May 18, 2015

 

As EU milk output increases, higher exports to head for China 

 

 

The first day of April this year finally witnessed the abrogation of EU's milk output quota system which lasted for 30 years. With this landmark action, two developments will eventuate: the rise of milk productions among EU states; and a more emphasized focus on exportations to China.

 

The end of the quotas means that dairy sectors in the EU and the Netherlands will have to be more attuned to the world market, experts said. It is especially crucial in alleviating the pressure which milk and dairy prices had been under since January 2015, and may likely go on for years, warned Roel Jongeneel, a senior scientist and market analyst at the Agricultural Economics Institute (LEI) of Wageningen University.

 

With milk productions anticipated for about 17% and 8% rises for the next decade in the Netherlands and the EU, respectively, a major portion of output will be directed to international sales outside the bloc, according to Jongeneel. Much of the additional outputs could also be used in boosting cheese and milk powder productions, mainly skimmed milk powder and whey.

 

Additionally, the EU might see an increase of 12 million tonnes in milk exports in the next 10 years.

 

In the meantime, consumptions in member states will be "relatively low", Jongeneel added.

 

Due to the upward trend in global sales, EU's milk prices will be increasingly exposed to volatility. Jongeneel attributed this vulnerability partially to "adjustments in the Common Agricultural Poilcy (CAP) towards a very low safety net price system for dairy products".

 

Tassos Haniotis, the director of Economic Analysis, Perspectives and Evaluation in the Directorate for Agriculture at the European Commission, said that milk price could be around an average of 35ct/kg in the next decade, based on medium-term projections given under particular macroeconomic considerations.

 

The price could drop depending on circumstances, specifically lower oil prices which could lead to a "lower average EU milk price of around 33ct/kg," he added. Whenever there's some imbalance between supply and demand, the price will deviate from the average figure.

 

 

More EU milk exports to the Mainland

 

Haniotis believes that the coming months may see a slow recovery in prices if China orders a huge amount of dairy products. Following the termination of the milk output quota, companies are currently exploiting emerging opportunities from the outcome as European dairy products arrive in the Mainland at significantly competitive prices.

 

Since April, Dutch facilities of Mead Johnson Nutrition has been making direct exports of finished milk powders to China. As the company looks to establishing new distribution channels in the country, it will increase production capacities to bolster more exports during the second half of 2015, according to Kasper Jakobsen, the CEO of Mead Johnson Nutrition.

 

Germany's biggest dairy firm, DMK Deutsches Milchkontor GmbH, had set up a liaison office in Shanghai in January.

 

The Netherland's Royal FrieslandCampina NV and China Huishan Dairy Holdings are presently in a joint venture to produce and sell infant formula in China.

 

Last year, EU exports constituted up to 71.8% of infant formula milk powder to the Mainland, with a further increase expected in 2015. EU's liquid milk deliveries could rose to 400,000 tonnes this year, compared to 295,000 tonnes in 2014 and 185,000 tonnes in 2013, said Wang Dingmian, a former executive director of the Dairy Association of China.

 

The growths accentuated the popularity of European dairy products in the Chinese market. These products, according to Song Liangxiang, a dairy analyst, are well regarded for positive brand images and uncompromising qualities, backed by a reliable supply chain and R&D capability. 

 

The entry of dairy imports from the EU is expected to challenge market positions held by Chinese dairy companies, chiefly in ultra-high temperature (UHT) milk and infant formula milk powder, Song said. In addition, the conventional pricing system in the Chinese dairy sector is likely to be affected.

 

However, it will not be a walk in the park for a sturdy European foothold in China's dairy market. Local dairy companies engages all sales channels in the country, a reason for foreign organisations' cooperation with Chinese firms here, said Song, pointing to the recent joint venture between FrieslandCampina and Huishan Dairy.

 

Moreover, the current range of Chinese products could even rivalled those of the EU, in terms of raw milk quality, production expertise and research, Gao Lina, the president of the Modern Farming Group in China, claimed.

 

Also, China's annual increase of dairy imports is expected to slacken to about 3% yearly, based on estimates by the European Commission. The percentage is dwarfed by a previous rate of 16% recorded over the last 10 years.

 

Elsewhere in the world dairy market

 

Beside China, rising demands for EU's milk are expected to occur in Asia, the Middle East and parts of Africa in the next decade, along with a 2.1% increase in the global consumption of dairy products. These trends will be driven by population growth and changing consumption patterns which favour more dairy proteins.

 

Products in these regions would also grow to about 2% annually.

 

For Russia, deliveries to the Federation are likely to continue falling, due to trade sanctions and a declining local population which may drop 0.3% annually.

 

"The major uncertainty remains if and when the Russian import ban will be lifted," Haniotis, the director from the European Commission's Directorate for Agriculture, said.