The medium-term outlook for dairy farming in Europe is good, according to a new report by the European Commission.

The expansion of EU milk production in dairy farming is limited by increasing levels of production in competing regions, by the growth rate of world imports, and by the relatively minimal potential for higher per capita consumption in the EU, the report says.

Production is expected to become increasingly concentrated in regions with lower production costs and where dairy farming including farmers and dairies have invested most in additional capacity, such as Denmark, Germany, Ireland, France, the Netherlands, Poland and the UK.

A number of other factors will also play a role in restricting the growth in dairy farming and milk production, one of these being environmental constraints — not only the nitrate directives (e.g. in the Netherlands and in France) but also possible limitations on greenhouse gas emissions (e.g. in Ireland).

In other regions of Europe, dairy farming has already declined, with crop farming, including for biogas production, often being preferred. This is particularly the case in Germany and France.

The EU farm-gate milk price (at real fat content) is expected to drop in 2015, as a result of supply exceeding demand from domestic and world markets, before rebounding in 2016 to stabilise at around €350/t, driven by robust world prices
for dairy commodities.

Nonetheless, in view of the uncertainties surrounding future developments in crop yields and the evidence from macroeconomic indicators, the EU milk price could vary, and a number of ‘paths’ are possible, reflecting the potential variation in prices that could result from, for example, higher feed costs.

The report goes on to say that it is apparent during the phasing-out of the quota system that not all Member States had the same interest in expanding milk production.

Moreover, the good performance of certain Member States in 2014 should be viewed in the light of the extremely high milk prices seen during this period.

Given that this price level is not expected to last, and that margins will be lower in the future than they were in 2014, the increase in levels of production could be short-lived.

Of the countries that have joined the EU since 2004, Poland has the greatest potential in terms of developing milk production. There is scope for making greater use of the industrial capacity already available. Increased production in Poland could, however, come at the expense of neighbouring countries, such as the Czech Republic and Hungary.

Despite the potential to increase the sale value of milk produced domestically, some manufacturers may favour cheaper imported milk for making ‘standard’ or lower-quality products, i.e. those without specific quality designations.

Feed prices are expected to be lower than in 2010 and 2012 but should remain above historical averages. This will particularly restrict production in countries that rely heavily on purchased feed, such as Spain.

Milk powders and cheese will absorb most of the additional milk produced from dairy farming in the EU. Higher cheese production (11 million tonnes by 2024) is driven mainly by domestic consumption.

Powders (skimmed milk, whole milk and whey) are the easiest and cheapest way to transport milk, and more than half of traded dairy products are powders.

By 2024, SMP production is expected to reach 1.6 million tonnes, driven by positive world demand. WMP production and exports could increase slightly, while whey powder production and trade are expected to expand significantly.

Increased milk and SMP production go hand in hand with increased butter production, most of which will be absorbed domestically.