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June 30, 2016

Post-Quota Boom in Europe could be Over

 |  By: Fran Howard

As EU milk production growth finally starts to stabilize, the European dairy industry has to grapple with losing its third largest-milk producer now that the United Kingdom, or Britain, has voted to leave the European Union, says Sarina Sharp, agricultural economist with the Daily Dairy Report.

In April, EU milk production of 13.5 million metric tons rose 1.6% above year-earlier levels, according to Eurostat. After adjusting for Leap Year, though, year-to-date collections soared 4.6%.

“Although April's year-over-year growth was considerably lower than the European Union’s nearly 5.7% jump in first-quarter collections, this comparison is skewed by the fact that milk production was negative in early 2015 as super-levies weighed on output in the last months of quota restrictions,” says Sharp. Last April, the first month EU producers were no longer constrained by quota, milk collections once again began to climb.

“Going forward, year-over-year comparisons are likely to fall far short of the staggering growth that prevailed in the final quarter of last year and the first three months of this one,” says Sharp. “Future expansion is also likely to moderate due to environmental, capital, and facilities constraints. The post-quota boom in European milk production is predominately done, but even a modest increase from last year's large volumes represents an abundance of milk.”

Milk production in seven of the 19 nations in the Eurozone fell below year-earlier levels in April. The major milk-producing countries of Ireland and France reported deficits in April, along with five other minor dairy-producing nations. The United Kingdom, which has its own currency, also reported lower year-over year output in April, down nearly 4.5%.

Collections in Ireland fell 4.1% short of April 2015, when output jumped 12.5%.

“A cool spring and poor grass growth led to back-to-back declines in April milk output in Europe's second-largest dairy supplier, France, where collections dropped 1.1% this year after falling 1% last year from April 2014 collections,” says Sharp. “However, dairy producers in top-ranked Germany increased output 2.3% over last year's modest growth.” Dutch producers also continue to pump out the milk, she notes, with April collections in the Netherlands exceeding last year's already impressive volume by 10.8%.

If the United Kingdom (England, Scotland, Wales, and Northern Ireland) succeeds in leaving the European Union—called Brexit—within a couple of years, Britain will be forced to go it alone. “It will give up access to the European Union's intervention purchase and private storage aid programs, which means there will no longer be a market of last resort for British butter or skim milk powder during periods of surplus and low prices,” she says.

British dairy product exports to its European trading partners could also suffer because British exports to these countries would likely face customs and a levy of up to 45% on some dairy products, says Sharp. It is also uncertain how Brexit would impact EU trading partners, like Ireland, that export large quantities of dairy products to the United Kingdom. According to the Irish Times, 41% of Ireland’s agricultural exports are sold to Britain, with cheese being the largest dairy export.

“The United Kingdom will have to renegotiate trade deals on all fronts, which could reduce exports (and possibly imports) for some time,” she adds. “On the other hand, the British will be free to set their own dairy and agricultural policies, which could include subsidies or other forms of support that the European Commission has vetoed.”

Still, many hurdles have to be overcome over the next two years for the United Kingdom to actually leave the European Union. “Dairy policy is probably low on the list of priorities for policymakers,” Sharp adds. “For now, the only things that are certain is that Brexit will continue to create volatility in financial markets, which will likely trickle down to world dairy product prices, and it will take time for world dairy surpluses to erode.”