Summary
Efforts to curb EU milk production expansion through financial incentives for voluntary production reduction are held to have met with some success in promoting improvements in farm gate milk prices. However rising farm gate prices is now stimulating a renewed expansion of milk production. This is despite prices still being below farm production costs. The EMB continues to call for a comprehensive Market Responsibility Programme which includes mandatory production restraint.
EU exports of SMP and fat filled milk powders to ACP markets continue to grow, with WMP exports being sustained. Certain ACP markets are also being targeted for increased cheese and butter sales.
While ACP markets remain of marginal significance to overall EU dairy exports, for certain products and for countries these markets collectively are of growing significance. In addition it should be borne in mind it only requires a small volume of EU exports to have a disproportionate effect on individual African dairy markets.
ACP governments seeking to grow their own milk production, as part of integrated dairy sector development strategies, will need to closely monitor current EU export trends, including in fat filled milk powders. ACP governments may need to look at what trade measures can be set in place to sustain local dairy sector development efforts. Extending the product coverage of EU MMO analysis of trade flows to include fat filled milk powders could assist in this regard.
….voluntary milk production reductions scheme has some effect…
At the end of March 2017 16 EU milk producers associations released an evaluation of EU volume reduction programme, which found it had been effective in influencing prices. The European Milk Board (EMB) maintained ‘the voluntary volume reduction, which ran from October to December 2016, had a direct effect on milk prices’, with prices increasing from 25 cents/litre to 33 cents/litre (1). However prices still do not cover average milk production costs estimated by the EMB at 40 c/litre (2). Prices thus need to rise substantially to cover average costs of production. Nevertheless it is held the programme showed voluntary production cuts could work in stabilising the milk market (1).
| The EU Milk Production Reduction Scheme
The EU milk production reduction scheme was launched in the summer of 2016 and financed with an allocation of €150 million from the EU budget. It engaged 43 968 farmers from across the EU in voluntary milk production reduction programmes which took nearly 851,700 tonnes of milk out of production in the last quarter of 2016. Under the scheme, farmers receive 14 euro cents for every kilogramme of milk production they agree to reduce. Each Member States could decide to top up that amount with EU funds allocated under national envelopes. Farmers are paid on the basis of the actual reduction in production and not the planned amount applied for, with proof of the actual production reduction needing to be submitted. Agriculture Commissioner Hogan described the voluntary production reduction scheme as a ‘measure which had never been done before, but which has been a clear success’, generating ‘a slow but unmistakeable price recovery’. EC, ‘EU support scheme helps to reduce milk production’, 16 March 2017 |
The EMB thus see’s voluntary production cuts as part of a broader Market Responsibility Programme, which also should include ‘capping of EU wide production’. It is felt that such a Market Responsibility Programme is the only way to avoid damaging surpluses. Intervention buying is not seen as a long term solution ‘because the surpluses continue to exist and prevent the urgently needed increase in milk prices’.
EU farmers are looking for ‘a real price increase and long-term stability on the market’. This it is held can only be achieved through ‘balance milk production in Europe’ (2). The EMB has called for the creation of a permanent production restraint instrument as the only means of addressing long term issues in the EU dairy sector (1).
….but EU milk production reduction is slowing down, with an expansion projected for 2017….
While between January and May 2017 EU milk collections declined 1.1%, this is a slower rate of overall decline than in the first quarter of 2017 (-2.3%) and the final quarter of 2016 (-3.5%). What is more, on an annual basis for 2017 the EC is projecting an overall increase in milk collections of 0.7%. Strong milk production increases continued in Ireland (+6.8% January to May 2017 compared to January to May 201) and are apparent in Bulgaria (+4.9%), Poland (3.5%), Italy (2.8%), Romania (+2.7%) and Spain (0.3%). Milk production was down in the major milk producers such as France (-3.2%), Germany (-3.8%) and the UK (-1.6%) (3).
EU farm gate prices are beginning to recover from the low levels in 2016, with prices in May 2017 25% above the level of May 2016 and 2.5% above the 5 year average. It is these signs of a price recovery which underlie the projected increase in EU milk collections projected for 2017 as a whole.
The global dairy market price recovery reflects high butter prices in the face of growing global demand and shortfalls in supply. The butter export trade is now stabilising in the face of high prices and limited supplies. From January to May global cheese exports grew 6% confirming a sustained increase in demand. Cheese prices are now at their highest level in four years. Overall there is a general buoyancy in dairy prices except for SMP and whey (3).
