Summary
Given the trade in milk powders is the principal area through which EU dairy sector developments impact on ACP dairy sector development, the increase in EU SMP prices which has followed on from the elimination of EU SMP intervention stocks should offer some relieve to African milk producers. This being noted no immediate benefits will be felt given the 30% increase in EU SMP exports from January to July 2019. The situation is further complicated by the level of EU exports of fat filled milk powders to sub-Saharan Africa, which is likely to continue to expand for the foreseeable future. Monitoring this trade should be simpler in future given the creation of a consolidated tariff heading for this product (19019050). The revised EU27/UK Withdrawal Agreement along with the UK’s post Brexit MFN tariffs for dairy products could reduce the adverse trade effects of any ‘No-Deal’ Brexit which could still emerge from 1st January 2021. What this could mean for EU-ACP dairy sector trade flows will however require detailed product by product analysis, with the key consideration being the extent to which disruptions of existing EU27 dairy exports to the UK result in increased EU production and stocks of SMP.
Overall the EU raw milk price at €33/100 kg is on a par with last years’ prices, but some 4% above the 2014/18 average. Significantly since 2018 the EU raw milk price has remained ‘above the Oceania milk price equivalent’. EU raw milk prices are expected to rise further in the last quarter of 2019 (1).
With the size of the EU dairy herd declining and a slowdown in yield growth the EC reports EU milk collection in 2019 will ‘grow by only 0.5% compared to 2018’. However this masks considerable variation in milk production trends with production expected to decline in ‘France (-0.5%), the Netherlands (-1%) and Italy (-0.5%)’ but increase in ‘Denmark (+0.5%), Poland (+2%), the UK (+2%) and particularly in Ireland (+8%)’ (1).
However with the higher milk solid production levels in member states such as Ireland the growth in production of dairy products will be higher than the growth in milk collections.
Perhaps of greatest significance for ACP countries is the trend in EU SMP and butter prices ‘since October 2018, when the EU price of SMP reached its bottom (around EUR 1 500/t), it has been continuously increasing. In mid-September, it reached EUR 2 150/t (+36% over the same period last year)’ (1).
This needs to be seen in a context where from January to July 2019 ‘EU SMP exports were almost 30% above the same period’ in 2018. However in the second half of 2019 with rising prices and empty intervention stocks EU SMP exports are expected to slow down during the course of the remainder of 2019.
Nevertheless by the end of 2019 EU SMP exports are forecast to be 16% higher than in 2018, with export volumes then falling back in 2020 to only 1% above 2018 levels. However this will still be delivering export volumes 44.2% above 2016 levels. This continued high level of EU SMP exports will be supported by the continued growth in EU SM production which in 2020 is forecast to be 7.7% above 2016 levels. According to the EC this continued growth in EU SMP production will be driven by export demand.
EU SMP Production, Consumption Exports and Imports (‘000 tonnes)
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | +2018-20 | |
| Production | 1,537 | 1,560 | 1,529 | 1,531 | 1,577 | 1,649 | +7.7% |
| Exports | 692 | 575 | 780 | 821 | 953 | 829 | +1% |
| Exp % Prod | 45.0% | 36.9% | 51.0% | 53.6% | 60.4% | 50.3% |
This contrasts with the declining trend in both EU WMP exports (-19% from January to July 2019) and domestic production (-5% for the whole of 2019).
In terms of the butter sector the EC reports a sharp drop in EU butter prices, with by mid- September price being 34% below the level of September 2018 (1). Nevertheless the increased availability of milk fat will prompt a 2.5% expansion of EU butter production in 2019, with a process of price convergence between EU and Oceania butter prices making EU butter more competitive on global markets.
In 2020, butter production is projected to grow 1%, but with the expansion not being fully absorbed by exports and domestic EU markets stocks are set to increase (+15,000 tonnes or around 25% of the production increase). It is likely to take some time before those processors who switched to using vegetable fat in response to high butter prices will return to the use of butter.
This is projected see EU butter exports increase by 10% after two years of declines (with a remarkable strong 19% expansion of EU butter exports in the first half of 2019. Here again with the exception of South Africa and certain markets in the Caribbean, imports of butter from the EU are not significant in ACP countries.
The most significant effect of trends in EU butter production is through its knock on effects on EU production of ‘fat filled milk powder’ (FFMP). The EC’s announcement of a new unified category for the classification of Fat Fill Milk Powders, with all exports of Fat Fill Milk Powders being consolidated for reporting purposes under a new code CN 19019050 should help better track this EU trade into ACP markets.
