IUF Dairy Division

EuropeanUnionDairySector

Abstract

Accountingforapproximately13%oftheturnoverintheEUandprovidingaround10%intheFood
andDrinkSectorin2010,theEUdairysectorisinsteadystateatthemoment.However,whilethe
rhetoric associated with the sector is broadly positive, it is a sector seen to face challenges on a
numberoffronts,includingitsstructure,competitiveness,tradeandwiderpoliticalissues,andR&D.
The overarching EU strategy for the diary sector has been to maintain stability in the sector by
targetedinterventions.Atpresent,theEUmilkmarketingsystemiscomplex.Milkisgenerallysoldto
dairyprocessors.Whilesomemilkgoesdirecttoconsumers,farmconsumptionisstillasignificant
factor.Processingvariesbetweenfarmerownedcooperativesandprivatesectoroperations.Inthe
contemporaryEUdairysector,theprocessofmergersandacquisitionshasproducedacoreoflarge
processing companies and fringe of smaller operations. Concentration has been greater in the
NortherneconomieswiththeexceptionofGermany.Ingeneral,thebiggestcompaniesaregetting
farmorefromassetsthanothersinthesector,reflectingreturnstoscale.

FactorsthatcaninfluencethecompetitivenessoftheEUdairysectorrangefromtheabolitionofthe
EU milk quota, higher productivity, full liberalization, to product development and innovation.
AssessingthecurrentEUdairysector,keycontextualfactorsincludeexpectedcontinuingstrongmilk
pricesandhighmilkproduction,greaterimpactofmarketpricingonthevolumeofoutputs,existing
milk quotas that are hampering some countries in a rising market, improvements in the fresh
productmarket,highcheeseexportsperformance,expectationsofimprovedmilkpowderexports,
andaconsequentreductioninSMPstocks.WhilethepolicyenvironmentfacingEUdairyfarmersis
uncertain at present, it can be assumed that the level of market support and management in
particularwillbesignificantlyreduced.ItisanticipatedthatEUdairypriceswill,inturn,moreclosely
alignwithworldprices.WorldpricesarebothlowerandmorevolatilethanEUpricesanditisfurther
assumed that this increased volatility will also be transmitted to EU prices. This increased price
volatilityisaconcernasitbringsmajornewchallengestofarmbusinessplanning,debtrepayment,
and, in some cases, solvency. Lower prices will require dairy farmers to increase scale in order to
maintain income. In many instances this increase in scale will need to be swift and dramatic thus
creatingthepotentialforincreasedriskasfarmenterprisesspecialize.Whileitiscurrentlypossible
forEUfarmerstomanagesomeoftheirinputpricerisksthroughenergyandfeedpricefuturesand
options,theymaybemoreinclinedtohedgetheiroutputpricerisk.Thesetrendsandoutlookare
acknowledged by the European Commission, which now has an opportunity to put in place and
facilitate instruments that will help ensure the long run competitiveness of this most important
agriculturalsector.Suchchangeswill,inevitably,playlongtermintothehandsofthelargerprivate
sectorbusinessesintheprocessingsector.Theyarelikelytohavethedominantpowerintheglobal
supplychains,andwillseektomaximizetheircommercialadvantagefromincreasedmarketbased
pricingofmilk,andaccompanyingpricevolatility,acrosstheEU.

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Introduction:basicdata

TheEUdairyindustryin2010was:
Approximately13%of theFoodandDrink Sectorturnoverin theEU (117billionof900
billion)
Approximately10%ofemploymentinthatsector(about400,000of4million)
basedon24millioncows
inapproximately1millionfarms
producing150billionlitresofmilk,
ofwhich138billionlitreswasdeliveredtodairies
34billionlitreswenttoliquidconsumption
2billionlitreswentintobutter
9.5billionlitreswentintocheese
1billionlitreswentintoskimmilkpowder(SMP)
820millionlitreswentintowholemilkpowder(WMP)
1billionlitreswentintocondensedmilk
4billionlitreswentintoskimmilk,usedforCaseinproduction

In2010,EUdairyexportsperformedrelativelystronglyandincluded:
378,0000tonnesofSMP
387,0000tonnesofwheypowder
669,000tonnesofcheese
444,000tonnesofWMP
150,000tonnesofbutter/butteroil
239,000tonnesofcondensedmilk

Ingeneralterms,theseproductiondatahavebeenevenforthepastfiveyears,suggestingthatthe
sector is in steady state at the moment. Whilst the rhetoric associated with the sector is broadly
positive, it is a sector seen to face challenges on a number of fronts for example, structure,
competitiveness,tradeandwiderpoliticalissues,andR&D.

