The Glass is Full, the Glass is Empty

On January 1st, 2015 Europe will officially abolish dairy quotas. With the date not too far away, nearly 400 dairy industry stakeholders gathered in Brussels last fall to discuss the future of the European dairy industry.
In these changing times, not everyone sees the future the same way. For some, abolishing dairy quotas suggests liberation, believing that they can finally open the flood gates and take advantage of global market opportunities for growth. While for others, exposure to the fickle reality of world markets along with the modest subsidies granted through the Common Agricultural Policy (CAP) does not seem investment friendly.

National quotas (thus dairy producer quotas) have not, for the greater majority of European countries, had limiting effects on production for several years now. Quotas have increased throughout the years to the point of becoming insignificant. Such increases did not come with increased production since prices at farm gate dropped accordingly. It's as if quotas were increased for every dairy producer in Canada and the price of milk was dropped to match US prices, which is about $35 per hectolitre. There is no guarantee that production would increase if quotas increased.

Deficient European subsidies help explain the dairy farmers' recurring complaints.

Only a few countries chose to take advantage of this "privilege" and increased their production as their national quotas rose. This indicates the existence of an as yet untapped potential in these regions. These countries (Ireland, Denmark and the Netherlands for example) will see major production increases when quotas are abolished once and for all.

The renewed European dairy policy came with direct aid paid out to dairy farmers. Highly varied from one country to another, the portion of subsidies out of the overall revenue of dairy farms increased to 15% between 2007 and 2011 (17% for France and 16% for Germany)1. These subsidies were primarily Single Payment Subsidies (SPS) based on past history. Deficient European subsidies help explain the dairy farmers' recurring complaints. Whoever believes these subsidies are generous must remember that, when major crops were in crisis - around the turn of 2000 - and in the pork industry most recently, subsidies represented 21 % and 17 % of earnings for Quebec's specialized producers.

What should we expect for the future? First, there will be a significant consolidation of businesses, which will undoubtedly be more expansive in areas where costs are high (mountainous zones). As for agricultural policy, there is a clear lack of agreement as to the tools needed to support the sector's development. At one extreme, the European Milk Board supports a measure to regulate supply in an effort to stop significant drops in price during periods of overproduction. The many countries that were opposed to quotas are particularly hostile to such a measure, hence the low probability of ever seeing it implemented. Others argue in favour of a price observatory all over Europe to help the market readjust the balance between supply and demand.

When talking with European dairy specialists over one year ago, they maintained that adapting to this new business environment would take about 15 years. Incorrect: it will take much, much longer.

1 Source: Réseau d'Information Comptable Agricole
 
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