The removal of EU milk quotas on April 1, 2015 will lead to significant changes in the European dairy industry over the coming years. In the short term, the impact will vary by country depending on whether they have been producing at, below, or above their quota levels. Countries producing at or above quota like Ireland, the Netherlands, and Germany will be able to expand production. The top 14 milk producing countries may increase production by 6.8-23.2 billion liters annually by 2020. However, almost all additional milk will need to be exported as demand growth in Europe is low. Long term impacts include a decline in dairy farm numbers across Europe as less efficient farms struggle and production shifts to more efficient larger farms in optimal locations

1. Change in the EU dairy sector:
lessons for all agri food industries, near and far
Impacts of quota
removal
So what does this mean for milk
production and dairy farmers waking
up on Wednesday morning 1 April?
In the short term, there may be little
impact, but this largely depends on
which country you are in.
For the last 5 - 10 years, milk quotas have
had little impact in a number of countries.
In the 2012/13 quota year, only five
countries (Germany, Denmark, Cyprus,
Austria and Poland) exceeded quota.
In 2013/14, eight countries (Germany,
the Netherlands, Poland, Ireland,
Denmark, Austria, Cyprus, and
Luxembourg) exceed quota. Perhaps
more importantly though, in 2013/14,
20 Member States produced below
quota, with 14 of these more than
10% below their delivery quota.
For those countries producing at, or
above their quota such as Ireland, the
Netherlands and Germany, quota
removal provides the ability for farms
to grow.
From recent research we have carried
out on the subject, it is possible that
the top 14 milk producing countries in
Europe will increase their production by
anywhere between 6.8 and 23.2 billion
litres per annum by 2020 following the
ending of the milk quota regime.
And with low level demand growth for
many dairy products in Europe, it is
inevitable that almost all additional milk
produced will have to be exported. This
means the growth of EU milk production
will be heavily influenced by global
dairy prices and driven mainly by external
factors including weather, supply and
demand shocks and input prices.
We can only predict further ongoing
change in the dairy farm sector.
Over the last seven years, European dairy
farm numbers across most countries
have declined in the last 10 years and
more. They will continue to decrease,
but in parallel with a continuing trend
towards increasing herd size.
Although they may not admit it, Irish
farmers tend to see themselves as the
‘New Zealand’ of the Northern Hemisphere
– a relatively small country, a mild
climate with mainly pasture based, low
cost dairy production. The current
narrative is that milk quotas have
constrained the Irish industry - if it
was not for EU milk quotas, Irish
production would be much higher
than it is now.
Likewise, many Dutch and Danish farmers
see themselves as global exporters that
have been constrained by European
quotas and look forward to improving
their farms and increasing milk
production.
Since World War Two, Europe has played a key role in influencing global dairy markets – as a major dairy
exporter, but also though its agricultural policies, which have influenced global markets. For many years, the
EU has been slowly modifying its approach to supporting European agriculture and on April 1 2015, one of
the major pillars of European dairy industry structure, the EU milk quota system, was finally removed.
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Issue 9 April 2015
A Company

2. External drivers
The extent to which key European
countries are able to increase
production will depend on a number of
other external factors, not just the
removal of quota.
In countries such as the Netherlands,
high levels of existing production mean
that environmental restrictions could
effectively cap production levels.
Farmers will need to produce more
milk, whilst at the same time, also
decreasing the amounts of manure and
nitrogen etc. that is discharged into
the environment.
Countries that have been consistently
under quota will need to address deep
rooted structural issues before
significant milk production increases
can be achieved.
These structural issues are typically
based around farm productivity.
In countries such as Finland, Austria
and France, there are still large
numbers of farmers with relatively
small herd sizes, high cost
structures and low
labour productivity.
Making these farms
more competitive
within Europe will be
necessary before milk
production
increases can
occur.
Global markets
and prices
The global milk price is a clear external
driver. Europe is now firmly part of the
global dairy markets and changes in
supply or demand across the world
impacts on the European milk price.
Europe is a relatively high cost dairy
producer; unless the global milk price
is sufficiently high, many European
farmers will find it uneconomic to
expand production.
The last three years have shown how
weather conditions can also significantly
increase or decrease national milk
production across a wide range of
farming systems in Europe. As an
example, mild weather during the
Italian summer of 2014 resulted in
greater milk production and higher
pregnancy rates, as less cows were
subject to heat stress.
On the other hand, across the UK and
Ireland, cool and wet weather during
the summer of 2012 resulted in low
pasture growth and poor quality silage
production - both of which resulted in
lower milk yield.
Speed of change
The speed at which some countries in
the EU have increased milk production
has surprised many industry analysts
and highlights that, given favourable
conditions, farmers will respond to
higher prices with increased production.
Although the Russian import ban and
slow down in Chinese demand may
decrease production growth in 2015,
and even 2016, we believe a return to
more favourable external factors in
subsequent years, will see a return to
strong milk growth in Europe.
Competition from other land uses is a
key driver of milk production volumes
in Europe. Across Europe, areas of flat
land with good soils and adequate
rainfall (or irrigation) tend to be used
for arable/cropping, not dairying.
In such areas, dairy production will be
influenced by the ratio of crop prices to
dairy prices.
In the UK, there are very few dairy
farms in the Eastern part of the
country, because they are strongly
more suited to arable production.
Whereas, in countries such as France,
mixed farms (dairy and cropping) are
still relatively common.
Biofuels are another newer source of
competition that will impact future
dairy production. In Northern Germany,
land prices are at a premium largely as
a result of biofuel plants looking to
lease land to grow maize/other crops
for fuel.
Access to processing capacity is another
potential brake on milk production
intentions. Countries like the UK and
Spain, which have seen little investment
in additional production capacity in
recent years, will find it harder to grow
milk production.
The effects will be
felt, by all, and
for the long-term
Ultimately, quota removal will result in
greater change and more competition
amongst all European dairy farmers.
The best farmers in the best areas will
continue to grow and prosper, while
less efficient farmers, or those in
poorer dairy farming areas, will find
conditions even more challenging.
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3. o
Technology across
the board is more
important
Over the next ten years, dairy processing
capacity will shift to focus on the best
production areas or, for high volume
products, such as liquid milk, to areas
strategically sited close to consumer
markets.
Other dairy support services such as
veterinarians, genetics and machinery
suppliers etc. will also focus their
resources on these high density milk
production areas. Farmers outside
these areas will find it harder to compete
and remain viable.
The potential for increased competition
between milk producers within Europe
following quota removal means that
more farmers will be looking for
technologies, including breeding
technology such as provided by our
own parent company, Genus ABS, that
help them lower their costs and
become more efficient.
The removal of EU milk quotas will not
change the European industry overnight,
but we believe their removal will make
it easier for the better farmers to move
from simply milking cows to becoming
entrepreneurs and “managing
businesses” that deliver a range of in-
demand products and services.
Europe - still a
good place to
farm and produce
food
Although we also see the removal of
EU quotas as causing change and pain
for many producers, particularly those
on small farms in remote areas, or
areas less suited to dairy farming,
overall, the changes will be positive
and lead to a more productive and
competitive European dairy industry.
Ireland stands out as a clear growth
opportunity with arguably all of the
above requirements already in place.
Countries such as Denmark and the
Netherlands also have strong growth
potential, so long as they are able to
manage ‘internal’ issues regarding
environmental impact and public
perceptions.
The UK, Germany, France and Poland
also have strong dairy growth potential
in regions where many of the above
factors are present. These countries
could see greater production growth if
they can overcome, or work-around, the
main barriers holding back milk
production in other parts of the country.
Even countries like Spain and Italy have
potential for dairy growth in specific
regions such as Galicia and
Lombardy.
A freer milk market also paves the way
for the EU to lead the world in
developing a truly sustainable dairy
industry with significant improvements
in animal welfare, environmental
impact and profitability for the farmer.

