out of a maximum 
volume of 100 000 tonnes, some 84 000 tonnes were applied for in two rounds. The level of 
stocks by the end of July 2016 was 25 000 tonnes. 

5 In order to help the sector find a new balance under the severe market situation, and preserve confidence in 
the effectiveness of intervention mechanisms, the ceiling under which SMP could be bought-in at fixed price in 
2016 was increased to 218 000 tonnes in April and to 350 000 tonnes in June. 

9 

 
 
                                                            
EU butter prices plunged between January and April 2016, while remaining well above public 
intervention  levels.  In  week  18,  EU  average  butter  prices  hit  a  bottom  of  250  EUR/100  kg 
(lowest level since September 2009) when they commenced a steep increase reaching +56% 
by the end of September (having outpaced 2015 and 2014 price levels, and approaching those 
of 2013). 

Global demand remains healthy in 2016 and even outpaced 2013/14 levels in June. The EU 
and NZ stand as first world exporters, with similar volumes in milk equivalent. The market 
for SMP has remained bearish in 2016, affected by reduced imports by Algeria (due to low oil 
price).  Trade  flows  for  the  other  main  dairy  products  have  improved  in  line  with  growing 
demand. The  main destinations for  EU products are Saudi Arabia (butter), the US (cheese), 
China (whey powder and infant formula), Algeria (SMP) and Oman (WMP). Liquid milk and 
cream exports are playing an increasingly important role for the EU, with China (UHT bricks) 
and Belarus (bulk whole milk and cream) as the main outlets. By the end of July 2016, EU 
exports of dairy products expressed in milk equivalent had increased by 3.5%. 

Graph 3 

Dairy products price developments 

2.4. 

ESTIMATED DAIRY FARMS' MARGINS IN THE EU 

The  model  developed  in  DG  AGRI  for  monitoring  milk  price,  operating  costs  and  gross 
margin indexes provides results in line with the market developments previously described. 

10 

 
 
 
 
After two consecutive yearly increases in 2013 and 2014 (having reached a maximum in the 
first  quarter  of  2014  of  49%  over  the  base  set  in  2008)  the  gross  margin  index  started  a 
declining  trend  due  to  the  fall  in  milk  prices,  which  was  not  fully  offset  by  decreasing 
operating costs (notably feed and energy). The margin index hit a bottom in the third quarter 
of  2015  (8%  below  the  base)  followed  by  an  upturn  due  to  the  slight  recovery  in  prices 
observed in late 2015. However, the fall in milk prices in 2016 was more pronounced than the 
easing of production costs (-14% for the milk price index versus -10% for the operating costs 
index in the first half of 2016), translating into a substantial drop in the gross margin index by 
June  2016  (28%  below  the  base).  The  trend  is  expected  to  reverse  in  the  fourth  quarter  of 
2016 with the prospect of improving milk prices in August and September 2016. 

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  in  dairy 
processing. 

Graph 4 

Gross margin index evolution6 

6 Source : FADN - base year 2012 + indexes: Eurostat, DG AGRI 

11 

 
 
 
                                                            
 MEDIUM TERM MARKET PROSPECTS 2015-2025 

3. 
The medium-term prospects7 for milk and dairy commodities remain favourable.  World and 
domestic demand are still expected to increase steadily, giving the possibility for the EU dairy 
sector to improve its position and share in the world markets. 

In the period 2015-2025, world trade for dairy products is expected to increase by 2.4 % (over 
1.4 million tonnes) a year. This is less than in the last decade when trade increased by close to 
1.9 million tonnes a year, mainly due to slower import growth in China not fully compensated 
by increased imports in Africa. China will remain the world’s main importer, accounting for 
22 % of world dairy trade. 

