1. The European Dairy Sector in a new Era 25 th Annual Conference of the Austrian Society of Ag Econ & Agrarian Perspectives XXIV Prague 16 18 Sept 2015 Trevor Donnellan & Michael Keane Ireland 1

2. Overview Current Global & EU Dairy Situation Heterogeneity of EU Dairy Production Milk production profit margins across the EU Post Quota Production at EU and Member State level –What factors will be important drivers? –Regions with opportunities –Regions facing challenges Is quota elimination more or less important that other issues facing the EU dairy sector? 2

3. Global perspective on Dairy over the next decade Strong consumption growth trends –population –incomes –increasing meat and dairy consumption (outside EU) –limited range of consumption substitutes for dairy Consumption of dairy growing globally –regions globally where production is not traditional Continuing export opportunities for regions with surplus milk production –EU, US, Oceania 3

4. EU dairy sector no longer insulated from world market Only 7% of world milk production is traded –Milk is most is consumed in country of origin Structure of world dairy trade differs from grain market –makes international dairy prices prone to volatility Small changes in world milk production or world consumption –Can lead to large changes in volume available for world dairy trade

5. Changing times for EU Dairy Sector Removal of EU Milk Quota System in 2015 Created mixed sentiment across the EU –growth opportunity in some Member States (MS) –a threat for dairy sector in some MS Concern for international market volatility –Volatile milk prices and volatile farm production costs –Some concern that quota elimination will exacerbate volatility 5

6. European Dairy Sector in “Crisis” in 2015

7. Volatile milk prices and feed costs 7

8. Recent Trends in EU Milk Production MS milk quotas were increased in run up to 2015 But production static or declining in some MS for several years –BU, HR, EL, HU, PT, RO, SK, SI, SE, UK Failure to fill quota due to –farmer exits, –lack of new entrants, –limited production growth from the remaining producers EU dairy consumption is flat –contrasts with the growing demand globally 8

9. EU 27 Milk Production and Consumption 9

10. Complexity of EU dairy sector EU dairy sector is quite diverse across the MS –in terms of both farm sector & processing sector MS milk prices across a wide range –25 to 40 cent/kg in 2014 MS production costs differ Strong variations in MS average dairy farm size –between 3 and 141 dairy cows (2011 data) 10

11. EU dairy processing sector 91 % of milk production is delivered for processing –but, in BU and RO, most milk production is used on farm Specialised dairy products vs generic commodities –High value added and lower value added dairy products –eg. specialist cheeses vs commodity butter EU15 modern, larger, more efficient milk processing facilities that rest of EU28 All of these factors suggest that quota elimination will not have a uniform impact across the EU 11

12. Contrast in scale and intensity of dairy farms across the EU EU-15 average specialised milk farms –54 dairy cows milk yield of 7,337 kg/cow –385,000 litres of milk/year EU-10 average specialised milk farms –19 dairy cows milk yield of 5,695 kg/cow –105,000 litres of milk/year EU-2 average specialised milk farms –5 dairy cows milk yield of 3,445 kg/cow –15,500 litres of milk/year 12

13. Share of EU27 Milk Production 2013 13 Production share only partly associated with the size of the MS. Countries across a central latitude in the EU where grassland is prevalent tend to have a disproportionately large share of milk production relative to their size e.g FR, DE, NE, IE, DK 75% of EU milk production in just 6 countries FR, DE, UK, IT, ES & PL

14. 5 year average Milk Price selected countries (2009-2013) 14

15. The EU Dairy Market: A few important things to remember Mainly dependent on concentrate feed, with cows housed for much/all of the year Except where grass is main portion of the diet –Such regions typically have lower production costs –Since grass is a cheaper feed than concentrates Production to expand where costs are lower –i.e. regions that favour grass production –But the milk price farmers receive is also a critical consideration 15

16. Low costs for EU’s Grassland Regions Darker green implies greater concentration of grassland Favours Mid range latitudes in Europe with higher rainfall levels 16

17. Post Quota Milk Production Levels: What factors will be important? Farm milk price in the MS Costs of production at farm level: influenced by –the production system in the MS (concentrates vs grass) –rate of tech adoption by farmers Farm size (in terms of milk volume) –Small farms will remain under pressure Milk processing industry –modern plants can process milk at lower costs –can farmers benefit from these efficiencies ? –higher farm milk prices vs additional processor profits ? 17

18. Post Quota Milk Production Levels: What factors will be important? Economic performance of dairy sector vs agricultural sectors and vs wider economy –In some regions dairy will face competition –competition for land from other agricultural sectors –competition for labour from other sectors of the wider economy Dairy will persist in some higher cost regions –Where no other agricultural or non agricultural opportunities exist Environmental constraints –Intensification limited by GHGs/nitrates policy 18

