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EU Fines No Bar to Milk Output Gain as Price Surges

February 27, 2014

For many European dairies, it makes more sense to pay fines for producing too much milk than to pass up surging prices and an early start to a jump in European output.

Feb. 27 -- Irish dairyman Pat McCormack figures it makes more sense to pay a 20,000-euro ($27,300) fine for producing too much milk than to pass up surging prices and an early start to a jump in European output.

The 36-year-old farmer expanded his herd to 80 cows from 60 two years ago and estimates milk production will exceed his European Union quota by 20 percent at 450,000 liters this year. While output limits imposed in 1984 won’t end until April 2015, EU prices are 17 percent higher on average than a year earlier. Even with the fine, McCormack says he will be profitable and his herd will be ready with more supply when quotas are lifted.

"People have been gearing up since 2010," McCormack said by telephone from his farm in Greenane in County Tipperary, 184 kilometers (114 miles) southwest of Dublin. "Without a doubt, farmers have been increasing their herd sizes. There has been significant investment, both on-farm and processor investment."

Global dairy costs tracked by the United Nations more than doubled since early 2009 as demand surged in China and droughts limited supply from New Zealand and the U.S. The end of quotas in the 28-nation EU, the world’s top producer, will spark an output gain after 2015 of 6.6 percent to 162.3 million metric tons, Rabobank International said. Before 2013, production grew 2 percent since 2005, industry data show. Processors including Royal FrieslandCampina NV, Europe’s biggest dairy cooperative by revenue, are expanding to handle the increase.

Record High

Farmers in the EU got 39.89 euro cents per 100 kilograms on average in December, up from 34.24 cents a year earlier, after reaching a record 40.55 cents in November, the Dutch Federation of Agriculture & Horticulture said. That’s boosting costs for buyers including Danone, the world’s biggest yogurt maker, and Nestle SA, the largest food company. More-expensive milk and cheese contributed to a 0.8 percent gain in euro-area consumer prices in January, data showed on Feb. 24.

Class III milk, used to make cheese, on the Chicago Mercantile Exchange reached an all-time high of $23.43 for 100 pounds on Jan. 31 and is up 20 percent since the end of 2013. The gain is more than 23 of the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index, which rose 2.4 percent this year. The MSCI All-Country World index of equities fell 0.6 percent, and the Bloomberg Treasury Bond Index rose 2 percent.

Class III futures for March delivery rose 0.9 percent at 9:43 a.m. in Chicago to $22.12.

Wet Weather

Milk prices have surged after wet weather in the last two years cut supply from northwest Europe, while New Zealand, the top exporter, saw its first drop in milk-solid output in five years because of a drought in early 2013. California, the top U.S. producing state, is contending with "extreme" drought, according to the U.S. Drought Monitor, scorching pastures and reducing this year’s dairy supply. At the same time, demand is rising in China, where imports of whole-milk powder jumped 14- fold since 2008, U.S. Department of Agriculture data show.

The rally in prices will fuel a 2.6 percent increase in EU output in the first six months of 2014 from the same period last year, even before the quotas end, Kevin Bellamy, a dairy analyst at Rabobank in Utrecht, Netherlands, said in a Dec. 19 report. The profit margins are large enough that some farmers will be better off over-producing and paying the fine, he said.

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RELATED TOPICS: Dairy, Milk, Global Markets

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