Background:FoodandDrinkindustry

ThefoodanddrinkindustryisoneofEurope'smostimportantanddynamicindustrialsectors.Itis
madeupofabout310000companies,andprovidesjobsformorethan4millionpeople.

With an annual turnover in excess of 900 billion, this diverse sector is a strong exporter and is
responsibleforcountlessendproductsinextremelycompetitivedomesticandinternationalmarkets.
Butroomforimprovementstillexists.

Excess red tape, finance shortages, a lack of R&D opportunities and difficulties to access raw
materialsaresomeofthemainobstacleswhichmustbeclearediftheEUistopositionitselfmore
stronglyinworldmarkets.

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Since2009,theEUhasbeenlookingat30keyinitiativestoupgradetheFoodandDrinkSectorThey
cover 1 :
a sector wide EU cordination, including improved and easier access to finances, greater
integration into, and control of, the global supply chain, improved logistics, better food
educationforconsumers,
amarketdrivenCAP(butwithprovisos)
competitivepricingofrawmaterialsandreducedpricevolatility
sustainability
improvedtechnologyandR&D
betterimpactassessmentsforchangesthatmighthaveconsequencesforthesector
betterharmonizationofsectoralregulationintheEU
improvedmanagementoffoodsafetyissuesandrisks
improvedsupportforSMEsinthesector
improvedexportstrategyandsupport
improvethesectorshumancapital,includingamoredevelopedsocialdialogue
asuccessful(favourable)conclusiontotheDohaRoundoftheWTOandanybilateraltrade
deals,includingimprovedphytosanitrayarrangements,improvedcustomspracticesndrule
oforigin,andmonitoringofothercountriestoseethatsticktoagreedrules
aEuropewideSWOTanalysisofthesector

The general perspective is that the food and drink sector is vital for EU economic performance,
performswellbutcanbeimprovedinnumerousways,andmust,inparticularcompeteeffectivelyin
globalmarkets,inpartbycontrollingkeyelementsofglobalvaluechains.Dairyplaysanimportant
roleinthewidersector.

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TheStructureoftheEUDairyIndustry 2 3

The overarching EU strategy for the diary sector has been to maintain stability in the sector by
targetedinterventions.Thisremainsthecase,evenaftertheCAPreformsof2003.Dairyfarmingis
structured differently from Member State to Member State. Farm and dairy herd sizes vary
enormously,asdoyields(particularlyfollowingtheMay2004EUenlargementthatbroughttennew
MemberStatesintotheEU).However,asthedairysectordevelopsthroughouttheEU,sovariations
inyieldandothertechnicalfactorsarebeingreducedlessdevelopeddairyproducersarerapidly
catchingupwiththosewhohadrestructuredandmodernized.ThereisnotypicalEuropeandairy
cowbreed,thoughtheFriesianHolsteinisthemostprevalent.

TheEUmilkmarketingsystemiscomplex.Milkisgenerallysoldtodairyprocessors.Somemilkgoes
directtoconsumers,whilst,especiallyinthenewEUmembers,farmconsumptionisstillasignificant
factor.Processingvariesbetweenfarmerownedcooperativesandprivatesectoroperations.There
hasbeenagrowthintransborderfarmingandprocessingoperations,but,equallymanyoperations
are still nationallybased. The value of milk production in total agricultural production varies. In
southerncountries,ittendstobelower(below10%);innortherncountriesitishigher,reachingas
muchas34%.

ThedrivingfactorbehindmilkproductioninEuropehasbeenthemilkquotasystem(firstintroduced
in1984).Underthesystem,farmersproducingmorethantheirquotacouldbepenalizedfinancially
(bythepaymentofasuperlevy.ThequotasystemactedtolimitmilkproductionacrossEurope.