19. Post 2015: Likely Outcomes (1) Volatility is likely to continue –milk prices, production costs and farm margins Quota elimination to have relatively minor implications at EU28 level –EU milk production will grow slowly At MS & regional level within MS impacts could be more appreciable –Milk production will reorientate towards regions to better reflect comparative advantage 19

20. Post 2015: Likely Outcomes (2) Movement of production to latitudes which have mild, short winters –Long grass growing seasons Grass growing regions –Part of IE/UK –coastal regions in Northern Europe –areas with milder climates, higher rainfall 20

21. Post 2015: Likely Outcomes (3) Expansion in milk production needs to be managed –the milk quota will be replaced by other limiting factors –issues at the farm level and beyond the farm Difficulties with access to land, labour and capital –will impede expansion for some producers Processing, storage, distribution, marketing –Needs forward planning –e.g. 3 year time horizon required to commission, design and build new processing plant –Need to secure new markets for additional product 21

22. Post 2015: Likely Outcomes (4) Increased competition for milk between processors in some regions –especially if production growth rate differ in neighbouring regions Implications for milk trade between countries –processors may find more milk locally –reducing milk or dairy product import requirements –Increasing milk or dairy production export capacity 22

23. Post 2015: Likely Outcomes (5) Processors moving up value chain Reflect fact that EU dairy market is mature –Growth cheese, fresh products and specialist dairy products (e.g. infant formula, athlete performance drinks) Exporters need opportunities outside the EU Commodities a bargain basement business? –Possibly not, strong demand in developing countries 23

24. German Milk Production to 2020 Largest milk producer in EU –30 million tonnes, over 4 million dairy cows. –Production concentrated in North West & Bavaria –Mix of bulk commodity & specialised local products –Growing trend towards housing cows in some regions Cows number rising in last couple of years Positive outlook Expectations of 1 per cent increase p.a. –Strongest growth rate in coastal regions and in the lower Rhine and in mountain areas

25. French Milk Production to 2020 2nd largest milk producer in EU –24 million tonnes milk, 4 million dairy cows –Strong tradition of mixed farms Average dairy herd size is slightly smaller than Ireland –Drive to increase farm size, particularly herds > 100 cows Profitability suggest expansion in some regions –but competition from the crop sector for land Parts of processing sector uninterested in processing additional volumes of local milk –Multinational food businesses content to grow internationally Jury out on whether French production will expand –but some experts reckon that expansion of 2% p.a. is possible

26. UK Milk Production to 2020 3 rd largest milk producer in EU –13.5 million tonnes (10 percent below quota) –Driven by rapidly contracting producer numbers Feed use increasing due to land constraint Evolving two tier milk price system –those with contract to supply supermarkets directly –and those without Two tiers of milk price and profitability –Margin over cost vs market determined price Stable to slightly contracting production outlook

27. Dutch Milk Production to 2020 4 th largest milk producer in EU –12 million tonnes milk production, 1.5 million dairy cows –densely populated & intensively farmed High productivity and low feed prices –but very high land prices – shift towards housing Strong export orientation (~ 70% exported) –efficient highly concentrated processing sector High profitability suggest expansion possible –but environmental factors are an area for concern –need to process animal manure Netherland to expand by about 1.5 percent p.a. –with environmental constraints hindering faster growth rate

28. Polish Milk Production to 2020 5 th largest milk producer in EU –10 million tonnes, 2.5 million dairy cows –low yields and small farms –but developing rapidly –deliveries increasing as a share of production Consolidation improving the competitiveness of processing sector Farmer and industry sentiment is quite positive –Like Ireland well over quota in 2014/15 Production to expand 2 to 4 % p.a.

29. Ireland 7 th largest milk producer in EU –Production of 5.5 million –Low yields –Low costs Grassland based –But only 20-25% of grassland is currently dairy Very ambitious expansion plans –Production likely to increase by >10% in 2015 Strong growth to continue over next decade Long term aim to become NZ of northern hemisphere

30. Other EU MS Represent ~ 25% of current production –MS where national quota no longer filled Some increase in MS with small quota share Elsewhere future production static/declining –Removal of quota will have no direct impact But these MS could face greater competition –from MS which are expanding their production and their export capacity

31. Additional Milk Production by 2020

32. EU Milk Production Outlook to 2025 Contraction in production in high costs regions Expansion is low cost regions –not constrained by environmental factors EU28 production to exceed “quota” pre 2020 With potential to increase further –if market conditions allow Shift in the relative shares produced by MS –Higher share likely in IE, DK, DE, UK, FR, PL, AT, –Lower share in MS in Southern and Eastern Europe 32

33. Conclusions Many challenges ahead for dairy Volatility to continue Quota elimination is a lesser concern International pressures –to increase scale at both farm and processing level –Improve farmer skills set (technology adoption) But also Opportunities for EU –Higher value added products –High animal health and food hygiene standards –Requires investment at both farm and processing level 33