Summary
Difficult production conditions in parts of the EU along with continued high export volumes saw EU SMP stocks substantially run down, with the hope being the remaining stocks would be disposed on in 2019. The EC believes EU dairy producers will be well positioned to serve growing world dairy markets, with the expectation being the EC could ‘could supply close to 35 % of the increase in global demand’. The EC expects these exports to increasingly consist of value added dairy products, with EU generated pressures on milk-to-dairy supply chains in ACP countries linked to exports of low prices SMPs being gradually reduced. The EC believes growing consumer demand could see milk production in Africa grow almost five times faster than in the previous decade. However these projections do not factor in the possible Brexit related disruptions of EU27/UK dairy trade flows which could carry ‘catastrophic repercussions’. These ‘catastrophic repercussions’ could include a major resurgence of EU exports of low priced SMPs which could once again disrupt efforts to develop local milk-to-dairy supply chains in Africa seeking to exploit growing consumer demand for dairy products.
Recent Developments in EU Milk Production and Prices
According to the EC in 2018 weather developments in many areas of northern Europe impacted adversely on EU milk production, although according to the EC’s December 2018 Prospects report EU milk production still grew 0.6% in 2018 to 167 million tonnes (1) Indeed later EC analysis suggested EU milk collections actually rose 1% from January to November 2018 compared to the same period in 2017 (2).
However the drought in 2018, through its impact on feed costs, was expected to depress EU milk production in the first quarter of 2019 (1). This needs to be seen in the light of EU milk prices which throughout 2018 were marginally lower than in 2017 and fully ‘2% below the last five year trimmed average’ (1).
In terms of price developments the relative stabilisation of EU milk prices was attributed by the EC to 3 main factors: ‘the continuing high demand for EU dairy products’ ; an undersupplied butter market in some EU member states as a result of lower milk production and ‘the continued reduction in SMP stocks’.
In the coming period the EC foresees growing demand for value added dairy products, where it feels EU producers have a ‘clear competitive advantage’. Within the EU the EC foresees a strong development of ‘differentiated’ dairy products, including organic, GM-free, pasture-based, and local dairy products. In EU member states such as Germany GM free feed in dairy production already accounts for around 50% of production, while production of organic milk is expected to increase from 3% to 10% of national production by 2030.
This it is held will create new opportunities for dairy producers. However the EU also takes the view environmental constraints will play an increasingly important role in patterns of dairy production (1)
Global prospects for EU dairy sector seen as favourable
In the coming years global milk production is expected to increase by more than 15 million tonnes per annum a rate ‘slightly faster than in the last decade’. By 2030 ‘world milk production is expected to exceed 1 billion tonnes’. While some 40% of this production growth is expected to come from India, the EU, alongside New Zealand is expected to play a leading role in meeting the growing global demand for dairy product imports. The EC believes EU dairy producers will be well positioned to serve growing world dairy markets, despite higher average EU milk production and dairy processing costs (1).
EU will producers will be able to meet this demand growth on the back of annual EU milk production growth of 1.3 million tonnes. This is an annual expansion ‘larger than the expected annual increase in New Zealand (+0.4 million tonnes and the US (around +0.7 million tonnes)’, with unlike the USA most of this expanded EU milk production being exported in the form of one of another value added dairy product. This needs to be seen in a context where the average milk yield per cow in the EU is expected to increase 17% between 2017 and 2030 (from 7,050 kg/cow to 8,240 kg/cow), though this yield growth will be slower than in the past decade.
Overall the EC believes the EU ‘could supply close to 35 % of the increase in global demand’ up to 2030.
Specific EU Dairy Export Trends in Context
According to the EC analysis ‘while the increase in EU export volumes is expected to be rather modest (close to 2% per year in cheese, butter, SMP, WMP and whey powder), export value should rise at a faster pace (+4% per year)’, as the shift to higher value dairy product exports gathers pace.