The milk quota system is to be removed. Quota prices are already low in many countries, zero in
some and are destined to be zero everywhere by 2015. For example, they no longer determine
productionlevels,especiallyinthenewmemberstates.Theendofthequotasystemin2015does
not find favour everywhere. For example, the European Milk Board 4 (representing particular dairy
interests) argues for continuing supply controls as a protection against increased production and
reduced prices. Against this there is a widely held view that these consequences will not follow,
mainlybecauseoftheincreasingimpactofworlddairypricesinEUproducersandprocessors. 5

Broadtrendsinthemilksectorinclude:
Decliningbutterconsumption
Increasingcheeseconsumption:40%ofEUmilkisconsumedascheese,with75%ofcheese
productionconcentratedinGermany,France,ItalyandtheNetherlands.
Decliningmilkpowderconsumption
Growthinotherareas(e.g.cream,specializedmilkproteinsanddairyingredients)

Milkpricesaredeterminedbymarketforcestoagreaterextenttodayasaresultofchangestothe
CAPin2003.Factorsinfluencingmilkpricesinclude:
SupplyanddemandintheEU
Worlddairyprices
Currencyratefluctuations
Qualityshifts
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Developmentsinthefoodchain
ImpactoftheCAPandsupportsystemsforfarmers

Businessstructure 6

The contemporary EU dairy sector has been described as an oligopolistic market with fringes,
meaning that a process of mergers and acquisitions has produced a core of large processing
companies and fringe of smaller operations. Concentration has been greater in the Northern
economies(with,interestingly,theexceptionofGermany).

StudiesofEUbusinessdemographyinthedairyindustrysuggestingeneral: 7
Decliningnumbersofprocessingfirms
Themeanageoffirmsis26years(higherforsmallandmediumsizedcompanies)
Asteadyrateofentryof newfirmsintotheprocessingsector, withmorenewentrantsin
ItalyandFrance,butbiggernewentrantsintheUKandGermany
Exit rates are low in some countries (e.g. Netherlands and Germany) but higher in others
(e.g.France,Italy,UK).Exitstendtoberelativelysmallemployers.
High industry concentration is found in some countries (e.g. Netherlands is the highest,
GermanyandFrancefollow,withItalyatthelowend).
Company size is high in the Netherlands and the UK, Italy has smaller firms, and France
comesinbetween
Measured against turnover, total assets, employment and valueadded, microsize
operations are falling in size, small and mediumsized operations are growing marginally,
whilstbigcompaniesdisplaycyclicalbehavior,dependentoninternationalmarkettrends.
In terms of employment microsized operations are employing fewer people at the mean,
smallandmediumoperationsaboutthesame,whichisalsotrueforbigcompanies.

Tackenetal(2009,p.50) 8 providesanoverallstructureofthesectorinEuropein2005:

NoofFirms % share National Firm Entry FirmExit

turnover2005
19962005
France
579
41
159
30
Germany
92
48
13

Italy
1427
41
458
99
Netherlands 50
94
14

UK
299
91
18
27
Poland
188
66
144
16
Total
2635
N/A
806
172

Tackenetal(2009,p50)notethefollowing:

thepopulationoffirmsissubstantiallydecliningforItaly,theUK,andPolandwhilethechangefor
France is only slight. In contrast, the number of firms in the Netherlands is increasing. This is a
surprisingresult,giventhewellknowndairycompanieshavegonethroughaseriesofmergers.Most
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likelytheseEurostatdatareflectthedevelopmentbysomefarmersandtradersofnewdairyorice
creamcompanies(Heidazuivel,amongothers).ForGermany,itisdifficulttodeterminethetrendbut
itisincreasingifwesmoothoutthefluctuations.

Firmsize

Tackenetal(2009,p.54)providesmeancompanydata:

Variable
France
Germany
Italy
Nethlands
Poland
UK
(1000)
Operating
40,641
213,27
9,471
2,084,139
21,240
210,231
Revenues
Employees 94
370
24
996
215
870

TotalAsset 17,561
67,369
8,128
92,121
8,934
119,760

Added
5,704
23,232
1,372
272,146
3,173
45,569
Value

Generally, the larger scale of operations in the Netherlands (in particular), the UK, Poland and
GermanycomparemarkedlywithFrance,ItalyandPoland.

