Holstein dairy cows eating TMR.(c) Tim Scrivener

Dairy farmers will wake up to a different world on 1 April.

The end of milk quotas will see the limits on European production disappear, so farmers and processors will be free to pursue growing world demand.

But the post-quota world will bring new challenges, a Rabobank report forecast this week.

See also: Global milk insights for post-quota world

Farmers Weekly pulled out the key findings.

  1. The future is now – A lot of the growth in milk production has already happened, as northern European nations constrained by quotas have been pushing their limits in anticipation of abolition. Production growth will likely slow after 2015, rising by another 4bn litres across the EU by 2020. That would be about a 3% increase on the current three-year average of 136bn litres
  2. There are other limits – EU milk production can only keep growing until it hits the next barrier. This will vary in different countries: it could be capital, available land, environmental restrictions or competition from other industries
  3. There’s still support – The story goes that when quotas go, the dairy industry will be fully deregulated. That’s not true. The CAP will add to farmers’ incomes, even if payments keep falling. Intervention buying and private storage aid will remain as crisis measures, and protected status symbols will help safeguard quality products
  4. Long-term demand for dairy – Farmers suffering rock-bottom milk prices might be sick of hearing industry chiefs and politicians drone on about the dairying’s bright future. But Rabobank still expects global demand for dairy products to grow 2% a year 2014-2020, despite occasional volatility. Also, it suggests key exporters will struggle to up production to match that increased interest in the medium term, lending support to prices
  5. Here come the waves – Volatility will be the key problem for European farmers as world markets become more integrated. Behind lies the lag between pricing and production decisions, the high cost of starting up and leaving the sector, and fluctuating feed, fuel and fertiliser values. EU farmers will be particularly affected as, compared with global competitors, they have high production costs
  6. Good convergence – European farmers could benefit how the gaps in world milk production costs are closing. Low-cost regions ssuch as New Zealand are coming up against new limits such as land availability and environmental rules. This pushes up their costs towards EU levels, removing their advantage
  7. Bad convergence – With world prices coming together, it might be cheaper and easier for global processors to buy milk from outside the EU – either inside the far-flung market or close by. A well-controlled supply chain will be important in a volatile world and buying milk from lots of smaller European farmers adds extra cost
  8. Asia is catching up – Reports from China suggest milk production costs on some Chinese farms are getting closer to European levels. This trend will continue. In the Chinese market, more home-grown milk from big, integrated dairy farms will become more competitive with EU exports by harnessing economies of scale
  9. Hard to grow at home – European farmers will find it tough to get bigger and intensify production, due to high land costs and limited availability of capital. Farmland is a good investment, but returns from farm business are not good enough to make major cash injections likely. In Europe’s best dairying areas, land is held by individual in lots of small parcels, making it hard for investors to gather large blocks
  10. Beyond the continent – The EU market will still be full of affluent shoppers who eat a lot of dairy. But population growth is only steady and the economy is stuttering, so any growth in demand will be slow, not requiring much extra milk. EU dairy processors will be forced to look to foreign markets for new customers. Then they have a choice: push European production harder and pay the higher milk prices needed or source milk close to the new consumers
  11. Where will the EU grow – To produce more milk in Europe, we might expect dairying to spread in areas close to the current main milk fields. These are Ireland, west England and Wales, the Low Countries, the French and North Sea coasts, central Europe and Scandinavia. But these regions are hemmed in by the sea and nearby land is expensive to buy. Expansion in eastern Europe is an option, but it would require big investments in processing, logistics and skills
  12. A divided approach – Dairy companies will have to take different routes. Smaller dairies focused on domestic markets could grow value rather than volume, while international businesses perhaps taking the option to increase milk supplies from abroad. Even European co-operatives could be forced to look beyond their members for new milk, or face losing out in growing markets