Prospects for EU dairy Markets 2015-2025 Danish Cattle Congress 29 February 2016 Sophie Hélaine DG Agriculture and Rural Development European Commission
Outline The EU and world price developments in the last 10 years What led to the current low price levels? The medium-term prospects Assumptions World and EU demand Supply Main drivers 2
EU and world milk price developments 500 450 400 EUR/t EU/World price gap Convergence and variability 350 300 250 200 283 265 246 227 221 217 150 100 15-01-00 15-06-00 15-11-00 15-04-01 15-09-01 15-02-02 15-07-02 15-12-02 15-05-03 15-10-03 15-03-04 15-08-04 15-01-05 15-06-05 15-11-05 15-04-06 15-09-06 15-02-07 15-07-07 15-12-07 15-05-08 15-10-08 15-03-09 15-08-09 15-01-10 15-06-10 15-11-10 15-04-11 15-09-11 15-02-12 15-07-12 15-12-12 15-05-13 15-10-13 15-03-14 15-08-14 15-01-15 15-06-15 15-11-15 EU Milk Equivalent Support Price World Milk Equivalent Price EU Milk Price Note: World milk price equivalent based on SMP and Butter prices in Oceania Source: elaboration by DG Agriculture and Rural Development 3
EU milk prices, from 40 to 30 ct/l: why? General decrease in commodity prices Global over-supply - Due to 2013-2014 high milk prices - Favourable weather in 2014 and 2015 and favourable feed prices - Milk quota expiry in the EU Stable import demand in 2015, but no increase - Loss of the Russian Outlet - Back to normal purchases in China - While import demand elsewhere increased sharply 4
All world commodity prices down in link to the macroeconomic context 200 (2010 = 100, real) 180 160 140 120 100 80 60 40 20 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: World Bank Agriculture Fertilizers Energy Metals & minerals 5
EU milk prices, from 40 to 30 ct/l: why? General decrease in commodity prices Stable import demand in 2015, but no increase - Back to normal purchases in China - Loss of the Russian Outlet (1.5% of EU milk production in 2013) - While import demand elsewhere increased sharply Global over-supply 6
Demand drivers Decline in Chinese SMP and WMP imports (1000 t) 1.400 1.200 1.000 WMP 800 SMP 600 400 200 0 Good import demand elsewhere % change in imports of dairy products in milk eq. 2015/14 - US +30% Cheese - Japan +12% and butter - South Korea +10% Good EU exports to - Oman - Saudi Arabia - United Arab Emirates Note: p projection Source: DG Agriculture and Rural Development based on WTA and OECD-FAO Agricultural Outlook 2015-2024 7
EU milk prices, from 40 to 30 ct/l: why? General decrease in commodity prices Stable import demand in 2015, but no increase - Back to normal purchases in China - Loss of the Russian Outlet (1.5% of EU milk production in 2013) - While import demand elsewhere increased sharply Global over-supply 8
A global over supply not linked to quota expiry only Since 2007, world supply +1.9% per year - Major exporters' supply: +1.4% Changes in milk supply in major producing countries between 2007 and 2015 (+32 Mt) 16 40% - Faster growth in other countries Acceleration of the growth in the last 2 years - Due to 2013-2014 high milk prices - Australia is back - Favourable weather in 2014 and 2015 and favourable feed prices - Milk quota expiry in the EU Million t (bars) 12 8 4 0 30% 20% 10% 0% 9 Source: DG Agriculture and Rural Development based on Eurostat, DairyNZ, USDA, Informa.
