DairyCo

EU-27 Market Balances

Published 1 December 11

EU Market Balances

The balance of supply and demand in the main dairy product markets in the EU is a major determinant of price trends for those products and these balances are therefore an important aspect of looking at future prospects for milk producers and for buyers of milk and dairy products.  Unfortunately, the calculation of those balances is subjective and very dependent on the assumptions made concerning world market demand and production of all main dairy products, supply and demand within the EU and import and exports of those dairy products.  Small changes in supply and demand can have very large impacts upon the balances in this report.  Not surprisingly, different market commentators have differing views about these various factors. 

World commodity markets remain highly volatile and benefited in 2010 and 2011 from high demand from China as a result of the Melamine scandal.  World milk supply growth was limited in the first three quarters of 2010 and world demand remained high in 2010 and has grown further in 2011, driven by China and Russia.  Milk supplies remained restricted until the second quarter of 2011.  Further increases in the Southern hemisphere are expected in the 2011/12 season, particularly in New Zealand.  Long term, the rate of increase in demand is expected to keep world prices historically high, driven by economic growth in Asia.

The EU market situation looked increasingly more positive as 2010 progressed. Producer prices recovered from 2009 and they have stimulated an increase in milk production. Continuing economic growth has increased cheese and fermented product demand, limiting the increase in production of butter and SMP.  EU exports of cheese and SMP have grown significantly and they could show more growth in 2011 and 2012 assuming that demand from Russia and China continues to rise.

Currently, world market prices for butter are well below EU prices. With EU production falling, the butter market showed excess demand over supply in 2010.  This was met with 80,000 tonnes coming out of intervention, mainly under the 'deprived persons' scheme and also by sales of the last intervention stocks.  In 2011, intervention stocks are no longer available and production has been just sufficient to cover internal EU demand plus a modest level of exports. The SMP market has been supported by a huge increase in exports, and has absorbed around 150,000t coming out of intervention without any market disturbance.

The European Commission have issued a rather positive forecast of market development in 2012 with a slowdown in milk supply growth and continuing increases in cheese and SMP exports and continuing modest increases in domestic consumption of cheese and fresh products. Butter production is not, however, expected to fall further.

EU27 milk production is expected to increase by 1.6% in 2011 but slow to 0.1% in 2012 to reach 151mt, with deliveries to dairies rising a little faster. Expansion is expected to slow as the end of the quota year approaches. Fresh dairy production (drinking milk, fermented milks and cream) is forecast to grow by 0.7% in 2011 and 2012, with a 2.5% growth in fermented milk production in 2012. Increases in exports and domestic consumption will result in a 1% increase in cheese production in 2011 and 2012. EU WMP production is expected to slowly decline as exports are affected by rising New Zealand production. SMP production is forecast to rise by 9% in 2011 and by 4% in 2012 driven by higher exports, with world demand rising, with intervention stocks completely sold out by the end of 2012 despite static internal use. Butter/butteroil production is forecast to rise by 1.2% in 2011 and a further 1% in 2012. Exports are not expected to fall further and EU consumption is not expected to drop by much. Despite the rise in production only a small butterfat surplus is expected in 2012, adding to private stocks, implying that butter prices may well be lower but still above world market levels.

There are significant downside risks to these projections. Milk supply growth could well be faster but the biggest danger is the fragile economic situation, especially within the EU with major cuts in government expenditure in a large number of countries, and the continuing fragile state of the Eurozone. There are also question marks over the ability of China to keep on growing rapidly, and the willingness of Russia to keep on importing more cheese. Middle East political turmoil creates more uncertainty. On the upside, milk supplies around the world, especially in exporting countries such as New Zealand are crucially dependant on the weather. Rising grain prices could limit supply growth throughout the world. Although 2010 and the first half of 2011 was surprisingly stable, market conditions can change exceptionally rapidly as the turbulent period between 2007 and 2009 testifies.

Please note: The 2010 figures contain estimates and the 2011 and 2012 figures are preliminary forecasts: all figures in the table are subject to change.

*   Contains estimates
**  Forecasts

Source: European Commission, Short Term Outlook, October 2011

*   Contains estimates
**  Forecasts

EU Commission Forecast

The EU Commission produced a market assessment in December 2010 as part of the examination of the conditions for phasing out milk quotas. Milk production is expected to grow from 2011 onwards with supplies in 2020 exceeding 2009 level by about 3%, even with quota abolition in 2015. The outlook appears favourable for higher added value dairy commodities, driven by growing demand for cheese and fresh dairy products. Production of fresh dairy product is projected to grow by 8% over the next 10 years and cheese by 10%, with the EU maintaining a steady share in global exports above 30%. The outlook depicts continued market stability for butter but conditional on firm domestic demand. Production and exports are expected to increase. SMP export perspectives are less favourable given an assumption of strong supply growth from other exporters. Despite the relatively favourable outlook with market stability for SMP, the nearer term prospects remain sensitive to global supply/demand developments and the EU's ability to control the release of intervention stocks. The Commission conclude that the phasing out of milk quotas will have little impact - milk quotas have ceased to work as a production limit in most member states.