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EU milk farmers to absorb quota rise, price is key

“It’s very much a

political deal… without maybe looking at what the best solution would be for the entire region.”

– MARK VOORBERGEN, RABOBANK

ANALYSIS BY JEREMY SMITH

BRUSSELS/REUTERS

Europe’s dairy farmers should gain more production flexibility after farm ministers agreed to a series of quota increases from 2009 but are unlikely to churn out extra milk yet, given the poor price outlook.

The dairy sector was one of the most problematic areas of all-night negotiations in November on farm reform, even though the EU’s agriculture chief managed to get agreement on her plan for one per cent annual increases in milk production quotas.

That was proposed as a way to provide a “soft landing” for the dairy sector ahead of the 2014-15 expiry of milk quotas, a system created in the mid-1980s to deal with the EU’s notorious milk surpluses, gradually raising volumes to free up the market.

But whether that extra milk will be produced seems, for the moment at least, fairly unlikely due to low milk prices in most EU countries, caused by poor consumer demand and high stocks.

“More room”

“It’s very much a political deal… without maybe looking at what the best solution would be for the entire region, given where the world market might be,” said Mark Voorbergen, dairy analyst at Dutch bank Rabobank.

“It gives more room for milk production growth. But what remains to be seen is if we see that room being filled up,” he said. “It all depends on milk prices… but I have my doubts whether giving room to produce more means it will be used.”

The EU’s 27 countries had differed widely as to how much dairy quotas should be increased, with opinions ranging between zero and 10 per cent. Germany was particularly opposed to production increases, fearing even lower milk prices.

But the major winner was Italy, consistently the top EU offender in milk overproduction, which secured a special deal whereby it gets all the five per cent quota increase from 2009.

That deal annoyed some other countries, so another provision was agreed to slap an extra-high fine on any EU state overshooting production by more than six per cent up to 2011.

One technical but important part of the deal was to reduce the “fat adjustment coefficient” in EU country milk deliveries. In practical terms, this is likely to result in an even higher increase in available quota volumes, officials say.

At present, the EU dairy market is structurally overloaded, causing low prices and giving producers little incentive to make full use of quota entitlements. Germany and the Netherlands, for example, have sizable surpluses of cheese and various butters.

While public intervention buying of butter and skimmed milk powder, agreed as part of the farm reform package, will go some way toward absorbing the extra supply, the volume ceilings have been set relatively low, analysts say. The real problem is poor demand – not helped by fears over a weakening global economy.

Under the EU’s intervention system, a commodity is “bought in” to stores, either private or public, until prices rise again to a level attractive enough for it to be sold into EU local markets. Private storage for butter will resume from January.

Prices weak

Dairy prices, particularly for milk, are weak across nearly all of the EU’s 27 member countries, although have been firmer of late in Britain, Denmark and Finland, industry officials say.

In Spain, for example, dairy farmers received an average of 0.368 euros per litre of milk in October: 22 per cent less than they got in January and below production costs of between 0.40 and 0.43 euros, according to estimates by industry group Prolec.

Milk producers can also react fairly quickly to price movements, adding to general market volatility. Last year in France, for example, higher prices led to an acceleration in milk production and the country moved from underusing its EU quota by around 2.5 per cent to an underuse of one per cent now.

– Additional reporting for Reuters by Martin Roberts in Madrid

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