EU exports of cheese are expected to grow by 48% between 2018 and 2030, with the EU supplying around ‘40% of world import demand’ compared to 34% in 2018The main growth markets for EU cheese exports are expected to be in Asia, mainly China and Japan. These exports along with growth in EU domestic consumption are projected to see an additional 4 million tonnes of milk equivalent will be channelled into cheese production in the EU (1).
In terms of EU whey exports by 2030 the ‘should still be the main world supplier in 2030, covering more than 50% of the market and accounting for around 45% of global production growth’ (1).
EU exports of liquid milk are expected to growth further reinforcing the EU’s position as an exporter, with China being the main market (1). There is however also a strong growth in EU liquid milk exports to West Africa, Central Africa and the Caribbean (see companion epamonitoring.net article ‘Continued Dominant Role for EU Dairy Exports Forecast’, 6 September 2018).
This growth in liquid milk exports will not entirely compensate for the decline in liquid milk consumption in the EU. This decline will however be partly compensated for by greater EU consumption of other fresh dairy products (yogurt, cream and other fresh dairy products, including dairy desserts). In this context ‘the total intake of fresh dairy products should decline only slightly, to 74kg per capita in 2030, compared with 77kg in 2018’ (1).
For butter growing world demand should drive a further increase in EU exports ‘to an absolute volume of around 260,000 tonnes. The EU will however remain in second place behind New Zealand with the EU having a 23% shared compared to a 50% share of world exports for New Zealand (1).
EU exporter of whole milk powder (WMP) meanwhile are likely to face ‘increasing competition on the world market, especially from New Zealand and South America’. As a consequence between 2017 and 2030 EU exports of WMP are expected to stagnate and the EU’s share in the world’s WMP production is expected to decline to 12% from 14% currently. However, the EU has a strong and growing position in the export of fat filled milk powders which can substitute for WMPs in a multiplicity of uses, particularly in Sub-Saharan Africa, where they are ‘reconstituted into liquid milk directly by households (1)’.
The key issue for ACP producers however is the trend in EU skimmed milk powder exports, since the price of these exports can set the benchmark for local milk prices, with low SMP prices undermining efforts to develop local milk-to dairy supply chains.
Projected EU Exports of Cheese, Whey, Butter and Whole Milk Powder Skimmed Milk Powder(‘000 tonnes)
| 2018 | 2019 | 2020 | 2012 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | +% | |
| Cheese | 842 | 973 | 935 | 951 | 975 | 999 | 1,031 | 1,064 | 1,101 | 1,135 | 1,171 | 1,209 | 1,249 | +48% |
| Whey | 578 | 599 | 605 | 614 | 624 | 632 | 642 | 652 | 664 | 675 | 687 | 701 | 717 | +24% |
| Butter | 160 | 161 | 180 | 196 | 203 | 208 | 215 | 221 | 230 | 235 | 243 | 250 | 258 | +61% |
| WMP | 354 | 356 | 349 | 351 | 348 | 346 | 347 | 348 | 350 | 350 | 351 | 352 | 353 | +0% |
| SMP | 804 | 890 | 815 | 820 | 819 | 821 | 831 | 843 | 860 | 870 | 882 | 895 | 907 | +13% |
Source: ‘EU Agricultural Outlook for Markets and incomes 2018-2030’, Tables, December 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2018/medium-term-outlook-2018-tables_en.pdf
Short Term EU Production Disruptions Help Clearance of SMP Stocks…..But….
The production problems in 2018 alongside a growing focus on production of value added dairy products saw a decline in EU production of skimmed milk powder (SMP) and whole milk powder (WMP) by 1.9% and 5.1% respectively in the January to November 2018 period.
However despite the decline in EU SMP production EU SMP exports in 2018 still rose up 2.94% to 804,000 tonnes (3). This was closely linked to efforts to clear the EU’s accumulated stocks of SMP. This saw EU public stocks of SMP fall from 375,000 tonnes to 175,000 tonnes over the course of 2018 (2).
