Europe Takes Emergency Measure to Soften Dairy Price Slide

September 11, 2014 07:46 AM
Europe Takes Emergency Measure to Soften Dairy Price Slide

The Russian ban on dairy product imports from the European Union, U.S. and Australia could not have come at a worse time for Europe.

The Russian ban on dairy product imports from the European Union, United States and Australia could not have come at a worse time for Europe. The one-year ban implemented on Aug. 6 has collided with Europe’s large milk supply and falling milk prices.

"Within a month of Russia implementing the ban, European dairy prices have fallen sharply with little signs of slowing," says Sara Dorland, analyst with the Daily Dairy Report and managing partner at Ceres Dairy Risk Management, Seattle. "European milk buyers have been lowering prices paid to farms to try to stem the flow of milk in coming months as world dairy prices continue to show weakness."

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The European Commission reported recently that spot milk prices in the Netherlands fell from 42 cents per liter in June to 32 cents in July for milk with 4.4 percent butterfat. The spot milk price in Italy fell from 41.21 cents per liter in June to 39.3 cents in July.

"The Russian ban will only accelerate the declines," says Dorland.

Extraordinary circumstances

Late last month the European Commission announced a plan to open Private Storage Aid (PSA) to provide emergency market support to dairy products. Last week the commission presented the measure to EU member states and the European Parliament for a vote.

"Price signals on the European dairy market show that the Russian ban is starting to hit this sector. In a number of Member States export earnings are being lost and new outlets need to be found," says EU Agriculture and Rural Development Commissioner Dacian Ciolos in an Aug. 28 press release.

Once opened, the PSA will remain available to dairy manufacturers through the end of the year for butter, skim milk powder (SMP), and some cheeses. Manufacturers will be able to store product for at least 90 days but no more than 210 days to receive reimbursement for daily storage costs.

"This could buy some time for European countries to find new outlets for their products," says Dorland. "However, it could fall short of providing longer-term price stability because the product will only be taken off the market temporarily." Early next year, the stored product will likely be released into the marketplace, she adds.

PSA was originally conceived to provide support for butter and skim milk powder (SMP). Under the Delegated Act, which allows for temporary modification of rules during extraordinary circumstances, the commission has extended PSA support to cheese due to the loss of the Russian market, which is estimated near 1 billion euros, according to the commission.

Cheese takes biggest hit

"Compared to other dairy products, cheese is likely feeling the brunt of the Russian ban, and it could prove to be the most difficult product to redeploy to other regions due to flavor and style differences among countries," says Dorland. "Storing cheese for an extended period of time could also prove challenging. Unlike butter and skim milk powder, cheese continues to age, resulting in a different product coming out of storage than what went in."

EU dairy exports to Russia in 2013 were worth 2.3 billion euros. Cheese accounted for 1 billion euros; food preparations for 470 million; butter and butteroil, 140 million; fresh milk 100 million; finished products 90 million; SMP 70 million; and whey powder 30 million. Twenty-five EU member states exported cheese to Russia last year, but the top-four EU cheese exporters to Russia accounted for 90 percent of Russia’s EU cheese imports. These countries were the Netherlands (301 million euros), Finland (253 million euros), Germany (184 million), and Lithuania (160 million).

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