USDEC Executive Brief 5 Data-Based Forecasts about the end of EU Milk Quotas BY MARK O’KEEFE AND ROSS CHRISTIESON For more than 30 years, European countries have imposed quotas on milk production. But in a decision that alters the global dairy marketplace, those quotas end on March 31, 2015. For U.S. dairy exporters and farmers, this raises several questions, including: • How much more milk will the European Union likely produce? • Which dairy products will be most affected? • Will the EU be more aggressive in exporting dairy products? If so, what is the best strategy for U.S. dairy to remain globally competitive? To answer these and other questions, the U.S. Dairy Export Council interviewed dozens of milk processors, producers and industry organizations in the six main EU countries likely to produce the most milk and export the highest levels of dairy products following quota reform. The findings are detailed in a country-by-country, 334-page report available to USDEC members on usdec.org here. INSIDE: Our Five Research-Based Insights 1. The EU will produce significantly more milk, mainly from six countries (page 2) 2. Much of that new milk will be turned into exportable commodities, led by cheese (page 2) 3. EU dairy companies will invest billions of dollars in processing capacity (page 3) 4. The big EU exporters will become even bigger U.S. competitors (page 3) 5. Smaller EU companies will try to compete with the U.S. on price (page 3) © Copyright 2015 U.S. Dairy Export Council. All rights reserved. What you are reading now is an executive brief boiling the report down to its five most essential points. This brief is an exclusive bonus offer to subscribers of the new ““U.S. Dairy Exporter Blog.” The blog delivers market analysis, research and news several times a week, directly to your inbox, if you subscribe. 2101 Wilson Blvd., Suite 400 › Arlington, VA 22201 › U.S.A. › PHONE 703.528.3049 › FAX 703.528.3705 › usdec.org Managed by Dairy Management Inc.™ Preparing for the End of EU Milk Quotas MARCH 2015 1. The EU will produce significantly more milk, mainly from six countries. From its discussions with leading EU dairy processors and organizations, USDEC generated a most-likely scenario, taking into account downturns in the global dairy market. Under that scenario, total milk production is expected to grow by 11 percent, with the EU producing 15.4 million metric tons more milk in 2020 than it did in 2013. Seventy-six percent of the extra milk is expected to come from just six of the 28 EU countries—Ireland, Denmark, France, Poland, Germany and the Netherlands. 76 PRECENT OF PRODUCTION INCREASE WILL COME FROM JUST 6 OF THE 28 EU COUNTRIES IRELAND DENMARK NETHERLANDS POLAND FRANCE GERMANY Germany is the largest milk producer in the EU. Increasingly large dairy cooperatives in that country will encourage growth in production volumes and the development of export markets. The annual increase in milk production in Germany is projected at 1.8 percent. Yet, even higher annual growth rates are expected in Ireland (4.6 percent), the Netherlands (3.7 percent) and Denmark (3.0 percent). 2. Much of that new milk will be turned into exportable commodities, led by cheese. In terms of sheer numbers, the impact on cheese production is most profound. The most-likely scenario projects that cheese production will increase by 660,000 metric tons across the six major dairy countries in the EU. Cheese production in the EU has increased in recent years— the end of quota will accelerate that trend. Production of whole milk powder has declined in recent years, and the end of quotas will effectively reverse the trend and create additional product. Many of the extra commodities will be exported to countries outside the EU. USDEC’s most-likely scenario projects there will be 303,000 metric tons more milk powder (skim + whole) and 218,000 metric tons more cheese exported in 2020 than in 2013. The vast majority will come from the six major dairy countries. U.S. Dairy Export Council › Executive Brief, March 2015 › Visit us at usdec.org BIG 6 PRODUCTION INCREASES BY 2020 VS 2013 BIG 6 ADDITIONAL EXPORTS BY 2020 VS 2013 PROJECTED INCREASE (MT) ANNUAL GROWTH % PROJECTED INCREASE (MT) ANNUAL GROWTH % Cheese 660,000 1.5 163,000 4.0 Whey 315,000 2.3 160,000 4.9 Butter 231,000 2.1 87,000 9.7 SMP 189,000 2.7 146,000 6.3 WMP 151,000 3.7 140,000 6.4 COMMODITY EU-28 EXPORT GROWTH: 2013-2020 COMMODITY 2013 (MT) PROJECTED GROWTH (MT) PROJECTED GROWTH % Cheese 787,000 218,000 4.2 Whey 517,000 170,000 4.9 Butter 122,000 74,000 7.7 SMP 407,000 168,000 5.9 WMP 374,000 135,000 5.3 2 Preparing for the End of EU Milk Quotas MARCH 2015 3. EU dairy companies will invest billions of dollars in processing capacity. 