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The Rise of Fat Filled Milk Powders ‘Fat-filled milk powder (FFMP) is milk powder that has a fat content similar to whole milk powder, but instead of butterfat contains vegetable fats, for example palm oil. The fat is added to skim milk and then the product is dried to create a cheaper alternative to whole milk powder. It is possible to make FFMP from SMP, which is reconstituted, blended with the oil and then dried. Making FFMP has been an appealing option in recent years. It has allowed processors to capitalise on high butterfat prices, while producing an alternative milk powder rather than having to make and sell SMP into an already well-stocked market. Vegetable oils such as palm and soy are much lower priced than butterfat, and have experienced less volatility, so the substitution is extremely cost-effective. For buyers, FFMP is cheaper than whole milk powder while performing the same functions. It can be used industrially in bakery or making products like yoghurt. It can also be sold direct to consumers, often in countries with limited access to refrigeration, for example in Asia and sub-Saharan Africa.’ AHDB, ‘The Rise of Fat Filled Milk Powders’ 19 October 2018 |
EU Butter Production, Consumption Exports and Imports
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | +2018-20 | |
| Production | 2,301 | 2,393 | 2,414 | 2,438 | 2,499 | 2,524 | +3.5% |
| Domestic Use | 2,121 | 2,209 | 2,257 | 2,290 | 2,322 | 2,357 | +2.9% |
| Exports | 172 | 206 | 170 | 157 | 173 | 196 | +24.8% |
| Imports | 3 | 3 | 3 | 9 | 11 | 11 | +22.2% |
The EC reports that with EU consumption of drinking milk continuing to decline exports are growing in significance, with these export volumes slowing down the rate of decline in EU production of drinking (from a 2% decline to a 1% decline) (1). Despite this it should be noted that exports still only represent some 3% of total EU drinking milk production.
While EU exports of cheese are expected to grow 1.8% on an annualized basis in 2019 and a further 1.1% in 2020, with the exception of South Africa and certain markets in the Caribbean, imports of cheese from the EU are not significant in ACP countries.
EU Cheese Production, Consumption Exports and Imports
| 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | +2018-20 | |
| Production | 9,872 | 10,100 | 10,237 | 10,337 | 10,420 | 10,480 | +1.4% |
| Consumption | 9,241 | 9,442 | 9,513 | 9,611 | 9,679 | 9,730 | +1.2% |
| Exports | 719 | 800 | 829 | 832 | 847 | 856 | +2.9% |
| Imports | 61 | 71 | 60 | 59 | 59 | 59 | 0% |
For 2021 milk collection growth is expected to be higher at 0.7% as the decline in herd size slow and yields recover.
| Comment and Analysis The continued growth of EU skimmed milk powder exports even in the absence of accumulated intervention stocks will continue to exert pressure on African markets throughout 2019 and into 2020. In the longer term the rising trend in EU SMP prices, arising from the elimination of EU intervention stocks of skimmed milk powder could ease some of the financial pressure on ACP milk markets arising from the availability of exceptionally low priced EU milk powders.However the situation in the EU milk powder trade with Africa is complicated by the huge trade in fat filled milk powders, for which sub-Saharan Africa is the principal market. With the EU’s production of fat filled milk powders being in part linked to the level of EU butter production the projected 3.5% expansion of EU butter production between 2018 and 2020 (which is double the rate over the preceding period), is likely to further fuel the expansion of EU fat filled milk powder production. In the longer term while the growth in EU butter production is projected to slow down, the growing importance of export markets could help support overall EU butter production. Given the extent to which the composition of these fat filled milk powders can be varied, depending on the market component being served, there would appear to be enormous scope for market development in sub-Saharan Africa and the expansion of exports in a product area where the EU is globally dominant. The overall extent of this EU trade in fat filled milk powders is difficult to monitor since it takes place under different tariff headings. However moving over to a single consolidated tariff heading for FFMP exports should assist in the closer monitoring of trends in this trade, which is playing an increasingly important role in EU milk powder exports to sub-Saharan Africa. Looking to the impending shock which the UK’s departure from the EU customs union and single market is likely to cause, the effects of the UK’s decision to eliminate MFN tariffs on most dairy products (2), alongside the special arrangements for trade on the island of Ireland, are likely to reduce tariff related trade disruptions in the absence if a comprehensive EU-UK FTA by 1st January 2021. However, the UK’s proposed MFN tariffs in the dairy sector would mean EU dairy companies would have to compete on the UK market under the same terms and conditions as other 3rd country suppliers. This would potentially increase competition for EU companies on the UK market from suppliers such as New Zealand, Canada and the United States, given the current high level of EU import duties applied in the dairy sector and the strict regulation of preferential imports through TRQs. The actual effects of these changes on individual dairy product markets in the UK currently served by EU27 dairy companies will require a detailed product by product analysis to determine the likely market effects and subsequent knock on effects on EU-ACP dairy sector trade flows. |
Source:
(1) EC, ‘Short –term outlook for EU Agricultural Markets in 2019 and 2020’, Autumn 2019
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/short-term-outlook-autumn-2019_en.pdf
(2) gov.uk, ‘The tariff of the United Kingdom Version 1.0’, 8th October 2019
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/837199/Tariff_Reference_Document_8th_October.pdf