Of more interest from an ACP perspective is the EU’s observation in regard to how for most of 2018 average EU SMP prices remaining ‘at a historical low’ of €1,500/t (nearly €200/tonne below the EU intervention price). However in the last months of 2018 and first months of 2019 saw a recovery of SMP prices to above intervention price levels, reinforcing the EC’s decision to set automatic intervention buying at zero.
The reduction in EU SMP stocks is holding out the prospect of a recovery of SMP prices, particularly if the EU succeeds in eliminating remaining SMP intervention stocks in the course of 2019. However it should be noted the possibility of opening up intervention buying operations if a serious market crisis emerges remains open to the EU, with such interventions being financed ‘under justified market conditions’ (1).
The EC analysis takes the view the increase in SMP trade will be much lower than in the past, when the processing of large quantities of (easier to store) SMP and low prices boosted exports, especially in 2017 and 2018’ (1). Despite this EU exports of SMP will still increase to be almost 13% higher in 2030 than in the exceptionally high export year of 2018. Levels which were themselves 40% above 2016 levels and fully 123% above the pre Russian import embargo levels of 2013 (3).
However given Brexit related uncertainties and the prospect of a ‘no-deal’ Brexit, the EU policy option of reopening intervention buying for SMP financed ‘under justified market conditions’ could come to take on some significance from April 2019, with this potentially carrying repercussion for ACP milk-to-dairy supply chains for years to come.
The African Dairy Sector Development Context
This needs to be seen in a context where according to the EC analysis African domestic dairy consumption is projected to ‘increase by more than a third by 2030’ (+73 million tonnes of milk equivalent compared to 2018). This is driven both by population growth (+2.4%) and increasing per capita dairy consumption and is a faster rate of growth than over the past decade (1). The EC projects the increase in milk production in Africa to ‘be almost five times greater than in the past decade’, with an additional production of 1.2 million tonnes per year mainly being concentrated in East Africa. Overall however African domestic demand for dairy products will grow faster than production and so ‘additional imports will be needed’ (1).
According to the EC by 2030 around 20 % of African dairy consumption should be covered by imports, totalling around 13 million tonnes of milk equivalent. This will not only consist of the traditional milk powder imports (see companion epamonitoring.net companion article ‘Ageing EU SMP Intervention Stocks See EU SMP Prices Discounted’, 6 July 2018) but is also projected to see a more than doubling of African imports of cheese and butter by 2030, reflecting a ‘Europeanisation’ of urban consumer tastes in Africa.
The EC also highlights how the ‘perceived higher rates of lactose intolerance in the SSA population’ is giving rise to a growing market for fermented milk and yogurt, while given its household storage properties consumption of UHT milk in Africa is ‘expanding rapidly’ (1).
These trends in Africa can be seen as providing a helpful market context for the expansion of both value added EU dairy products and EU bulk dairy commodities which are increasingly being linked in West Africa to EU corporate investment in repackaging and simple value added product production based almost exclusively on imported milk powders (see companion epamonitoring.net articles ‘FC WAMCO Dairy Development Programme Expands Amidst Continued Import Dependence’, 9 July 2018 ‘Arla Plans Expanded Investment in Production of Milk Powder for Export to Africa’, 1 March 2018).