4. The big EU exporters will become even bigger U.S. competitors. 5. Smaller EU companies will try to compete with the U.S. on price. Investments totaling more than 2.7 billion (U.S.) have been made in EU dairy manufacturing and processing facilities. Half of this amount, $1.38 billion, is in Germany and the Netherlands. The EU already exports more cheese, whole milk powder and butter than the United States. Other co-ops have less experience in the export market and don’t have the direct sales outlets available to them that Arla, DMK and FrieslandCampina do. The largest dairy company in Germany, DMK, is clearly focused on export growth after the removal of quotas. In its 2013 annual report, DMK said investments have been made to “progress the course of internationalization,” which will improve shareholders’ competitive position by “combining the strong position in the domestic market with the development potential in Eastern Europe, Asia and the emerging countries.” Meanwhile, substantial investments are under way at Netherlands-based FrieslandCampina to add value to milk powders. FrieslandCamina stated in 2014 that it intends to double exports to China post-quota, focusing on cheese, UHT milk and infant formula. Denmark-based Arla Foods established a new cheese “innovation factory” through its joint venture with Mengniu Dairy in China. Several companies already have extensive experience in the export market, and that involvement will become even more pronounced with the end of quotas in March 2015. For example: • FrieslandCampina plans to export much of the increase in post-quota milk to countries outside of the EU. The co-op already has an extensive range of sales offices, supplying dairy products to 100 countries, and a physical presence in 28 countries. • DMK generated 44.5 percent of its sales outside of Germany in 2013. DMK drove the inter-nationalization of its business further with a new, internationally focused distribution organization. • Arla Foods supplies 70 percent of its production to EU markets and 30 percent to outside markets. The hope is to develop a volume split of 50-50. U.S. Dairy Export Council › Executive Brief, March 2015 › Visit us at usdec.org For example, the largest milk processor in Poland, Miekpol, ships about 12 percent of its product to other EU countries and about 7 percent to countries outside the EU. Export to non-EU countries is run by traders; the company does not have branch offices or partner companies abroad. Export development strategy is at a very early stage. Therefore, companies such as Miekpol are most likely to fight on price. This, coupled with an increasingly competitive marketplace, may exacerbate the high levels of market volatility seen in recent years. All other things unchanged, the effect on international dairy commodity prices is expected to be negative. In reality, longterm demand growth is expected to increase at a rate greater than the increase in overall exportable supply. This would keep upward pressure on dairy commodity prices. 3 Preparing for the End of EU Milk Quotas MARCH 2015 Conclusion: Customer-Centric Focus Key to Continuing U.S. Export Growth. The research is clear that more dairy commodities from the EU will lead to increased competition between the major exporting countries, including the United States, New Zealand and EU member nations. According to the groundbreaking Globalization Study commissioned by the Innovation Center for U.S. Dairy, global demand for dairy products will grow faster than available supply over the next 10 to 15 years, driven by economic growth in developing nations. There is a latent demand gap—the global shortfall between consumption and production forecasts—for many commodities that is likely to persist through 2020. The conclusions of that study have been affirmed in subsequent studies, including a Globalization Refresh by the Innovation Center for U.S. Dairy and ongoing analysis by the U.S. Dairy Export Council. Regarding USDEC’s current analysis of the EU, a substantial increase in milk production is foreseen over the next several years. Under the most-likely scenario, the EU will produce 11 percent more milk in 2020 than it did in 2013. This isn’t a huge increase, considering the strong growth in dairy export markets in recent years. The large, sophisticated dairy companies in the EU will rely on subsidiaries and joint ventures in emerging markets in Asia, Africa and the Middle East. They will take a value-added approach, vying for high-quality, and stable customers on the basis of product quality and customer service. These customers value long-term commitments. A joint venture between Arla Foods in Denmark and the Mengniu group in China, which developed an “innovation factory” to meet the specific