Medium term prospects for EU dairy sector

Author: Laura Nobel

Brussels, 2 dicember - The DG Agriculture and Rural development of the European Commission held a two day conference on the first and second of December containing topics about the new developments in the agriculture sector, including a discussion on the prospects of the European dairy sector.

With the milk quota abolished spring 2015, the EU supplies production growth and wishes to gain market shares on the world market. Growth is estimated on 15 megatonne in 10 years.

The questions raised during the discussion were about export, value of the product and how to deal with volatility. The first point raised was the increase of milk production in all EU member states. Farmers are allowed to produce as much milk as they see fit, which creates more opportunity for export outside the European Union (EU). Currently, New Zealand is on top in the export market for dairy products. The United States follows closely behind. This is a great competitive world market the EU wishes to join in on. With higher production, the EU won’t be able to absorb the entire internal dairy market and therefore makes export a commodity. New Zealand has its benefits of cheap production costs, which means they are also able to sell their products easily on the world market.

The prices and costs for production of agricultural products does not have a fixed price and has many factors at play for the increase or decrease of one another. This is also called volatility. The EU has a low volatility percentage of 9%, while in the US it remains on 15% and in New Zealand 21%. When expanding trade outside of the EU, it is inevitable that the volatility of the milk price will increase. The question is whether farmers and other stakeholders in the supply chain are able to cope with it.

 

An occurring problem with the volatile prices is that farmers are in the biggest disadvantage of it. Being the first stakeholder in the supply chain, milk producers carry the burden of producing in quantities desired by the end of the supply chain, supermarkets. The volatile feed prices are another factor that weigh in a lot to the income of the farmers. As retailers barely have any direct connection with the primary farms, there is a limited impact on farmer income and price-premiums when the price of dairy products increases in the supermarkets.

Retailers do try to be proactive and answer customer demands, for example distribution and promotion of local products. There are a few direct contracts between retailers and farmers, but they are not efficient on big scale use. The supply chain for dairy products holds too many essential stakeholders, for example processing factories to create butter, yoghurt and cheeses. In most cases, these direct contracts also uphold margins that relate to retailers, not the farmers. This means, farmers are still on the short end of the deal.

The discussion has led to points that will need further examination and improvement. Farmers are in need of help to cope with volatility better, but the volatility cannot only be solved through the farmers. The whole supply chain needs to work together to deliver a product of quality and should allow for a decent income for all stakeholders without losing market by absurd end product prices.