| Comment and Analysis However this analysis needs to be seen in a context where the EC’s projections contained in the December 2018 Agricultural Outlook report are based on an EU of 28 member states. Since the Brexit negotiations are currently stalled and there is no definitive indication as to the outcome of the negotiations (see companion epamonitoring.net article ‘State of Play in the EU/UK Brexit Negotiations: Update 4 February 2019’, 8 February 2019) the EC analysis simply assumes the UK will continue to constitute part of the EU’s dairy market.This is a dangerous assumption and means the EC’s December 2018 Agricultural Outlook report simply does not factor in the potential impact of a ’no-deal’ Brexit on the future prospects for the EU dairy sector and the likely consequences this will carry for the EU’s dairy sector trade flows. In January 2019 the impact of a ‘no-deal’ Brexit was described by the Secretary General of the European Dairy Association as carrying ‘catastrophic repercussions’ for what is a highly integrated sector (4). The Secretary General expressed the view the repercussions would be ‘far more severe than the Russian ban on dairy imports in 2014, with “a whole new scale of crisis” on the cards’. It was highlighted how the ‘volumes of EU-27 butter sold in the UK are three times higher than EU-28 butter exports to Russia were’, while EU-27 cheese exports to the UK ‘are twice the volumes that used to be sold to Russia’ (4). The significance of this from an ACP perspective lies in the dominant role which SMP and associated milk powders (fat filled milk powder) plays in the EU’s current export trade to ACP markets (see companion epamonitoring.net article ‘Strong Expansion of EU Fat Filled Milk Powder Exports to West African Markets Resumes’, 19 April 2018). In the face of any Brexit related EU dairy market crisis the first EU policy response is likely to be to renew SMP intervention buying to take milk off otherwise flooded EU dairy markets. The use of SMP intervention buying was one of the principal EU policy tools used in response to the Russian import embargo. The use of this policy tool saw a rapid 38.6% expansion of EU skimmed milk powder production between 2013 and 2015 with this expansion being sustained. However it saw an even more dramatic increase in EU skimmed milk powder exports. Between 2013 and 2015 EU SMP exports increased 70% from 407,000 tonnes to 692,000 tonnes. While these export volumes fell back slightly in 2016 by 2018 EU SMP export volumes were 97.5% higher than in 2013. Trends in EU SMP Production and Exports 201 to 2018 (‘000 tonnes)
Source: ‘EU Agricultural Outlook for Markets and incomes 2018-2030’, Tables, December 2018 These export levels at time at prices substantially below world market price levels have had a significant impact on efforts to develop local milk-to-dairy production by encouraging African dairy companies to investment in local packaging and simple processing activities based almost exclusively on imported milk powders (SMP, FFMP and WMP). This served to transform the economics of local milk production for dairy processing activities, with, despite ongoing EU corporate commitments to developing local milk-to-dairy supply chains, the role of milk powders in the production of dairy products for growing African markets continuing to expand. Against this background any major expansion in EU SMP intervention buying in response to Brexit related dairy market disruptions is likely to be followed in subsequent years by a major export drive. This export drive is likely to target ACP markets, particularly in sub-Saharan Africa where EU trading networks are already solidly established and a growing level of EU investment in local packaging and processing is already underway. What is more these dairy trading networks are already moving beyond the import and local repackaging of milk powders to the import of branded higher value dairy products to serve rapidly ‘Europeanising’ urban dairy product consumer tastes (see companion epamonitoring.net article ‘Arla Plans Expanded Investment in Production of Milk Powder for Export to Africa’, 1 March 2018). These existing trends are only likely to be exacerbated by a ‘no-deal’ Brexit, with local African milk producers being likely to faced growing commercial competition in the coming years (starting in April 2019). This could then further undermine the on-going efforts to develop African milk-to-dairy supply chains which the EC has itself highlighted in its December 2018 Agricultural outlook report. |
Sources:
(1) EC, ‘EU Agricultural Outlook for Markets and incomes 2018-2030’, text, December 2018
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/medium-term-outlook-2018-report_en.pdf
(2) EC, ‘Milk Market Situation’, slide ‘EU -Cows’ milk collected’ 7 February 2019
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/market-situation-slides_en.pdf
(3) ‘EU Agricultural Outlook for Markets and incomes 2018-2030’, Tables, December 2018
https://ec.europa.eu/agriculture/sites/agriculture/files/markets-and-prices/medium-term-outlook/2018/medium-term-outlook-2018-tables_en.pdf
(4) foodingredientsfirst.com, ‘A “no deal” Brexit: European Dairy Association exec warns of “catastrophic” repercussions for highly integrated sector’, 11 Jan 2019
https://www.foodingredientsfirst.com/news/a-no-deal-brexit-european-dairy-association-exec-warns-of-catastrophic-repercussions-for-highly-integrated-sector.html