product preferences of the Chinese market, is a prime example. It is incumbent on U.S. suppliers to respond in kind. The U.S. industry has made great strides in terms of improving quality in recent years; however, top-notch buyers will continue to demand more and our competitors are upping their game. It will be important for ambitious U.S. suppliers to respond in kind by becoming even more customer-centric. If U.S. dairy exporters stress the fundamentals of doing the right things—improving the quality and range of products, improving customer service, getting closer to customers—the United States should continue to build share in the global marketplace despite increasing competition from EU countries. Total exports of skim milk powder from major suppliers, including the U.S., EU, New Zealand and others, grew 38.5 percent from 2010 to 2014 (estimated), while whole milk powder grew 28 percent and cheese 13 percent.2 2 Dairy: World Markets and Trade, Foreign Agricultural Service, USDA, Dec. 16, 2014 U.S. Dairy Export Council › Executive Brief, March 2015 › Visit us at usdec.org 4 Preparing for the End of EU Milk Quotas MARCH 2015 Request the Full Research Report You can request the 334-page research report this brief is based upon by going to the usdec.org website here. Click “Request Report” and follow the prompts. “The goal of this research was to provide meaningful insights in relation to the competitive nature of the international dairy markets following quota removal,” said Ross Christieson, senior vice president of market research and analysis at USDEC. “To do this, we had to take a very pragmatic, company-by-company approach to gather and analyze the information. While other studies may give a general view, our research attempts to provide important details for USDEC members and the U.S. dairy industry.” The report, “European Union: The Impact of the Removal of Milk Quota in 2015,” takes a comprehensive look at the EU dairy industry, with special emphasis on the six leading dairy nations of Germany, France, Poland, Denmark, Ireland and the Netherlands. Filled with useful charts, it navigates through the current situation in the EU and projects what the future is likely to hold. This executive brief was created as an exclusive bonus offer to subscribers of the new “U.S. Dairy Exporter Blog.” The blog delivers market analysis, research and news directly to your inbox, but you have to subscribe. If you haven’t already, go to usdec.org, locate the blog on the upper right and click. Then find the red “subscribe” button and fill out the simple form. U.S. Dairy Export Council › Executive Brief, March 2015 › Visit us at usdec.org 5 Preparing for the End of EU Milk Quotas MARCH 2015 About the Authors Mark O’Keefe Ross Christieson VICE PRESIDENT, EDITORIAL SERVICES SR. VICE PRESIDENT, MARKET RESEARCH AND ANALYSIS Working with talented colleagues, I utilize the best practices of journalism and digital marketing to build global demand for U.S. dairy products. I manage USDEC global market research. I look at where opportunities exist for U.S. dairy companies, then work with U.S. suppliers to help them take advantage of those opportunities. I enjoy mining the in-depth research of USDEC colleagues such as my co-author, Ross, to create relevant, accessible nuggets that give you an edge in the global marketplace. I am the head researcher behind the full, 334-page volume this executive brief is based on: “European Union: The Impact of the Removal of Milk Quota in 2015”. Read more articles from me at the U.S. Dairy Exporter Blog. I would love to connect with you on Linkedin. Read more articles from me at the U.S. Dairy Exporter Blog. See all of our USDEC research on our website here. ABOUT THIS BRIEF USDEC Executive Briefs boil down in-depth research to their most essential points. ABOUT USDEC The U.S. Dairy Export Council (USDEC) is a non-profit, independent membership organization that represents the global trade interests of U.S. dairy producers, proprietary processors and cooperatives, ingredient suppliers and export traders. Funded primarily by the dairy checkoff program through Dairy Management Inc., USDEC aims to enhance U.S. global competitiveness and assist the U.S. industry to increase its global dairy ingredient sales and exports of U.S. dairy products. USDEC accomplishes this through programs in market development that build global demand for U.S. dairy products, resolve market access barriers and advance industry trade policy goals. USDEC is supported by staff across the United States and overseas in Mexico, South America, Asia, Middle East and Europe. U.S. Dairy Export Council › Executive Brief, March 2015 › Visit us at usdec.org 6
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