December 8, 2017

Calls for Subsidies Begin Anew in Europe

 |  By: Fran Howard

The EU dairy industry continues to have growing pains, and once again some producer groups are hoping to shield producers from the pain of the inevitable low milk prices that result from oversupply in an unfettered market. Ireland is the most recent case in point.

“Ireland has been one of the engines driving EU milk production higher since the end of quota,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. “It seems that Ireland’s milk prices—the highest in two years—are providing incentive for producers to keep cows milking longer than usual.” In October, milk prices in Ireland were estimated at near 38.25 euro cents per liter, the equivalent of $16.87/cwt.

In October, milk production in Ireland soared 7% above year-earlier levels to 563 million liters, according to Eurostat. While Ireland’s strong milk prices have encouraged producers to expand output, rapid expansion globally will pressure world milk prices lower.

“While prices are still quite favorable, forecasts for the start of 2018 suggest a different reality as world dairy product prices decline in response to higher global milk output,” notes Dorland. “However, not all sectors of the Irish dairy industry are willing to see that happen.”

The Irish Farmers’ Association has asked dairy cooperatives in Ireland to hold milk prices steady despite falling world dairy product prices, arguing that dairy companies have benefited from selling higher-priced dairy products  after procuring lower-priced milk in spring and early summer.

“Irish cooperatives would be ill-advised to ignore market signals, though,” Dorland says. “If they do, the resulting impact could spread.” In 2014, she explains that the European Union and EU dairy cooperatives worked to buffer producers from sharply lower markets by injecting a considerable amount of money into the dairy sector. Cash infusions were made through the Intervention program, private storage aid, subsidized milk prices, and direct payments to producers.

“While well intended, the economics of those transactions likely helped create a downturn that lasted longer and was more severe than it would have otherwise been had dairy producers in Europe experienced the full range of market conditions their counterparts in the United States and Oceania did,” she adds.

Unlike some European producers, Irish dairy producers have expanded rapidly since quota was eliminated in 2015. In 2014, annual milk production in Ireland was just under 5.82 million metric tons. By 2016, the country produced 6.85 million metric tons, a nearly 18% increase over the two-year period, according to CLAL data. Conversely, the EU-28—the world’s largest milk-producing region—increased milk production by 3% since 2014, from 127.42 million metric tons in 2014 to 131.18 million metric tons in 2016. Output is expected to grow by at least 1.3% this year in the EU-28, while Ireland is on track to increase annual output by 7% or so.

“In the meantime, the world is dealing with a literal mountain of Intervention skim milk powder, which is sitting in warehouses across Europe. At some point, the world will need to absorb both current skim milk powder production and the 376,005-metric-ton stockpile,” Dorland says. “The European Commission is showing great resolve as it continues to shepherd proposed Intervention program modifications through its approval process in the hopes of avoiding some of the pitfalls of the 2014–16 market downturn. But the commission’s effort will have less impact if dairy producers in individual member states successfully lobby their processors or governments for subsidies.”

Clearly, Dorland says, current European milk prices are encouraging milk production, and if free markets are allowed to work, surpluses will eventually drive milk prices lower, successfully tempering future production gains until markets come back into balance. “Artificially propping up markets now, however, will only delay the pain for European producers and worsen the pain for producers around the world,” she adds.