What about 2016 in the EU? EU-28 deliveries +1.4% in 2016/15 Strong increase in deliveries in Q1 Lower deliveries in H2 (weather)? Affordable feed and low energy costs (to continue) Farmers need cash (to pay loans) Price signal? Prices (milk and commodities) to remain low SMP stocks to accumulate Increasing domestic demand and exports Source: DG Agriculture and Rural Development 10 3% 2% 1% 0% -1% -2% -3% -4% EU-28 EU-N13 EU-15 Dairy cows 2015/14 Deliveries 2015/14 e Deliveries 2016/15 f
Prospects for EU dairy Markets 2015-2025 11
Outlook: sources and process OECD/FAO Agricultural Outlook 2015-2024 Agricultural commodity markets for the rest of the world EU Short Term Outlook Recent years and orientation for near future Version of Autumn 2015 Macro-economic forecast For the EU: AMECO November 2015 (DG ECFIN) Consistent source for main countries and up to 2025 (IHS Global Insight) Expert opinion In-house expertise and senior staff Workshop on EU commodity markets, October, Brussels Modelling work and validation (with JRC-IPTS) AGLINK-COSIMO (EU-version) & uncertainty analysis 12
Assumptions Russian import ban: until end 2016 (inc. pork sanitary ban), in 2017, partial recovery longer term development, depends on change in domestic production Only ratified Free Trade Agreements in: Ukraine (not Canada) CAP assumptions: Coupled support and greening 13
Macroeconomic assumptions Which oil price? Favourable crop prices for livestock But uncertainties!! 150 125 100 75 50 25 260 240 220 200 180 160 140 EU wheat 0 2000 2003 2006 2009 2012 2015 2018 2021 2024 120 100 OECD-FAO, 2015 AGRI 2015 IMF, Aug 2015 EIA, Ref Scen., Apr 2015 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 IHS, Oct 2015 14 Note: Uncertainty analysis prepared by JRC-IPTS, based on partial stochastic analysis
The outlook is not a forecast. More precisely, the projections correspond to the average trend agricultural markets are expected to follow in a given macroeconomic environment were policies to remain unchanged. 15
A steady growth in world imports Close to +2% a year in world consumption and production, mostly in developing world +2.3% a year in world imports +1.5 Mt of milk eq. per year = 30% of supply increase in major exporting conutries in 2014 and 2015 A lower increase in traded volumes compared to the last decade China to contribute (but less) to import increase 80 70 60 50 40 30 20 10 0 World imports of dairy products million tonnes of milk equivalent 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 China Other Asia Middle East Africa* Russia Other 16 *Africa ex. South Africa Note: Milk equivalent based of total solids, coefficients used: 6.57 for butter, 3.6 for cheese, 7.6 for SMP, 7.56 for WMP, 7.48 for whey powder
A steady growth in world trade Close to +2% a year in world consumption and production, mostly in developing world +2.3% a year in world imports A lower increase in traded volumes compared to the last decade China to contribute (but less) to import increase The EU to contribute most to trade expansion 80 70 60 50 40 30 20 10 0 World exports of dairy products million tonnes of milk equivalent 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 New Zealand EU US Other 17 Note: Milk equivalent based of total solids, coefficients used: 6.57 for butter, 3.6 for cheese, 7.6 for SMP, 7.56 for WMP, 7.48 for whey powder
Domestic demand trends in the EU Retail sales: Drinking milk and yogurt Cheese, cream, butter Industrial use - Cheese: sandwich, pizzas - Butter: Bakery and biscuits - SMP, WMP: Bakery & biscuits, chocolate - Whey: Infant formula Cheese per capita consumption +1.3 kg / capita in 10 years % annual growth in EU-28 retail sales per capita (based on volumes of sales, 2010-2014) 1,0 0,8 0,6 0,4 0,2 0,0-0,2-0,4-0,6-0,8-1,0 Cow milk Yoghurt From. frais, quark Cream Butter Cheese 18 Source: DG Agriculture and Rural Development based on Euromonitor and AMECO
Driving a moderate increase in EU supply +15 Mt deliveries in 2025/2015 - Faster growth in the EU-N13 170 EU-28 Milk deliveries (million tonnes) Moderate increase - Compared to exceptional 2014 (+6.5 Mt) 160 150 140 Delivery quota +0.9%/year Why? - Moderate milk prices (though affordable feed) 130 120 Milk deliveries 2014/2013 +4.7% - Environmental constraints 110 Quota expiry 100 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 19
50 45 40 35 Dairy prices increases expected after 2020 EUR/100 kg World milk price eq. Milk 90 th percentile EU raw milk 3.500 3.300 3.100 2.900 2.700 EUR/t World SMP 90 th percentile 2.500 30 10 th percentile 2.300 EU 25 2.100 1.900 10 th percentile 20 Milk support price equivalent 1.700 Intervention price 15 1.500 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 20