4. o
The European dairy
industry towards 2020
Promar International has produced a report on
the future of the European dairy sector. The
analysis was based on a review of published
reports and articles, supplemented by in-depth
interviews with dairy industry experts in the
nine largest dairy producing countries. These
experts were based across the supply chain
from universities to input suppliers to industry
support organisations. We also built on the
inherent knowledge we have gained from
working in the international dairy sector over
an extended period of time.
Published by: Promar International, Alpha Building, London Road, Stapeley, Nantwich, Cheshire, CW5 7JW.
Tel 01270 616800 • Fax 01270 616704 • www.promar-international.com
Farming • Food & Drink • Environment • Public sector • Trade associations and levy boards • Private agri business
For more details contact:
Andrew Mclay,
Senior Consultant,
Promar International.
Email: andrew.mclay@genusplc.com
Tel: +44 (0)7885 532256
What can we all
learn from change
in the European
dairy industry?
Aside from the formal removal of
quota, we have identified many other
underlying change drivers in the
European dairy industry, which are also
affecting many other agri food supply
chains. These include:
• Growth and expansion should not be
“at all costs” – production growth
needs to be sustainable and managed
in such a way that mitigates
environmental impacts. Many regions
of the EU however, remain
fundamentally good places to
produce agricultural and food
products in the future
• EU markets will be less regulated than
they have in the past and production
controls and incentives are being
replaced by support and rewards for
good environmental practice, use of
protected food schemers, adding
value and rural sustainability
• Less protected markets will inevitably
lead to the rate of change accelerating,
especially when combined with the
greater price volatility which will be
prevalent. These conditions will be
new to many European countries,
while other parts of the world are
more familiar with them
• Global commodity prices will play an
ever increasing role in influencing
changes in supply
• Farm numbers will continue to fall in
most EU countries, but those that
remain will get bigger in size
• The role of technology per se will
become more important as farmers
and food processors need to become
more efficient
• Market growth will come from
emerging countries in the likes of
Asia, Africa and the Middle East in
particular bearing in mind the often
mature nature of the EU markets for
agri food products per se
• Producers will need to be globally
competitive in order to survive and
will need to develop their technical,
financial and people management
skill sets in order to operate high-
performing businesses
• Land use policy, the suitability of land
for different types of agricultural
production and land costs will be a
key driver of what, where, how much
and how food will be produced
• Climate will be an increasingly
volatile variable and agri-food
businesses will need to capable of
withstanding weather-related ‘shocks’
To our minds, these are all issues facing
agricultural and food businesses alike,
not just the European dairy industry.
The ‘winning combination’ will eventually
be the country/region with an efficient
farm production sector, able to produce
high-quality, low-cost products with
minimum environmental impact,
coupled with an efficient, customer-
focused processing sector.
Some European farmers and processors
already display these characteristics,
but many do not. Europe’s success in
capturing a large share of future global
market growth is not guaranteed in the
face of strong international competition
from countries in the Southern
Hemisphere and North America, and
some of the emerging markets
themselves, who are rapidly developing
their own food production, processing
and export sectors.