EU SMP exports have been increasing, although this could now slow down. The EU continues to buy into intervention with intervention stocks of SMP stabilising over the last year at over 350,000 tonnes. EC tenders for sales of SMP from public storage have had very limited success (3).
Prospects for global dairy exports are seen as improving although a 9% appreciation in the Euro since early 2017 now means EU products are less competitively priced than those of Oceania and the US.
Looking forward, the overall dairy picture (with the exception of SMP) is seen as positive although it is acknowledged time will be ‘needed for producers to make up for the losses incurred during the crisis’ (3).
In terms of the EU dairy product export trade with ACP countries, a review of trade to the top 30 extra-EU export destination in the first 6 months of 2017 reveals some interesting trends.
….EU SMP exports to Africa rising….
In the first 6 months of 2017 EU skimmed milk powder (SMP) exports to African countries grew dramatically. While in 2016 only two African countries (Ghana and South Africa) were among the top 30 destinations for EU SMP exports, taking only 2.4% of total extra-EU exports, in the first six months of 2017 five African countries were amongst the top 30 destinations for EU SMP exports, taking 4.9% of total extra EU SMP exports during this period. In the first six months of 2017 export volumes to African destinations were 47.5% above the export volume for the whole of 2016 (4).
This included a resurgence of EU SMP exports to Nigeria and Ivory Coast and the emergence of Kenya as a top 30 destination for EU SMP exports. These exports mainly originated in Belgium (49.7%), the Netherland (16.7%), Ireland (29.9%) and the UK (3.6%). Export volumes to South Africa and Ghana in the first half of 2016 meanwhile were consistent with export volumes in 2016 (4).
….African markets for WMP remain significant….
In terms of the overall importance of ACP markets to EU dairy exports the most important category reported on by the Milk Market Observatory is whole milk powder (WMP), with twelve ACP markets amongst the top 30 extra-EU destinations, taking 18.7% of total EU WMP exports in 2016 and 17.6% in the first 6 months of 2017 (4).
2017 saw the emergence of Angola and Trinidad & Tobago as top 30 destinations for EU WMP exports, while exports volumes to the Dominican Republic (DR) were on track to attain similar levels to those achieved in 2016.
The two top 30 Caribbean ACP destinations in the first six months of 2017 took 3.7% of total extra-EU WMP exports, with Danish and Dutch exporters playing the dominant role in trade with the DR (53.1% and 24.3% respectively) and Ireland playing the dominant role in exports of WMP to Trinidad and Tobago (89.7%) (4).
….Slight increase in EU cheese exports to top two ACP markets….
The DR was only one of two ACP countries in the top 30 destinations for EU cheese exports, with proportionally the volumes exported in the first six months of 2017 being equivalent to almost 60% of the total volumes exported in 2016. The Netherlands, Spain, Germany and the UK were the top EU cheese suppliers to the DR in 2016 (36.5%, 23.5%, 13.5% and 11.8% respectively). In the first six months of 2017 the Netherlands retained its top position (34.5%), with Germany in second place (19.7%) followed by Spain (16.6%) and France (10.5%). The other ACP destination amongst the top 30 destinations for EU cheese exports was South Africa where export volumes in 2017 were on track to slightly exceed those of 2016.
….Irish butter exports to South Africa increasing strongly….
The only ACP destination for EU butter exports amongst the top 30 extra-EU destinations was South Africa, with export volumes in the first 6 months of 2017 up 78% on the total export volumes in 2016 as a whole . This saw the importance of the South African market to extra-EU butter exports increase from 1.3% to 2.9%. Ireland accounted for 60% of EU butter exports to South Africa in the first 6 months of 2017, with South Africa coming to account for 6.6% of extra-EU Irish butter exports. Exports in the first 6 months of 2017 were equivalent to 66% of Irish butter exports to South Africa for the whole of 2016.
