This is a fascinating study of a market correcting after years of government control.
Overproduction was a problem in the EU’s early days too, until the Commission in 1984 brought in milk quotas — caps — as a way of stabilizing ballooning production. A wave of market-oriented reforms in EU agricultural policy over years committed the bloc to ending them. In 2003, the Commission said it would lift milk quotas in 2015 — in theory leaving farmers ample time to adjust their business models.
But geopolitical events wrecked those best-laid plans. By the end of the quota system in March 2015, the Russian food embargo — retaliation for EU sanctions enacted after the annexation of Crimea — had already been in place for five months.
Russia bought 13 percent of EU milk exports before the ban, according to Commission data. For milk products such as cheese and butter, the EU’s stake in the Russian market was far higher: The country bought 32 percent of EU-produced cheese, and 24 percent of butter, before the ban.
“A huge market … was literally wiped off the grid,” European Council of Young Farmers President Alan Jagoe said. “It turned a problem into a crisis.”
Almost simultaneously, the U.S. shale-gas boom accelerated oil production and triggered a decline in crude-oil prices. In a remarkable example of economic interconnection, this has a major effect on milk yields. Animal feed costs fall with dropping crude oil prices, said David O’Neil, director of dairy commodity trading house Dansko Foods, and low feed costs encourage farmers to add use more feed — which leads to larger milk yields.
“The flip side of this is that the major oil-producing countries have less buying power as their GDP falls, therefore they buy and consume less dairy products,” O’Neil said. “This leads to an oversupply, lower-demand scenario which leads to a lower milk price.”
That story was from last year. Since then, many milk producers have exited the market (by choice or otherwise) and there is a shortage:
The EU would go on to intervene in the market, but many dairy farmers went out of business. Over 1,000 stopped production in the U.K. alone, according to Moreau.
The looming shortage
The next worry is a shortage of butter in Europe.
Butter production slumped 5% in the year to May 2017. Meanwhile, butter stockpiles have plunged 98% in a year, according to the European Commission’s Milk Observatory.
“While supplies remain tight and demand has increased, there has been a shortage of butter in the EU, causing prices to soar as buyers try to lock into contracts to obtain stocks,” said Michael Liberty, dairy market analyst at Mintec.
Peder Tuborgh, CEO of U.K. dairy giant Arla, warned the BBC last month that there might not be enough milk and cream to go around at Christmas.
Unfortunately, these kind of wild swings are normal as a market adjusts from one of central control to more free market. If left alone, it will continue to take more, but increasingly smaller swings until it reaches equilibrium. In the meantime, can Wisconsin export some butter to the EU? There’s a market opportunity there.