Building dangerously on dreams of dairy exports

Saturday, October 3, 2015

European milking herds have been expanding in style for several years with the relaxation of EU controls. But the euphoria about export markets is already diminishing as competition heats up

by NORMAN DUNN

For the past three years, there's been a building boom on European dairy farms, especially in the Netherlands, Denmark, Germany, France, Britain and Ireland. A casual drive through the countryside reveals the impressive frameworks of new mega-barns reaching for the skies. Dairy herds are not only being rehoused. They are also expanding. In Britain, a dairy herd of 100 head was typical at the beginning of this millennium; in Germany, maybe 60 cows. The new facilities are mostly designed to house and milk 200-400 or more, with a strong scattering of 1,000-head-plus barns amongst them. At the same time, plenty of smaller dairy farms have decided to give up business altogether. In Britain, for instance, the Royal Association of Dairy Farmers reckons that nine milk producers a week are selling off this year.   

On other farms, the starting gun for this building bonanza was April 2015, the end of 30 years of European Union (EU) milk production controls, the so-called "milk quotas." The feeling persists that this free market might mean new riches for future-oriented dairy enterprises, especially those expanding for extra efficiency.

Maybe three or even two years ago, this euphoria could be partly understood. After all, there were really promising markets for EU dairy products in Russia and China. Sales were expanding, as they were for European cheeses in the United States and Japan. However, a closer look even then would have shown that all major dairying countries across the world were also planning expansion.

Neither was there much room for bigger sales on home ground. By 2014, the EU with its 28 member countries was 113 per cent self-sufficient in dairy products on a milk-equivalent basis, as calculated by the Italian consultancy CLAL. By last year, the Russian embargo on imports, including all dairy products, had started to bite. This year, the sector is also coping with falling demand from another important market: crisis-hit China.

Worldwide, expansion in milk production still continues: plus 2.5 per cent from January to May in Australia, 1.5 per cent in the United States and nearly one per cent in New Zealand. The EU-28 state milk production increase in this context is just 0.2 per cent. But this comparatively low figure hides worrying increases in top dairy lands such as 4.6 per cent annual growth rate for milk production in Ireland, 3.7 per cent in the Netherlands and three per cent more milk from Danish farmers. Backing these figures up, the U.S. Dairy Export Council currently estimates that EU annual milk production will probably have increased 11 per cent by 2020.

Before the Ukraine conflict and the Russian embargo, the latter was importing around 300,000 tonnes of cheese annually from Europe. Whether this scale will ever again be reached is a moot point. Russia has long since opened negotiations with other countries to top up its dairy product requirements. For instance, a co-operation with China, through a leading Russian dairy, involves a planned 100,000-cow complex in the Mudanjiang region of northeast China near the Russian border. Among other products, about 100,000 tonnes of cheese may be produced for the Russian market from this new super farm.

All is not lost for European dairy farms. There are still customers out there in the wide world looking for European cheeses and other specialities. The European Commission Milk Market Observatory points out in midsummer that the EU has increased its cheese exports to all other destinations during the year so far. The United States is now the largest cheese customer, buying 22 per cent more European products than previously, followed by Japan (plus 58 per cent.) Butter exports have increased to Arab countries and again to the United States.

However, there's huge competition out there, and prices for farm deliveries are already dangerously low. This May, EU farmers were being paid the equivalent of 43.7 Canadian cents a litre. That's 19 per cent down on the same time last year.

Break-even point for a milk production business is open to all sorts of arguments. The British government advisory service points out that the cost of production between best and worst milk producers varies by as much as 11 pence (22 cents) a litre. And there's evidence seen by this author that, down at 45 cents a litre, smallish (100-head) milking herds are surviving financially, even under European conditions, albeit mostly with robotic milking used to cut labour costs to the bone. Saving labour in this way represents a huge capital investment. Somewhere down the line, even go-ahead family farms like this one will be looking for more return from the global market. Or else they'll be leaving the sector in the thousands. BF

Norman Dunn writes about European agriculture from Germany.