There is a host of reasons why European dairy farmers have become hesitant or challenged to invest in expansion. A lack of succession plans, unavailability of labor, frequently recurring unfavorable weather and competition for farmland have contributed to a situation with generally tight margins. Adding to the costs and perceived uncertainty for the future is compliance with (future) environmental legislation or sustainability targets.
Milk volume growth has been shrinking for the last ten years. The European Union (EU) + United Kingdom’s annual milk delivery growth dropped from nearly 2% to less than 1% and toward the current standstill. The last decade’s early growth was backed by periods of healthy margins and the period leading up to milk quota abolishment. The modest growth of recent years was primarily the outcome of consolidation and yield improvements offsetting the losses in farm numbers and dairy herd size.
The EU’s executive arm, the European Commission, has announced a number of policy initiatives that have not been implemented as regulation yet but could have a significant impact on agriculture in the EU. These sustainability ambitions of the European Commission were not written with trade in mind. Called the Green Deal, Farm to Fork and Fit for 55, these sustainability ambitions have little to do with the current lackluster growth in EU milk production. But they indicate that a further stagnation or even decline in EU milk volume growth through 2030 is plausible.
The details about how EU member states are planning to comply with these proposed policy initiatives remain limited and will differ significantly among member countries. In Germany, the focus is animal welfare of cows in tie-stanchion barns. Meanwhile in the Netherlands, the dairy industry is facing a possible drop in herd size to reduce ammonia emissions near protected environmental areas that will contribute to improved biodiversity.
For the near term, the implementation of the EU’s new Common Agricultural Policy (likened to the U.S. Farm Bill) on January 1, 2023 will on average result in lower direct payments to dairy farmers as more of the budget has been allocated to eco-schemes. The allocation of budget and criteria for these eco-schemes have been defined in the National Strategic Plans, submitted by each EU member state.
The combination of the Green Deal, Farm to Fork and Fit for 55 will act as guidelines for future agricultural related policies in the EU for its individual member states. Members have a significant degree of freedom to allocate and define specific targets for sectors in order to comply with the EU’s ambitions. While the magnitude of impact on milk volume growth will differ among member states, there will be pressure across the region, limiting growth potential.
For dairy processors, the implementation of these policies will cause a transition from periods with exportable surpluses toward periods of milk deficits to run processing plants efficiently. This change will likely have a negative impact on export volumes from the EU (assuming a stable domestic consumption) and on the product mix for the domestic market. For example, there may be fewer low-margin, private label liquid milk contracts.
The U.S. could benefit from this to gain volume and/or market share. RaboResearch expects global dairy import demand to continue growing as population and incomes grow. The EU represented 35% of global dairy trade in 2021 and the U.S. represented 24%, in terms of dairy product volume. While the U.S. will continue to strive to meet its own environmental and sustainability targets, maintaining an eye toward export growth potential in consideration of the evolving EU policy changes could present significant opportunity for U.S. dairy producers and processors.