Profitability 9

In general, the biggest companies are getting far more from assets than others in the sector,
reflectingreturnstoscale.Lookingatprofitabilityinmoredetail:
UKcompaniesdowellin termsof profit margin,returnontotal assetsandontheEBITDA
measure(whichadjustsfortaxandcapitalstructureeffects)
Francedoeswellacrossallmeasures,butparticularlytheEBITDAmeasure,whereitisvery
successful
ItalydoesrelativelypoorlyexceptontheEBITDAmeasure
GermanyperformsbetterintermsofreturnstototalassetsandEBITDA
TheNetherlandsalsoperformsbetterintheEBITDAmeasure

Overall, the UK seems to be the most profitable across all measures, France the second best
performer, Germany the third, Netherlands fourth and Italy fifth (when looking at the major
countriesintheregion).

In the major country players, debts to asset ratios are positive (that is, assets are greater than
debts).Largerfirmsfinancethemselvesmorefrequentlyfrominternalresources;smallerfirmstend
to have higher debts, as one might expect. Using the current asset ratio as assign of company
resilience, Dutch companies are in the strongest position, with UK, Italian, German and French
companiesfollowing.Financially,thesectoringeneralseemstoperformsoundly,especiallyinthe
largercountryplayers.
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TheCompetivenessoftheEuropeanDairyIndustry

There are major debates around the competitiveness of the EU dairy sector. One major study
concludesasfollows.ThesearesummarizedinTackenetal(2009,p.7):

Thelocalconsumptionofmilkproductsisincreasingslightlyduetoincreasedconsumptionofcheese
and yoghurts. Milk consumption is slightly decreasing in most countries. In the EU12 the dairy
industryisgrowinginimportanceinthetotalfoodindustry.

TheEUdairyindustryisverydominantintheworldmarket.TheEU25exportsamount21bnworth
to other countries, while Oceania exports amount to 3.8 bn and NAFTA to 1.1 bn. Although the
exportvalueisincreasingtheworldmarketshareoftheEUisdecreasing,sincetheworldmarketis
growingfasterthanthe EUcanmeet. NewZealandprofitsmostfromtheincreasingworldmarket
demand.Brazilisstillanunimportantplayerintheworldmarketbutinthelocalfoodindustrythe
importanceofthedairyindustryisincreasingveryfast.Duetoincreasingcompetitionofespecially
NewZealandinthemilkpowdermarkettheEUspecialisesmoreincheese.

WithintheEUthecompaniesinnovatemostlyonproductsandlessinmarketing,organisationand
process.Productinnovationsaremostlydoneonvarieties,butalsoveryimportantareinnovationson
newingredients(infunctionalfoods).SMEsaswellaslargecompanies,includingthepackagingand
ingredients industry, all contribute to innovation. In northwestern Europe the dairy industry is
dominated by large firms. In the Netherlands the dairy industry is most concentrated. France and
Germanyhaveasmallnumberoflargefirmsandquitealargenumberofmediumandsmallfirms.
Italy has a high number of medium and small firms and the highest number of new entrants. The
turnoverofthetop10dairycompanieshasincreasedbetween2004and2006.Inthelargemajority
of countries labour productivity has improved. In conclusion, the EU dairy industry can be
characterised as innovative and a global player, but it is losing market share. The competitive
position is just below average, mainly due to the loss in world market share. The world market is
growingfasterthanEuropeanexports.theimprovementinlabourproductivityandthegrowthin
value added compensate for the loss in market share. New Zealand performs well because of the
highincreaseinworldmarketshare.

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LookingatTackenetal(2009)inmoredetail,theynotethefollowing:

Keyareasofinnovationinclude:

