December 3, 2012

 

 

EU dairy farmers' incomes are squeezed by rising feed costs and major market reforms expected to lead to a larger but leaner industry.

 

Farmers have seen their incomes fall sharply this year with the cost of feeding cows soaring while the region's economic crisis has also kept a lid on retail prices for their products. Hundreds of dairy farmers from across Europe protested in the EU's power hub, Brussels, this week spraying thousands of litres of fresh milk at the European Parliament and blocking traffic with their tractors.

 

"Farmers have been hit by a triple whammy of subdued milk prices over the course of a year, bad weather and high feed prices," said Jim Begg, Director General of Dairy UK, whose members collect and process about 85% of milk production in Britain.

 

The EU is in the process of reforming its dairy policy with quotas, which have constrained production and helped to support prices, set to be lifted in 2015. The reforms should lead to a shift in production towards countries such as Ireland where costs are lower as cows can feed on grass from less fertile countries such as Spain where farmers are heavily reliant on more expensive grain concentrates.

 

"There has been a speeding up in dairy farmers stopping activity to turn to growing (crops) recently because grain prices were at a very high level and milk was in an unfavourable economic situation," said Emmanuel Beguin, a milk specialist at France's livestock institute.

 

In Germany, farmers say roughly a 30% increase in milk prices would cover their production costs. "We need US$0.40 per kilogramme to break-even but prices are currently around US$0.30," said Hans Foldenauer, spokesman for German dairy farmers association BDM.

 

The weather has posed an additional challenge this year. Britain had its wettest June since records began more than a century ago, while drought in some other parts of the EU reduced available pasture.

 

Irish Dairy Board Company Secretary Anne Randles estimates that milk output in Ireland will be down about 4% this year while prices will be 6% lower. "I think the estimation in farm incomes (in Ireland) are going to be down 20-22% in 2012. The main factors are the poor weather which has reduced output and the higher input costs which have been substantial," she said.

 

Retailers have begun to increase the price they pay to milk processors who in turn have been able to increase how much they pay farmers. The rise has been modest, however, with retailers reluctant to raise prices for consumers.

 

"All the supermarkets (in Britain) are now paying more for milk to the processors that they were at the beginning of the summer," RABDF's Cotton said, adding milk prices in the shops were, however, still lower than they were two years ago. Consumers are not ready to pay higher prices as the economic crisis brings rising unemployment which limits their budgets.

 

There is some industry consolidation as processors prepare for an expected rise in production after the abolition of production limiting quotas.

 

"Companies are growing, getting bigger so they are able to absorb rising milk volumes after 2015," said a spokesman for FrieslandCampina, the Netherlands' biggest dairy producer.

 

Rabobank analyst Kevin Bellamy said he expects an additional 10 million tonnes on top of the roughly 150 million tonnes which is currently produced in the EU. Ireland's government has targeted a 50% expansion by 2020 but the current crisis has tempered optimism.