Towards a concentration of the production? 21
Different dynamics by Member States Expected annual growth in deliveries 2015-2025 Increase above EU average IE, PL, DK, AT, EE, LV, RO Increase on average DE, FR, UK, LU Increase just below average NL, BE, PT, HU, CZ, SK, SI, LT Small increa se ES, IT, BG, CY Decre ase SE, FI, EL, HR, MT 22
Towards a concentration of the production? But there are environmental constraints Nitrates directive Phosphates policy in the Netherland GHG emissions: ammonia (air pollution policy), methane (climate policy) and the Voluntary Coupled Support Could help maintaining production in more areas 50% of EU dairy cows eligible, 825 Million EUR per year Limited alternatives Lower attractiveness of the crop sector Areas (like Massif-Central) without better alternatives 23
Index of environmental challenges on milk production (from 1 = low to 5 = high) Water quality GHG Air quality Source: Institut de l'elevage, Dossier Economie de l'elevage N 460, Septembre 2015 24
Dairy cows mostly located where highest livestock density 25
GHG Emissions of dairy cattle expected to decline with the reduction in herd Expected GHG emissions from dairy cattle by 2025 (kg CO 2 eq./total ha) EU dairy cows (million heads, left axis) and yield (kg/cow, right axis) 25 EU-28 Yield 8.000 20 EU-N13 Dairy cows 7.000 6.000 15 10 5 EU-15 Dairy cows 5.000 4.000 3.000 2.000 1.000 0 0 Source: JRC-IES in collaboration with JRC-IPTS 26 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025
Towards a concentration of the production? But there are environmental constraints Nitrates directive Phosphates policy in the Netherland GHG emissions: ammonia (air pollution policy), methane (climate policy) and the Voluntary Coupled Support Could help maintaining production in more areas 50% of EU dairy cows eligible, 825 Million EUR per year Limited alternatives Lower attractiveness of the crop sector Areas (like Massif-Central) without better alternatives 27
EUR/cow 500 450 400 350 300 250 200 150 100 50 Significant voluntary coupled support in the dairy sector No VCSdairy in: DE, UK, DK, IE, NL, AT, Flanders, LU, SE, EL, CY 0 Note: * max. number of heads per farm; # Other criteria applying. There are additional specifies (like top ups to new farmers) in FR, FI, IT, ES not presented here To know more: http://ec.europa.eu/agriculture/direct-support/direct-payments/docs/voluntary-coupled-support-note_en.pdf 28
EU: Most of the extra milk channelled into cheese and exported powders 2025 vs 2015, in million tonnes of milk eq. 4 3 Expected increase in domestic use 2 1 0 Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Prod. Exp. Cheese Butter SMP WMP Whey FDP Note: Milk equivalent total solids coefficients used: 1 for FDP, 3.6 for cheese, 6.57 for butter, 7.6 for SMP, 7.56 for WMP and 7.48 for standard whey powder 29
High EU share in world exports 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Whey Cheese Butter SMP WMP 30
Prospects for milk and dairy products in the EU The EU to supply growing internal and world demand and gain market shares on the world market EU deliveries to increase by 15 Mt in 10 years More milk channelled into cheese mainly for domestic consumption and powders for exports 31
Reports and data available at: http://ec.europa.eu/agriculture/index_en.htm http://ec.europa.eu/agriculture/milk-market-observatory/index_en.htm http://ec.europa.eu/agriculture/markets-and-prices/index_en.htm http://ec.europa.eu/agriculture/policy-perspectives/index_en.htm http://ec.europa.eu/agriculture/trade-analysis/index_en.htm Tak! 32 32
A rather lower margin per tonne and a lower income for FR specialised dairy farmers 200 Gross margin with coupled payments (EUR/t) 80.000 Farm net value added (EUR/AWU) 180 160 140 120 70.000 60.000 50.000 100 40.000 80 60 40 20 30.000 20.000 10.000 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EU-15 FR IE DE NL Source: DG Agriculture and Rural Development, based on FADN data, provisional data 33 EU-15 FR IE DE NL Note: Farm net value added (FNVA) = Output + Subsidies Intermediate costs - Depreciation
A rather lower margin per tonne and a lower income for FR specialised dairy farmers 80.000 Farm net value added (EUR/AWU) 50.000 Farm net income (EUR/AWU) 70.000 60.000 50.000 45.000 40.000 35.000 30.000 40.000 25.000 30.000 20.000 10.000 20.000 15.000 10.000 5.000 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 EU-15 FR IE DE NL Source: DG Agriculture and Rural Development, based on FADN data, provisional data 34 EU-15 FR IE DE NL Note: Farm net income = FNVA Wages Interests - Rent