29 Oct, 2008 - After peaking in mid-2007, domestic prices for raw milk and export prices for dairy products are falling in 2008. Lower prices for milk combined with increased costs of agricultural inputs make milk production and dairy processing less profitable.
Despite lower prices, milk production in the EU-27 is expected to increase in 2008 due to the enlargement of the milk quota and growing consumption of dairy products. However, the increase in production is not expected to continue at the same rate into 2009 due to the drop in raw milk prices and lower prices for dairy products on the world market. In the spring and fall of 2008, farmers in Germany, Austria, France, Czech Republic, Poland and Bulgaria protested against the drop of milk prices and the higher costs of inputs. The inventories of European dairy herds continue to decline, however there is continued genetic improvement and higher yields from cows, and a general trend toward greater consolidation of the dairy industry.
Growing milk production and higher domestic consumption of all dairy products, except butter, is expected to increase output of dairy products in 2008 and into 2009. Production of cheese is expected to grow in 2008. However, competition from other products and a slow increase of exports is slowing the growth of cheese production more than originally predicted. A higher production of butter, combined with almost stable consumption and a significant reduction in exports in 2008, is causing an excess of butter on the EU market and resulting in growing private stocks.
Due to a gap between domestic and world market prices, the absence of export restitutions, and strong worldwide competition, exports of butter, and in particular butter oil, are expected to drop in 2008. Higher world demand is causing EU-27 production and exports of whole dry milk (WDM) in 2008 to increase from the 2007 level. Growing supplies of milk are processed to WDM as cheese production almost reached its maximum potential and the profit margin on non fat dry milk (NFDM) production is lower of that of WDM production. Higher milk supplies are expected to only slightly increase NFDM production in 2008. The profitability of NFDM/butter production remains below that of manufacturing cheese and WDM. However, the worsening world market conditions for EU exporters of dairy products is forcing the industry to partially switch to products with a longer shelf life, such as butter and milk powder.
A moderate increase of milk output in 2009 will increase production of dairy products in the EU-27, with the exception of WDM. Cheese consumption in the EU is forecasted to continue to grow in 2009, in line with growing output. However, domestic consumption of cheese may be affected by the developing financial crisis in Europe. EU butter production is forecast to increase only slightly in 2009, as increased milk output will be used mostly for cheese production. NFDM production is forecast to increase in 2009 in line with higher milk supplies and increases in butter production. WMP production is forecast to decline in 2009 as additional raw milk supplies will be used mostly for the manufacturing of cheese and fresh dairy products.
Until the end of October of 2008, the Commission did not intervene on the internal or external dairy market. However, the situation may change towards the beginning of 2009 as growing supplies combined with lower competitiveness of European dairy products on the world market and stable domestic consumption will put strong pressure on the EU authorities to build intervention stocks, subsidize consumption, or re-introduce export refunds.