April 3, 2019
Understanding Europe's diverse dairy sector
Fatty value-added exports are leveraged for world market dominance, with production increasingly concentrated in the Continent's northern and Eastern regions.
By Eric J. Brooks
An eFeedLink Hot Topic
With 715 million people over 31 nations, 28 of whom are in a single integrated market, Europe is the world's largest dairy producer. The world's largest market is also its slowest growing. EU milk output expanded at a 2.1% average rate from 2013-18, with drought conditions reducing growth to 0.4% in 2018. At an EU-estimated 157.4 million tonnes, EU fluid milk output is 10.9% above 2013's level of 141.9 million tonnes but only 3.3% above 2015's 152.3 million tonnes, when the community's output was deregulated.
Constrained by civil wars and oil price crashes, large non-EU dairy producers fared worse, with Russian output expanding by a mere 0.6% annually and Ukrainian milk production falling at a 2.2% rate over from 2013 through 2018 inclusive. Despite being the second largest milk producer after Germany, the oil price crash has kept Russian milk production in the 30.5 to 31.5 million tonne range since 2013.
Among Eastern European producers, only Belarus leveraged its peaceful geopolitics and neighboring Russian market to boost output. With its own population flat, milk output rose from 6.67 million tonnes in 2013 to 7.39 million tonnes in 2018.
Collectively, the collective milk output of the EU, Russia, Ukraine, and Belarus rose at a 1.6% annual rate, from 190.63 million tonnes in 2013 to 206.56 million tonnes in 2018. Despite having only half their population, Europe produces 510% more milk than China and 29% more than dairy-centric India. The world's largest consumer of dairy good is also its largest supplier, out-exporting all other dairy supplying nation or regions.
While such collective statistics are impressive, European dairy production is as diverse as its weather, nationalities or geography. One European country's output booms while that of its neighbor stagnates. European dairy defies generalizations and must be looked by country or subregion.
Germany (32.5 million) tonnes leads European milk production, followed by Russia (31.45 million), France (24.5 million), Britain (15.21 million), Netherlands (13.88 million), Italy (12.07 million), Poland (11.95 million), Ukraine (10.3 million), Ireland (7.80 million), Belarus (7.38 million) and Spain (7.12 million). These eight EU nations and three Eastern European countries collectively produce almost 85% of Europe's fluid milk.
The largest milk producers however, are not necessarily the fastest growing ones. The  growth rates of German (1.4%), Russian (0.6%) French (0.5%) and Ukrainian (-2.2%) dairy production are all far below average. Their share of European milk production fell from 51% in 2013 to 47% in 2018.
On the other hand, though their collective 60 million tonnes of 2018 fluid milk output accounts for 29% of European production, Ireland (6.9%, 7.8 million tonnes), Czechia (5.0%, 3 million), Belgium (3.8%, 4.2 million tonnes), Poland (3.8%, 11.95 million), Netherlands (2.6%, 13.88 million), Italy (2.5%, 12.07 million) and Spain (2.4%, 7.10 million)  were the only nations whose milk output expanded significantly faster than the EU average of 2.1% or Europe wide 1.6% annual expansion since 2013.
Unlike India where a large proportion of milk comes from non-cow species, 98% of European milk was derived from dairy cows. Among leading European producers, Spain gets a million tonnes of milk from sheep and goats, totaling 14% of output. This was followed by Italy's 6%, which was mostly derived from buffaloes (for mozzarella cheese) and 3.3% or 0.8 million tonnes of French milk derived from sheep or goats
On one hand, milk output is growing incrementally. From 135 million tonnes in 2000, EU milk production expanded an average of 0.94% yearly to 160 million tonnes in 2018 and 205.66million tonnes if Russia, Belarus and Ukraine are included. Even if the production of non-EU states such as Russia, Belarus and Ukraine are added in, India is already producing 168 million tonnes of fluid milk yearly and its output will overtake the combined of the EU and Eastern Europe combined within one to two decades.
On the other hand, despite 90% of its output being used to satisfy domestic demand, EU nations collectively make the continent an increasingly a leading and increasingly important dairy supplier. Foreign demand is the main reason why in the 5 years since 2013, EU milk output has increased at a 2.1% average rate, or double its 2000-18 average.
EU policymakers expect the proportion of fluid milk production going to exports to rise from 9% in 2015 to an estimated 11% this year and 14% by 2026, by which time they project the EU will overtake New Zealand as the world's largest dairy exporter by volume –though by exporting fattier, high-value items, the EU already has an impressive export profile, both in terms of quantity and value added terms.