milk,nondairymilkandyoghurtdrinkshadthelargestshare(onethird)inproductreleasesin2006,
morethanotherdairycategories;
new productdevelopmentin milk concentratedonhealthier milksaddressingfatandcholesterol;
organicmilkwithlowfatvarieties,newflavouringsandsingleserveproductswerealsoimportant;
for cheese the orientation of innovation was on health and convenience (functional cheese,
individuallywrappedportions,newblends,longlifepackaging,tablereadypackaging);
new yoghurt products comprise mainly new flavours (wintery flavours such as plum, cinnamon,
American heritage flavours and exotic fruits); there is also intense competition to differentiate
betweenhealthbenefits;
the most innovative category of 2006 was margarine, butter and spreads with new flavourings,
moreconvenientpackaging,longlifeandhealthierbutters;strawberryremainsthemostcommon
flavour,mangothefastestgrowing;
the role of functional foods is increasing, now that they have also become incorporated in more
indulgent categories; the three key trends of ethical, health and indulgence are increasingly
combinedinoneproduct;
emphasisonbrainhealthisgainingmomentum(omega3);
'natural' is an important trend for the future with lower tolerance for artificial preservatives,
sweetenersandflavourings;
lowfatandwellbeingproductsarebecominganupmarkettrend;premiumtrendsareontherise,
particularlyfoodswhichhaveastrongregionalorlocalidentity;
gourmetisbecomingamassmarketwithrealgourmetproducersintroducingevenmoreunusual
flavourings(Italian/Frenchcookingflavourssuchastruffles,spicyIndianorHispanicflavours);
theconveniencetrendislikelytoexpandwithseveralinnovationsintheareaofportability,based
onnewtechnologythatallowsforextendend,unrefrigeratedstorage.
(Tackenetal,2009,p.38)

The UK, France, Denmark, Netherlands Germany and Sweden are the most innovative
countriesintermsofthedairysector,withtheUKsdramaticallybetterperformancedriven
bytheretailsector;
Some European firms are high performers in terms of innovation Arla, Danone, Nestle,
Valio, for example but onlt Arla is seen as having any superior innovative qualities over
Fonterra;

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Tacken et al (2009) also offer a GTAP assessment of the competiveness of the EU dairy industry
acrossarangeofscenarios.Thatassessmentimpingesonanumberofrelatedandimportantfactors.
Itskeyconclusionsare:

abolitionoftheEUmilkquotaeffecthasappositiveimpactontheEUdairysectoroutput,
butfullliberalizationwouldhaveanegativeeffect.Inotherwords,theEUdairysectorwould
face serious competition from elsewhere in a liberalized environment. New Zealand and
Australiabenefitunderthefullliberalizationmodel;
HigherproductivityintheEUsectorbringscompetitiveadvantage,includingdevelopments
intheprocessingsector;
All scenarios modelled give the EU an important role in processed foods, but challenges
arise in terms of relative position, unless, for example, productivity improvements are
achieved;
Again,forEUfoodexports,fullliberalisationisdisadvantageousbecauseofitsimpactinter
aliaondairyexports;
Full liberalization will have adverse employment effects in the dairy industry. It would, for
example lead to a 3.2% employment decrease in milk processing, whilst competitors see
significantrisesinemployment(upto44%inNewZealand);
Increased productivity in the dairy sector will, as might be expected also lead to a small
declineindairysectoremployment;
Valueaddedinthesectorremainsstableacrossallscenarios,thatis,althoughtheremaybe
declining employment, productivity increases couple to produce development and
innovation,maintainsthelevelofvalueadded

Tackenetal(2009)concludesitsanalysisasfollows:

Europeisthelargest exporterof dairy productsintheworld,evenexcluding intraEUtrade.World

tradeindairyproductsisconcentratedincheese,butterandmilkpowder.IngrowthofexportsNew
ZealandsurpassestheEU.WithintheNewZealandfoodindustrydairyismuchmoreimportantthan
in the EU, Australia and the USA. The world market growth in combination with the CAP quota
restrictions, mainly benefits New Zealand. Over the last years the European Union has quickly lost
marketshareintheworldtrade.

FormilkproductstheEUhasmetmorecompetitionfromOceaniaandAsiasince1999.Milkpowder
production in New Zealand already approaches the total EU production. The EU reacts to this
developmentbyspecialisingoncheese,anotherstrongproductininternationaltrade.Oftotalworld
trade in cheese 45% originates from France, the Netherlands and Germany. The USA and Canada
choose to maintain their position on all products. In world trade this strategy is reflected by a
detoriatingpositionforCanada.

On the basis of the publicly available sources, like the enewsletter Food Navigator and the
professionalmagazineDairyInnovation,insighthasbeengainedintoinnovationinthedairyindustry.
Most innovations are product innovations and marketing innovations. The product innovations are
mainlylineextensions:

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newsizesorflavorsintheexistingproductcategory.Butinnovationsin
newingredientsarealsoverynumerous.

