The competitive gap in international markets widens as EU producers face falling milk prices and fines for overproduction of milk, while U.S. dairies enjoy an unprecedented string of high milk prices.
European dairy producers have been dealing with falling milk and dairy product prices for months, while their counterparts on this side of the Atlantic continue to enjoy record-high or near-record-high milk prices.
“Recent robust milk production gains in the European Union are the result of favorable weather, good feed crop production, and near-record-high milk prices,” says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill.
EU producers face over-quota levies
“Reports from Europe are that significantly lower milk prices are expected to reduce milk production growth into 2015 because many EU dairy producers face levies for over-quota production,” Ledman notes. The following eight EU member states will receive levies for overproduction: Ireland, Germany, the Netherlands, Austria, Poland, Denmark, Lithuania, and Cyprus. As part of Common Agricultural Policy reform, EU milk quotas are set to expire March 31, 2015.
Erhard Richarts, a German dairy economist, predicts that EU-28 year-over-year milk production in 2014 will increase 4.4 percent to 326 billion pounds. Stronger-than-anticipated milk production during the first half of this year has already contributed to better-than-expected output of milk powders.
EU skim milk powder (SMP) production in 2014 is expected to hit 3.1 billion pounds, up a phenomenal 16.7 percent compared to 2013. Whole milk powder (WMP) output is expected to reach 1.6 billion pounds, up a modest 1.4 percent. Butter output, meanwhile, is running 2.1 percent ahead of last year at 4.8 billion pounds, and cheese output is expected to remain unchanged at 21.2 billion pounds.
“With EU milk prices expected to continue to fall and production of milk powders anticipated to stay strong into 2015, EU milk powder suppliers are in a competitive position compared to U.S. suppliers,” says Ledman. “Lower EU prices are also expected to attract demand for milk powders from emerging markets, many of which until recently were priced out of the market given high prices.”
Record profits in U.S.
At the same time that EU producers are protesting low milk prices and asking for a reduction in their over-quota levies, mailbox prices on this side of the Atlantic are sky high. The U.S. all-milk price has exceeded $20/cwt. for a year, and the national average income over feed costs hit a record high in September.
“Global dairy supplies are burdensome and weighing on U.S. dairy product prices, but U.S. dairy producers won’t get the signal to slow production until next year due to a lag in pricing,” says Sarina Sharp, agricultural economist with the Daily Dairy Report. “As milk prices fall in early 2015, many U.S. producers will initially try to preserve income by increasing milk yields, and although there are some regional issues, feed costs are generally quite low. Milk prices would have to truly collapse to inflict widespread losses throughout the industry.”
U.S. dairy producers are in good shape financially. Many of them have paid down debt and will be able to endure a period of losses without being forced to liquidate or even downsize, notes Sharp. And that means there likely will be no severe contraction on this side of the Atlantic.
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