After 31 years of production constraints, European Union (EU) farmers, who already produce a whopping 145 billion litres annually, are free to deliver as much milk as they want without risking government penalties for exceeding their allotted output.
The end to quotas, planned since 2008, potentially releases a flood of extra production onto world markets, particularly from countries such as Ireland, Germany, Denmark and the Netherlands.
With dairy product demand experiencing huge growth in Asia and the Middle East during the past decade, and now no quotas to constrain their milk output and exports, European farmers are being watched with some trepidation by market rivals worldwide.
«Only 7 per cent of the world’s dairy production is actually traded internationally, so it doesn’t take much extra supply or demand to create significant price shifts,» Dairy Australia’s trade and industry strategy manager, Charles McElhone, said.
«I think we have to expect a lot more potential for price volatility.
«EU quotas did provide some measure of production stability, even though European marketing assistance policies also compounded price volatility at times.
«Australian farmers will have to make sure we’re ready and aware good times in the market will change quickly in response to a range of influences, including, perhaps, extra volumes from Europe.»
Milk levels already on rise
Britain’s National Farmers Union (NFU) dairy board chairman Rob Harrison has noted some EU countries had already been rapidly increasing output in the past year without an end market for their products.
«With milk prices yet to show any strong signs of recovery, this could push farmgate milk prices down further in the EU, and stall any recovery in our dairy markets,» he said.
Abolition of EU quotas comes just when the Australian industry was tipping an end-of-year recovery in demand (and prices) in China, where last year’s rapid rise in surplus milk powder and butter stocks suddenly put the brakes Chinese buying activity and sent the dairy commodity price see-saw falling again.
New Zealand’s dairy export prices have slumped 40pc in 2014-15 compared to the previous year, although Australian export values are down by only about 15pc because of our broader spread of product sales and smaller overall export output.
However, few industry analysts expect the removal of quotas to have much immediate impact on Asia’s demand recovery, partly because much of the anticipated extra production from Europe has already kicked in, fuelled by the price highs of 2013 and 2014, and global prices have now retreated.
Rabobank dairy analyst Michael Harvey: «There’s no doubt that in the longer term Europe will produce more milk, particularly in northern and western Europe – some of it will find its way to compete with Australian markets in Asia and China.
«But we don’t expect that growth trend to be immediate or across all Europe.
«We still think a global market recovery will come later this year.»
Global impacts in play
Mr Harvey also noted US production growth was slowing after a heady few years, and Russian bans on imports from Europe and elsewhere were likely to ease after August.
While the EU’s major dairying countries were set to drive much of Europe’s extra four billion litres of production in the next five years, herd numbers in the Mediterranean were likely to decline as competitive market forces increased.
Even productivity growth in Germany, Ireland or Denmark was dependent on farmers and processors achieving good returns, lifting production efficiencies, overcoming environmental hurdles and other regulatory constraints, energy costs and space limitations.
«Australian farms produce milk much more cheaply than Europeans,» he said.
Murray Goulburn (MG) co-operative has acknowledged an increase in European exportable milk surplus is likely to follow the scrapping of quotas over the longer term, but this was expected to be consumed by the increase in demand from emerging markets.
«The short-term impacts depend on the raw milk prices received by (EU) farmers and are less predictable,» a company spokesman said.
Lower cost countries in northern Europe were likely to increase milk production, but some reduction in milk production in higher cost southern European countries was also widely anticipated.
Mr McElhone noted even Europe’s most productive farms, such as in the Netherlands, had severely restricted growth options because of land constraints, while Ireland’s planned 25pc production increase would only lift its total production from 5b litres to 6.75b.
«It might seem like a potential flood of extra milk is on the way, but the loss of quotas won’t be a hit to the market,» he said.
«And we’ve championed the removal of these sorts of interventionist policies because they distort market decision-making.
«Quotas are a legacy of policies which encouraged too much production and subsequently resulted in Europe having to provide government incentives to aid export sales.»
Europe’s trademark dairy market support programs are now likely to be far less active as farmers and processors take increased responsibility for responding to market signals themselves.
Australia, is currently on track to produce about 9.4b litres in 2014-15 – up 3pc for the year – but still below the 10b litres produced early this century.
Source: FarmOnline