Cheese is the dairy commodity that best combines a high price and mass market scale economies –and at a USDA estimated 830,000 EU exports approximately 2.5 more cheese in 2018 than its nearest competitors, America (347,000 tonnes) and New Zealand (350,000 tonnes).
When non-EU cheese exports from Belarus (205,000 tonnes) and Russia (25,000 tonnes) are factored in, the continent exports approximately 1.1 million tonnes of cheese, which is more than triple US or New Zealand volumes. Within the EU, cheese makes up 19% of exports but 37% of export revenues.
While no European country out-exports America or New Zealand on their own, collectively Netherlands (141,000 tonnes), Germany (123,000), France (115,000), Italy (100,000), Denmark (75,000), Poland (54,000) and Ireland(50,000) swamp the cheese export volumes of other nations. Moreover, while EU milk output has grown 1% annually since 2000, its cheese exports have increased by an average of 3.4% annually.
They also produce higher priced less commodified cheeses that enjoy a higher price/kg than the cheese exports of competing countries. Exporting almost €4 billion in cheese in 2018, EU cheese export earnings of €4 billion exceed the combined value of US (€1.33 billion) and New Zealand (€1.25 billion) shipments.
EU nations not only supply the world market with cheese but help other nations make their own: At €5.31/kg,  casein is even more costly than cheese itself. Here too, we see how the casein exports of EU members Ireland (46,000 tonnes), Netherlands (42,000), France (31,000), Germany (30,000), Denmark (18,000) combines with that of other European nations to collectively edge out New Zealand (98,000 tonnes), with their combined US$1.1 billion of revenue approximately 60% above those of New Zealand (€520 million).
On one hand, with so much European milkfat diverted into leading export earner cheese, it is not surprising that the Continent's butter exports of 168,000 tonnes are second to those of New Zealand (510,000 tonnes). France (33,000 tonnes) and Ireland (31,000)  are the continent's top butter exporters with second-tier suppliers Denmark (17,000) Netherlands (14,000), Germany (13,000) and Belgium (10,000) accounting for most of the remainder.
Selling at the highest price of any dairy good, butter completes the high-fat/high-value triumvirate formed by itself, cheese and casein. These goods are not just strong export revenue earners but their prices held up well in the years following the dairy market crash, when dairy powders went into a prolonged market slump.
On the other hand, mass exports of fatty dairy goods make for huge SMP surpluses. While the post-crash dairy market depressed SMP prices, the volume exported almost equals that of cheese, making it the second largest EU dairy export by volume (795,000 tonnes) and revenue (€1.617 billion) –in effect a lower-value mirror image by-product of high volume, high-value cheese making.
Alongside SMP, EU dairy's other low-margin/high volume export line is fluid milk, where shipments of nearly 800,000 tonnes are more than triple second-ranked New Zealand, which hopes to export 260,000 tonnes this year. While New Zealand milk sells at a higher price premium, total EU fluid milk export revenues of slighter over €11 billion were far ahead of New Zealand's €5 billion or third-ranked America's €1.33 billion.
Going forward, during our era of low corn and soybean prices, the EU's feed-driven dairy business model enjoys an advantage over New Zealand and Australia's more pasture and weather-driven production. The latter is subject to variations in weather and high Asian demand has resulted in a 'maxing out' of pastureland availability in these two southern hemisphere suppliers.
While falling returns have constrained the expansions of Australian and New Zealand's pastureland-based dairy sectors over the last decade, established northern European producers enjoy their greatest returns in export markets. Their Eastern European rivals such as Poland have equally buoyant domestic and foreign customers that justify rapid expansion of dairy facilities.
Within Europe itself, 2015's abolition of EU milk production quotas will allow northern European EU states like Germany, Belgium, Denmark, and the Netherlands to leverage their superior feed inputs, ideal cooler temperate climates and scale economies.
At the same time, many Eastern European nations have imported modern farm capital to leverage their combination of cheap feed supplies and rapidly expanding domestic markets. The latter include both EU nations such as Poland, Czechia and Latvia as well as non-EU nations including Russia, Ukraine and Belarus.
--Granted, an oil price crash and civil war caused Russian and Ukrainian dairy growth to fall to below average levels in the 2010s. After these medium-term issues dissipate, we can expect Russia and Ukraine to join Poland, Czechia and Belarus to act as locomotives of European dairy growth.
Consequently, we can expect European producers to grab an increasingly large share of the world dairy market while production itself becomes increasingly concentrated in established northwest European producers and new, fast-growing East European rivals.

All rights reserved. No part of the report may be reproduced without permission from eFeedLink.