May 27, 2016

USDA Expects EU Milk Production Gains to Slow

 |  By: Fran Howard

Lower milk prices in Europe have not been able to stem the flow of milk since quotas were eliminated a year ago, but the rate of growth could be slowing.

In a recently released 2016 milk forecast, USDA’s Foreign Agricultural Service forecasts EU-28 milk production to increase by 1% in 2016 over 2015 levels. For the first quarter of this year, however, EU milk production, adjusted for leap year, soared 5.8% above same quarter in 2015.

“While USDA is predicting further expansion of EU milk supplies, given the 5.8% year-over-year gain in the first quarter, the forecast implies a substantial deceleration in milk output later in the year,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle.  

“To reach USDA’s latest forecast, the milk supply between April and December 2015 would need to decline by 0.6% compared to 2015. Given Europe’s extraordinary expansion over the past year, milk output below prior-year levels would be a remarkable turn of events,” Dorland adds.

USDA based its estimate on the expectation that lower profitability will lead to higher culling in Europe, notes Dorland. The forecast calls for the milking herds in the major dairy-producing countries of Germany, France, the Netherlands, and the United Kingdom to hold steady or contract this year.

“Offsetting those declines, though, will be improved genetics that help to boost output per cow,” Dorland says. “While this latest forecast may cause buyers anxiety, USDA does not expect the projected decline in the EU milk supply to translate into a deficit situation. In fact, the report suggests that the reduction could result in less milk to an already oversupplied market.”

That said, any reduction in global supply would be welcome news toward balancing world dairy markets.

In March, the weighted average EU milk price fell 11% to €28.10/100 kilograms (kg), compared to a year ago, and prices ranged from a low of €20.70 in Latvia to a high of €56.32 in Cyprus. Despite the double-digit decline in milk prices in March, EU-28 (excluding Romania) milk production of 29.6 billion pounds was 5.5% higher than in March 2015. “Granted, milk collections in March 2015 were suppressed as dairy producers in some countries sought to reduce levies in the final month of the quota program,” Dorland notes.

USDA expects increases in the EU milk supply to continue to be funneled into skim milk powder (SMP) and butter production. During the first quarter of 2016, SMP and butter output grew 17.7% and 11%, respectively, compared with 2015 levels.

“USDA anticipates most of Europe’s increased dairy product output will make its way into the world markets,” says Dorland. “The latest forecast indicates that European domestic consumption remains mostly flat for cheese, butter, and SMP. Therefore, new product is expected to head to public aid programs or to export—news that could spell concern for U.S. dairy manufacturers.”

USDA projects that EU-28 cheese exports will rise 5% above 2015 levels, which is still below the trading block’s total cheese exports prior to Russia implementing a ban on food imports from the European Union and a number of other countries. USDA also expects SMP exports from the European Union to grow as much as 10.5% above prior-year levels.

“All in all, a considerable amount of product is likely headed abroad. Fortunately, some of these dairy products have already been made and could be partially committed. If USDA’s European milk production forecast proves accurate, the worst of the supply glut may be in the rearview mirror,” says Dorland. “However, for that to occur, an actual slowdown in the milk supply is needed.”