Industry Trend Analysis - Quota End Will Benefit Cheese Output The Most - DEC 2014

BMI View : EU dairy production growth will be robust over the coming years, fuelled by the liberalisation of the sector from April 2015, favourable input prices and robust export growth. We expect cheese output and exports to be major outperformer s over this time period.

EU dairy production growth will be robust over the coming years, fuelled by the liberalisation of the sector from April 2015, favourable input prices and robust export growth. We forecast fluid milk output to increase by 2.7% year-on-year (y-o-y) to 148.8mn tonnes in 2013/14, before averaging growth of 2.1% per year through to 2017/18. We expect fluid milk production to reach 161.5mn tonnes by then.

Higher Average Growth Over Coming Years
EU-28 - Milk Production & Growth

The EU's long standing milk production quota will end in April 2015, which will allow all countries in the bloc to produce an unlimited amount of the product. Since 2008, the EU has increased the production quota by 1% each year in order to prepare the region's market for liberalisation. As a result of the steady production increases over the past six years, it is unlikely that production growth will inflate massively in 2015 and 2016, but it will move to a higher plane of growth. Many countries have produced below their production quota in the last several years, though countries such as Germany, the Netherlands and Austria have had their output constrained by the imposed limits. We believe that the greatest production growth in Europe will come from these countries over the next few years.

As well as liberalisation of the sector, output will be boosted by improved margins for dairy producers and strong export demand growth. Feed prices for cattle have reduced significantly over the last year relative to 2011-2012 levels, which has led to lower input costs for dairy farmers. Though we expect global wheat and corn prices to rise from current levels in 2015 and 2016, they will remain subdued relative to the last few years. Furthermore, low interest rates in Europe will continue to provide farmers with cheap access to funds to enlarge and invest in dairy production.

Germany & France Lead The Way
EU-28 - 2013 Milk (RHC) & Cheese Production By Country (% of total)

Export demand for milk and dairy products will be strong over the coming years, driven by increasing demand for such products from emerging markets, as well as the increase in global demand for finished dairy products such as cheese. Indeed, we expect global cheese demand to post some of the strongest growth in dairy products over the coming years. Germany, France and Italy are the largest producers of cheese in Europe, with Germany and France the largest and second largest global exporters of the good, respectively. Outside of Europe, the US, Japan and Russia are three of the largest destinations for European cheese.

Large EU/World Premium Over
Select Milk Prices (EUR/100kg)

We believe that producers of dairy products in Europe will benefit from lower milk costs in the region over the coming years. In our view, liberalisation of milk production will largely abolish the premium for European milk over global prices that has historically existed (see 'European Agriculture: The Future Of The CAP', 20 November).

EU-28 - Milk & Cheese Production ('000 tonnes)
2012e 2013e 2014f 2015f 2016f 2017f 2018f
Milk production, '000 tonnes 143,750.0 144,850.0 148,750.0 152,000.0 155,500.0 158,500.0 161,500.0
Cheese production, '000 tonnes 9,142.0 9,300.0 9,450.0 9,650.0 9,870.0 10,000.0 10,100.0
e/f = BMI estimate/forecast. Source: Eurostat, USDA, BMI

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