Among  the  world’s  main  exporters,  the  EU  is  expected  to  see  the  highest  increase  in 
production  and  exports.  Production  is  no  longer  constrained  by  quotas  and  production 
capacity  is  strong,  given  very  good  agronomic  and  climatic  conditions  for  milk  production, 
big processing capacity, a wide variety of products and significant yield growth potential. By 
contrast, expansion of production in New Zealand will be more limited than in the past, with 
1.7 %  expected  annual  growth  (OECD-FAO),  as  compared  with  5.2 %  in  the  last  decade. 
Nevertheless,  any  additional  volume  of  milk  produced  in  New  Zealand  will  be  sold  on  the 
world  market  and  its  exports  are  expected  to  grow  by  440 000  tonnes  a  year  (in  milk 
equivalent). In the USA, out of 1.1 million tonnes extra milk produced each year in the next 
decade, 800 000 tonnes will be used domestically leaving 300 000 tonnes for extra exports as 
compared with 500 000 tonnes in the EU. 

7 DG AGRI projections based on OECD-FAO agricultural outlook and macroeconomic assumptions. See 
http://ec.europa.eu/agriculture/markets-and-prices/medium-term-outlook/index_en.htm 

12 

 
 
                                                            
Annual change in trade of 

Graph 5 
dairy products (million t of milk 
equivalent) 

1.8

ROW

US

1.3

0.8

NZ

0.3

-0.2

EU

AUS

AFR*

O. AS

ME

AFR*

O. AS

CHN

ME

CHN

ROW

RUS

ROW

RUS

ROW
AUS

US

NZ

EU

2005-14 2014-25 2005-14 2014-25

World exports

World imports

Note: Trade in milk solid equivalent of cheese, butter, 
SMP, WMP and whey powder8. NZ: New Zealand, ME: 
Middle East, ROW: Rest of the world. *South Africa 
excluded. 
Source: DG Agriculture and Rural Development based 
on OECD-FAO Agricultural Outlook 2015-2024. 

Graph 6 

EU share in world trade (%) 

60

50

40

30

20

10

0

0
0
0
2

2
0
0
2

4
0
0
2

6
0
0
2

8
0
0
2

0
1
0
2

2
1
0
2

4
1
0
2

6
1
0
2

8
1
0
2

0
2
0
2

2
2
0
2

4
2
0
2

whey

SMP

cheese

butter

WMP

Graph 7 
the EU (million t) 

Milk supply and deliveries in 

180

170

160

150

140

130

120

5
0
0
2

7
0
0
2

9
0
0
2

1
1
0
2

3
1
0
2

5
1
0
2

7
1
0
2

9
1
0
2

1
2
0
2

3
2
0
2

5
2
0
2

Production

Delivery quota

Deliveries

Milk supply in the EU is expected to increase by 13 million tonnes in the coming years 
(0.8 % a year), driven by growing world demand and sustained domestic consumption. 
Close to 90% of the milk is used to supply the domestic market in the EU and not only the 
population,  but  also  per  capita  consumption  of  cheese,  butter  and  fresh  cream  are  growing 
steadily.  Moreover,  powders  are  increasingly  used  to  produce  processed  products  (bakery, 
viennoiserie, patisserie (BVP) and biscuits, etc.).  

After a few years of turmoil, it is expected that supply expansion will remain moderate and 
driven by market fundamentals: favourable demand, relatively moderate milk prices and costs 
of production, etc.  

Competition with other sectors  might have less incidence than in the past, given the expected, 
rather low crop prices. However, environmental constraints may also play a role: dairy cows 

8 Coefficients used: 3.6 for cheese, 6.57 for butter, 7.6 for SMP, 7.56 for WMP and 7.48 for standard whey 
powder 

13 

 
 
 
 
 
 
                                                            
are concentrated mainly in areas where a surplus in nitrates is recorded. The potential fixing 
of  targets  for  GHG  emissions  reductions  might  affect  dairy  cows  as  a  major  source  of 
methane, limiting expansion of milk production and favouring yield increases at the expense 
of herd numbers.  

14