ACP Countries in the top 30 Destinations for EU Dairy Product Exports (tonnes)
| SKIMMED MILK POWDER | Jan-June 2017 | 2016 | WHOLE MILK POWDER | Jan-June 2017 | 2016 | |
| Total Extra-EU | 419,905 | 574,185 | Total Extra-EU | 209,398 | 380,447 | |
| Africa | Africa | |||||
| Nigeria | 9,106 | 22,924 | Nigeria | 9,486 | 17,161 | |
| Ghana | 4,308 | 8,680 | Ivory Coast | 3,558 | 7,221 | |
| South Africa | 2,723 | 5,207 | Angola | 3,489 | – | |
| Kenya | 2,511 | Mauritania | 2,585 | 4,475 | ||
| Ivory Coast | 1,813 | Cameroon | 2,455 | 5,362 | ||
| CHEESE | Senegal | 2,313 | 6,500 | |||
| Total Extra-EU | 421,515 | 800,155 | Gabon | 2,106 | 3,565 | |
| Africa | Mali | 1,938 | 5,218 | |||
| South Africa | 5,609 | 10,726 | Guinea | 1,650 | 5,193 | |
| Caribbean | DRC | – | 3,719 | |||
| Dominican Republic | 4,188 | 6,999 | Caribbean | |||
| WHEY | Dominican Republic | 6,161 | 12,576 | |||
| Total Extra-EU | 292,078 | 552,960 | Trinidad & Tobago | 1,590 | ||
| South Africa | 2,666 | 4,623 | BUTTER | |||
| Ghana | 2,025 | 4,275 | Total Extra-EU | 76,917 | 162,285 | |
| Nigeria | 2,015 | 3,413 | South Africa | 1,699 | 2,175 | |
| Angola | 570 | – |
Source: MMO Economic Board, ‘Meeting of 25 July 2017’, 25 July 2017
….EU exports of fat filled milk powders surged since onset of milk price crisis….
In 2016 the overall importance of ACP markets were most significant in the category of fat filled milk powders (HS code 190190), with ACP markets taking fully 35.5% of total extra-EU fat filled milk powder exports. Between 2015 and 2016 fat filled milk powder exports to the top 10 export destinations in the ACP taking over 10,000 tonnes increased 19.1%. The rate of increase in fat filled milk powder exports to the top 10 ACP destinations was almost 4 times the increase in the overall volume of EU fat filled milk powder exports (5).
Top 10 African Destinations for EU fat filled milk powder exports 2011-2016(HS code 190190)
| 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | + % 2015/16 | |
| Nigeria | 60,472 | 51,088 | 57,410 | 71,189, | 87,439 | 66,187 | -24.3% |
| Senegal | 25,395 | 34,616 | 37,128 | 43,247 | 40,837 | 55,238 | +35.3% |
| Mauritania | 13,456 | 18,697 | 19,353 | 26,534 | 28,233 | 29,670 | +5.1% |
| Ethiopia | 790 | 1,908 | 21 | 5,989 | 7,793 | 29,011 | +272.3% |
| Mali | 8,717 | 10,618 | 12,962 | 17,375 | 19,568 | 20,899 | +6.8% |
| South Africa | 5,156 | 5,054 | 4,501 | 6,413 | 7,387 | 12,402 | +67.9% |
| Ghana | 8,053 | 9,858 | 12,587 | 7,597 | 10,352 | 12,123 | +17.1% |
| Kenya | 29,179 | 11,619 | 7,213 | 16,181 | 21,031 | 11,980 | -40% |
| Togo | 4,757 | 7,167 | 8,429 | 8,267 | 11,156 | 10,565 | -5.3% |
| Ivory Coast | 4,405 | 4,758 | 7,259 | 8,725 | 10,206 | 10,441 | +2.3% |
| SUB-TOTAL | 160,380 | 171,055 | 166,863 | 211,517 | 217,047 | 258,516 | +19.1% |
| 28.7% | 28.1% | 27.0% | 27.1% | 25.5% | 28.9% | ||
| Total EU | 558,387 | 609,109 | 618,884 | 780,514 | 852,311 | 896,055 | +5.1% |
Source: EC Market Access Data Base
This strong increase occurred despite a 23.4% decline in export volumes to the top ACP export destination Nigeria (which took Nigeria to 2nd place as an export destination for EU fat filled milk powders after Saudi Arabia). Notable developments in 2016 included:
- a 272.3% increase in exports to Ethiopia, taking it to the rank of the 4th most important ACP destination for EU fat filled milk powder exports and 7th most important extra-EU destination, from a position of virtually no exports in 2013;
- a 35.3% in exports to Senegal, which retained its 2nd place ranking amongst ACP destinations and which took Senegal to the 3rd place amongst extra-EU export destinations;
- a 67.9% increase in exports to South Africa, taking it into 6th place amongst ACP export destination and 11th place in extra-EU export destinations (5).
