post-quota will need to be exported. Looking at the types and locations of investment in dairy processing provides some indication of how the industry may develop post-quota. There is likely to be a continuation of the trend in production moving to more competitive regions at both a Member State and internal regional level. The processing sector is likely to grow in areas of favourable milk production and high levels of net investment.
Recent European dairy processing investment announcements (Figure 2), suggest milk powder production could be rising significantly in the future. Information collected by Rabobank over 2012 and 2013 suggests that half of the 42 investments announced are focused on milk powders, with smaller numbers focused on cheese and whey protein. The size of the investment will vary from plant to plant and there is also considerable variation in activity among different member states, with the Netherlands, France and Germany being most active. Investments have been encouraged by the potential growth in milk production post- quota, along with expected growth in export demand for certain dairy products.
Figure 2: EU dairy expansion 2012-2013 milk
Denmark France
Germany Ireland
Total Source: Rabobank
The impact of a higher reliance on export markets for the EU dairy industry is a closer alignment of prices to global markets. While global growth in demand from emerging countries is expected to be sufficient over the long-term to support increased production from the EU, short-term imbalances in growth rates for supply and demand are expected to mean that the existing market volatility will remain.
Impacts on UK dairy industry Milk production in the UK has been under quota for the past 10 years (Figure 3) and, despite the current milk year continuing to produce at or near record levels, it is not likely the quota limit will be reached. As growth in the UK industry has not been restricted by its quota limits, there is no expectation that production will respond to the abolition of quotas. Any growth witnessed in the UK will be more the result of the growth potential
powders cheese 2 6 2 3
The Netherlands 9 UK
21
1 2 3 1 4 3
14
Figure 3: UK wholesale quota v milk deliveries (1997/98-2013/14) Source: DGAgri/RPA
offered by rising global demand than by the absence of production restrictions. While the UK dairy industry will not be directly impacted by quota removal, it will be
subjected to the impacts of increased competition on global markets, affecting both dairy product prices and costs of production. Historically, UK and EU prices generally follow each other over the medium-term (Figure 4), this is due to the links through trade in the commodity markets. As mentioned earlier, the increased reliance of the EU industry on trade will require EU export prices to be globally competitive.
whey protein
2 2 1 1
2 7
With most of UK trade in dairy products taking place with EU trade partners, this means UK prices will also need to remain competitive to retain or grow their market share. As such, prices will become increasingly aligned with global prices through this trade link, although the speed to which global movements impact UK prices will depend on the degree to which the UK market is exposed to import competition, the ownership of milk processing and the proportion of milk paid on contracts not aligned to markets (e.g. Cost of Production models).
Figure 4: Farmgate prices trends (UK v EU)
The removal of quotas is also likely to add pressure to the cost competitiveness of UK dairy farms as the increased need to compete at a global level will, over time, shift production to the lower cost areas within the EU. According to the International Farm Comparison Network (IFCN), the UK compares favourably with its EU neighbours in terms of production costs on typical dairy farms. With a favourable climate and well-developed farming systems, the UK has the ability to compete at a global level.
The removal of production quotas in the EU dairy industry is happening at a time of increasing global demand, providing the industry with enhanced opportunities to take advantage of this growth. However, with it will come the need for the industry to maintain, or improve, its relative position in terms of production efficiency to remain competitive at a global level. This will apply to both the UK dairy industry and to other producing nations if they wish to compete and benefit from the growing appetite for dairy products.
THE JOURNAL DECEMBER 2014 123
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