EU quota removal one year on

It was one year since the removal of EU milk production quotas, but few European dairy farmers were lighting candles on birthday cakes in celebration.

Quota removal has quickly unleashed pent-up production capacity, and now farmers — those same ones — are lamenting bitterly to their governments in Europe that they have themselves expanded too fast — and that the governments should fix the problem.

Sounds like Euro agripolitics, right?

While removing quotas has kicked off a gradual reshaping of Europe's dairy supply chains, it will take much longer for the culture of farmer leadership to embrace market realities and walk away from the shroud of government protection.

Back to history

The quota was a regulated, strictly enforced cap on milk production that applied to each and every farmer in all member states of the EU.

Milk quotas were put in place (as in some agrifood sectors) in April 1984 as a 'big brother' action to protect the EU dairy sector, and to help avoid large product purchases by the European Economic Commission in the event the industry over-produced.

The large protests now, by angry farmer groups in many countries, might lead a casual watcher to think this was a change made at short notice.

But the removal of quota was agreed back in 2003 as part of a gradual deregulation process to slowly wean the EU industry off regulation – particularly the type that affected the market — and to reduce the size of the EU's support budget.

There was a serious 'industry' built around quotas themselves.

Quota rights were bought and sold between farmers in many regions of Europe, specialists advised on the quota market, and many farmers built up hefty capital investments in the market access ensured by the quotas.

A long notice period was necessary so that the quota removal wouldn't create major compensation lawsuits. Time will tell.

Planning for expected increases in milk supply was underway many years before the final days of quota in March 2015.

Major dairy companies made large investments in additional manufacturing capacity in commodity milk powders and cheese, and they added capacity to improve the economics of making infant formula, specialised milk powders and other functional ingredients – all with an export focus.

All has not gone to plan

The expected growth in Europe's milk output since March 2015 has been far greater than expected with the perfect storm of strong grass growth, low feed-grain prices and milk prices that have held up better than logic might suggest.

The strongest milk output has come from a limited number of regions where herd expansion and grass growth has been easiest.

Just three of 28 EU member states – Netherlands, Ireland and Germany – were responsible for two-thirds of the growth in milk supply in the second half of 2015.

The effect of adding the surge in Europe's milk to an already over-supplied world market – given the retreat of China and the shut-down of the Russian market – is delaying the timing of a substantive recovery until sometime in 2017, although steady improvements will begin in the second half of 2016.

Of course, quotas weren't the last vestige of protectionism. While export subsidy payments are no longer in play, intervention buying remains and is in full swing.

The European Commission is standing in the market at present to buy skim milk powder (SMP) and butter to take surplus product off the market. The government-owned SMP stockpile will probably reach at least 270,000 tonnes by the middle of this year.

Import tariffs are also still in place, limiting access to the EU's market.

Environmental outcomes remain a major focus of the agricultural policy regime, including regulation of farm impacts and emissions, which will cap output.

Regulations such as those applied in the Netherlands limit phosphate fertiliser discharges on farms (tied to cow numbers on individual properties) and in that country will force a contraction in herds over the next year.

But we're only in the early days of a new era. The landscape and culture will gradually evolve. Longer-term challenges for farmers as the EU market becomes more volatile will be more complex.

Smaller, traditional higher-cost dairy farms may struggle to cope in that environment. It is expected that the output from such farms will gradually contract, allowing room for expansion in lower-cost regions where flexibility in scale and productivity are afforded.

• Steve Spencer is a director of the Victoria dairy consultancy Fresh Agenda.