EU dairy farmers eye the Chinese market

Thursday, May 1, 2014

With quotas about to disappear, European milk production is rising rapidly and the huge Chinese market is beckoning. But costs will have to come down if EU farmers are to compete with other successful exporters

by NORMAN DUNN

Milk quota control on European dairy farm production is scheduled to disappear when the bells ring out for New Year, 2015. But anyone driving across the land from Germany to Ireland could be forgiven for thinking restrictions are already gone. New barns sprout everywhere. The average herd in Britain, for instance, now tops 150 head, with the biggest expansion reported in the 200-plus cow units.

Milk output from all European Union (EU) member countries increased fairly slowly up to last year, with a 4.5 per cent rise in deliveries to processors (to 139 million tonnes) in the previous 13 years. Now it's 2014, and the rise in milk production for this year alone is already hitting 4.7 per cent. The development must be especially interesting for other countries, such as Canada, which produce under a quota system.

To a certain extent, Canada will also be directly affected by the European development. Ongoing free trade negotiations with the EU, if ratified in 2016, will give European dairies freedom to export 29,000 tonnes of cheese a year (an increase of 123 per cent over the current total) to Canadian customers by 2023. That, however, represents a comparatively small (and far in the future) outlet for the expected tidal wave of new milk coming with quota withdrawal.

The Canadian example, though, is one that European producers want to repeat in promising markets all over the world. Indeed, there will have to be a dramatic expansion in dairy exports if the current expansion of milk production in Europe is to make any sense at all.

Wads of investment cash are being bet on China as the really hot market for European milk and its products. Certainly, demand for dairy foods from that country's 1.38 billion consumers is growing much faster than domestic production according to leading dairy co-operative processor Arla, which turned over the equivalent of C$205 million in that country (in partnership with the Chinese dairy Mengniu) in 2013. This may be as trifle compared with Arla's global sales of C$15 billion, but strong and steady growth is expected there by all major European processors.

With its own milk production put at 34.65 million tonnes in 2013, China is expected to import some 300,000 tonnes of liquid milk products (leading supplier: Germany) in 2014. That's an increase of 65 per cent on the year! Whole milk powder shipments to China are expected to increase by 25 per cent on the year to around 780,000 tonnes and cheeses will, it is reckoned, increase sales by 18 per cent to 45,000 tonnes.

Of course, farmers wouldn't be farmers if they didn't view this proclaimed bonanza on the world market with more than a little cynicism. "Is it right to depend so much on growth in a single market and what would happen if the Chinese stopped buying dairy products from Europe?" they ask. The answer to the first question is naturally "No" and to the second, "Disaster."

Catastrophe would unfold because Europeans currently have no chance of producing milk as cheaply as the competition on the world market: Australia, New Zealand and the United States. The difference in production costs is already substantial, with a litre of milk costing just the equivalent of 36 to 38 Canadian cents before it leaves a farm in New Zealand or Australia, an average 45 cents in the United States, but up to 55 cents in western EU countries. The obvious answer for any country (or region) wanting to become a world power in dairy exports is to become much more efficient. Europe's journey into the future in this respect is hampered by the baggage of smaller farms, grain-based dairy rations and huge labour costs.

But there are exceptions. The Irish milk industry has represented a blazing beacon of common sense in milk production economics for the last 50 years. What can western Europe grow best? "Grass," point out the Irish agronomists. This country reacts sensibly and stays with milk from pasture. Result: cost of production there is being whittled down to the New Zealand level and is coupled to fierce export marketing.

An example: Irish butter has prevailed for years in the overcrowded and oversupplied German retail market, even though Germany produces so much butter and other dairy products that it has to export more than 50 per cent.

Little wonder then that the Irish plans for the next five years include a 50 per cent increase in milk production. BF

Norman Dunn writes about European agriculture from Germany.