ThemaininnovatorsintheEuropeandairyindustryarethelargedairycompanies(e.g.Arla,Danone,
Mller, BSA Lactalis, Dairy Crest or Campina), suppliers of ingredients (Danisco, Chr Hansen, DSM)
andpackaging(TetraPack)inEurope.Thelargefirmshaveashareofover60%intheindustry'stotal
turnoverandemploymentandashareofover50%ininnovations.Thisimpliesthatinnovations
areproportionallydistributedoversmallerandlargercompanies.Arlapresentedthehighestnumber
ofinnovations,Fonterra(NewZealand)ranksnumber2.

A fair amount of the mainly large corporations works closely together in innovation with research
institutes.Thiscooperationturnsouttobeamajorpartoforganisationalinnovations.Thissuggests
anopeninnovationmodelwherepromotinginnovationbenefitsfromthepromotionofcooperation
betweenpartnersinthefoodchain(Tackenetal,2009,p.90).

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The2009CrisisandRecovery

In 2009, there was a severe drop in milk prices across the EU, primarily as an effect of the 2007
globalcrisis.Thingsimproved:

TheGermanbutterpriceisnowbacktothelevelof2002beforethecutsininterventionprices.The
recovery in SMP prices has not been as strong, but even so these are now comfortably above
interventionlevels.EUdairyfarmersalsobenefitfromanadditional5billionperyearintheformof
directpayments(3.5c/kgmilk)tocompensateforthereductionsininterventionprices.

Farm prices are responding to the better prices for dairy products, although with some lag. The
averageEUpriceforstandardised4.2%fatmilkhasrisento27.06/100kginOctober2009fromits
lowestpointof23.74/100kginApril.ItisnowbackatthelevelsofSpring2007,beforethebigrun
upinpricesin2008. 10

TheEUrespondedasfollows:

ExportrefundsfordairyproductswereintroducedinJanuary2009.

The intervention period has been extended until February 2010. Normally, intervention
buying is limited to 30,000 tonnes of butter and 109,000 tonnes of SMP and is only open
between1Marchand31Augusteachyear.TheCommissionhasalreadyboughtbutterand
SMPwellbeyondtheselimits(approximately83,000tonnesofbutterand283,000tonnesof
SMP).

Adjustments to the quota/superlevy system to exclude quota boughtin by member States

andkeptinthenationalreservefromthesuperlevycalculation.

IncorporationofthedairysectorintoArticle186oftheSingleCommonMarketOrganisation
(the socalled disturbance clause), which allows the Commission to take temporary action
quickly,underitsownpowers,duringtimesofmarketdisturbance.

Reinforcement of the School Milk Programme by extending the range of products and the
age groups of children covered by the scheme. A new round of promotional measures for
dairyproductswasalsoopenedbytheCommission.

Intotal,theCommissionexpectstospendupto600milliononmarketmeasuresthisyear.
Amongtheincomesupportmeasureswere:

70percentofdirectpaymentscouldbepaid6weeksearlierthanusual(from16October).

An additional aid package of 280 million for dairy farmers was agreed in October 2009,
under pressure from the Group of 21. The division of these payments between Member
States was agreed in November, and the money must be paid out by June 2010. For the
record, the agreed aid allocation is: Belgium, 7.21m, Bulgaria 1.84m, Czech Republic
5.79m, Denmark 9.86m, Germany 61.20m, Estonia 1.30m, Ireland 11.50m, Greece
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1.58m, Spain 12.79m, France 51.13m, Italy 23.03m, Cyprus 0.32m, Latvia 1.45m,
Lithuania 3.10m, Luxembourg 0.60m, Hungry 3.57m, Malta 0.08m, Netherlands
24.59m, Austria 6.05m, Poland 20.21m, Portugal 4.08m, Romania 5.01m, Slovenia
1.14m,Slovakia,2.03m,Finland4.83m,Sweden6.43m,UK29.26m.

UndertheHealthCheckandtheEconomicRecoveryPackage,anextra4.2billionisavailable
to address new challenges, including dairy restructuring, although the outgoing
CommissionerhastartlynotedthatsomeofthemostvocaladvocatesofEUaidhavemade
relativelylittleuseoftheirownallocationstohelpdairyfarmers.