Developments in 2016 mean that since 2013 EU exports of fat filled milk powders to the top 10 ACP export destinations have increased 55% (5). This reflects the expanded EU production and export of fat filled milk powders in the face of the milk price collapse in the EU, with total EU exports growing 26.1% in 2014 compared to 2013, and with strong growth continuing in 2015 and 2016..
| Comment and Analysis
The first 6 months of 2017 show that as EU milk prices began to recover, so the decline in the volume of EU milk production began to slow down, with an overall expansion of EU milk production in 2017 foreseen. This would appear to highlight the limitations of the voluntary EU production restraint scheme being taken up in some EU member states with the benefit of EU financial assistance. However the EC has ruled out any return to mandatory EU milk production quotas. The only option would appear to be to let the logic of CAP reform work itself out, by withdrawing the coupled support to EU milk producers which is sustaining milk production in the less efficient areas of milk production in the EU. However such an option would not be acceptable to EU member states governments, so a continuation of ‘stop-gap’ solutions appears more likely. Under this scenario the EU is likely to continue to contribute to instability on global dairy markets, as stocks of EU skimmed milk powder continue to overhang the market, weighing down any sustained price recovery in milk prices. The expansion of Irish milk production continues apace, while exports to certain ACP markets are on the rise. This is potentially a source of concern given fears over a possible BREXIT related disruption of Ireland’s dairy trade with the UK, its main market. This would suggest existing Irish dairy sector export drives are likely to intensify in the coming 18 months. However Ireland is not the only EU27 member states with a major engagement in diary sector trade with the UK. The UK has a particular deficit in butter and cheese, with in addition to Ireland, France,; the Netherlands and Belgium being most engaged in dairy sector trade with the UK (6). Any failure to conclude a successor trade agreement covering mutual EU27/UK trade in dairy products from 30th March 2019 could see a reintroduction of MFN duties, which in the dairy sector is projected to lead to a 68% decline in current dairy sector trade (see companion article, ‘Agro-Food Sector Effects of the Application of MFN Duties on EU27-UK Trade: An Area of Potential ACP Concern and Opportunity’, 18 August 2017). This could then drive EU27 exporters to further intensify efforts to find new markets for dairy products beyond the borders of the EU28. This drive has already been underway in response to the abolition of EU milk production quotas. Given extensive smallholder dairy production in Kenya and across East Africa the emergence of Kenya as a destination for EU SMP exports is potentially a source of concern, given the scope for using internationally sourced milk powder prices as a benchmark for prices paid to local milk producers. While ACP countries remain a small market for overall EU dairy exports there is a need to view this issue from the other side of the telescope, with individual ACP dairy markets being dwarfed by EU export capacities. It only requires a small volume of EU exports to have disproportionately large impacts on local African dairy sectors. As EU milk production once again starts to grow in response to a recovery in EU milk prices, this is something which individual ACP governments will need to pay close attention to, if they have aspirations to develop their own local milk production which is integrated with local value added dairy processing. Existing pressures to expand their export drives from countries such as Ireland will only be intensified by a mishandling of the BREXIT process. While there has been a rapid expansion of EU fat filled milk powder exports to African markets, this product category is not included in the routine trade flow reporting of the EU Milk Market Observatory. This oversight needs to be rectified, given the growing trade in exports of bespoke milk powders for specific reconstitution purposes in trade with African countries. |
Sources:
(1) thedairysite.com, ‘EU Volume Reduction Programme Proves Itself’, 31 March 2017
http://www.thedairysite.com/news/51203/eu-volume-reduction-programme-proves-itself/
(2) thedairysite.com, ‘European Milk Producers Demand Major Milk Powder Action’, 25 January 2017
http://www.thedairysite.com/news/50754/european-milk-producers-demand-major-milk-powder-action/
(3) MMO Economic Board, ‘Meeting of 25 July 2017’, 25 July 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/reports/2017-07-25-report_en.pdf
(4) EC MMO, EU ‘Exports to Third Countries’, 11 August 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/eu-extra-trade_en.pdf
(5) EC, Market Access Data Base
http://madb.europa.eu/madb/statistical_form.htm
(6) MMO Economic Board, ‘Meeting of 23 May 2017’, 23 May 2017
https://ec.europa.eu/agriculture/sites/agriculture/files/market-observatory/milk/pdf/mmo-economic-board-meeting-of-2017.05.23_en.pdf
| Key words: Dairy, Cheese, butter, SMP, WMP, Whey, fat filled milk powders Area for Posting: Dairy, Brexit |