MemberStateswereallowedtomakeaoneoffpaymenttofarmersofupto15,000instate
aiduntiltheendof2010undertheTemporaryCrisisFramework,adoptedbytheCommission
inJanuary2009.Whileaidschemesputinplaceunderthisinstrumenthadtobeopentoall
primaryproducers,theprimaryintentionwastoprovideassistancetodairyfarmers. 11

Recoverywashelped,ofcoursebytheglobalrecoveryincommodityprices,includingthatofmilk.

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CurrentEUSectoralAssessment(20102011)

Keycontextualfactorsinclude:

Expectedcontinuingstrongmilkprices
Continuinghighmilkproduction(deliveriesup1%between2010and2011)
GreaterimpactofmarketpricingonthevolumeofoutputssinceEUregulatorychangesin
theearly2000s
Existingmilkquotaswillhampersomecountriesinarisingmarket
Improvementsinthefreshproductmarket
Cheese exports are expected to continue very high performance (cheese production up
100,000tonnes20092010,andexportspassing600,000tonnesforthefirsttimein2010)
Highprocessmaycauseanadverseshifttovegetableoilproductsinthebuttermarket
Expectationsofimprovedmilkpowderexports,andaconsequentreductioninSMPstocks

Overall:

In 2011, it is likely that milk prices will remain stable or increaseslightly. At the end of 2010, both
producers and users had only small stocks of dairy products. Orders for exports in the first few
months of 2011 are looking positive, particularly for milk powder. For most products, longerterm
contracts contain higher prices than last year. There is no reason to believe that demand on the
international market for dairy products will fall away. It is also thought that demand on markets
which are important for the European Union, such as Russia and Algeria, will remain stable. The
additionalquantitiesofmilkwhichareexpectedthisyearwillmostprobablybeabletobeexported.
Manymilkproducingregionsoftheworldwerefacedwithunfavourableweatherconditionsin2010
whichcurbedproduction.Atthesametime,demandwasstimulatedbyeconomicrecoveryinmany
countries.Chinasincreasingneedforimports,whichwasaresultofthemelaminecrisisandwhich
will probably continue, also contributed to this trend. However, export opportunities are key to
marketdevelopment,asconsumption. 12

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Conclusion

Arecentstudy,talkingaboutaneraofunprecedentedchangefortheEUdairysectorconcludesas
follows:

WhilethepolicyenvironmentfacingEUdairyfarmersisuncertainatpresent,itappearsreasonable
to assume that the level of market support and management in particular will be significantly
reduced.ItisanticipatedthatinturnEUdairypriceswillmorecloselyalignwithworldprices.World
pricesarebothlowerandmorevolatilethanEUpricesanditisfurtherassumedthatthisincreased
volatilitywillalsobetransmittedtoEUprices.Increasedpricevolatilityisaconcernforanumberof
reasonsasitaddsmajornewchallengesforfarmbusinessplanning,debtrepayment,and,insome
cases,solvency.Lowerpriceswillrequiredairyfarmerstoincreasescaleinordertomaintainincome.
Inmanyinstancesthisincreaseinscalewillneedtobeswiftanddramaticthuscreatingthepotential
for increased risk as farm enterprises specialize. While it is currently possible for EU farmers to
managesomeoftheirinputpricerisksthroughenergyandfeedpricefuturesandoptions,theymay
bemoreinclinedtohedgetheiroutputpricerisk.thepotentialforincreasedriskisacknowledged
bytheEuropeanCommissionwhichnowhasanopportunitytoputinplaceandfacilitateinstruments
whichwillhelpensurethelongruncompetitivenessofthismostimportantagriculturalsector. 13

Suchchangeswill,inevitably,playlongtermintothehandsofthelargerprivatesectorbusinessesin
theprocessingsector.Theyarelikelytohavethedominantpowerintheglobalsupplychains,and
willseektomaximizetheircommercialadvantagefromincreasedmarketbasedpricingofmilk,and
accompanyingpricevolatility,acrosstheEU.

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[EUROPEANUNIONDAIRYSECTOR] IUFDairyIndustryResearch

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