13 June 2007

3 minute read

Report Highlights:

As processors decided to honor increased domestic and export demand for cheese, EU production of butter, NFDM and WMP decreased significantly compared to 2005. While domestic consumption of butter and WMP further increased, consumption of NFDM decreased as a result of lower use in feed. Exports of WMP and NFDM decreased, but butter intervention stocks supplemented EU butter supplies.

EU milk deliveries in 2007 are forecast to rebound, although still below the 2005 level. Further increases in cheese production are forecast to use this additional milk supply, leaving no room for a recovery in production of butter, NFDM and WMP. This is forecast to result in continued slow exports of NFDM and WMP, a further decrease in domestic consumption of NFDM and the complete depletion of EU butter intervention stocks.

Executive Summary

Implementation of the 2003 CAP reform, especially the decoupling of support for dairy farmers, led to a decrease in milk production in 2006. A drought in the summer of 2006 strengthened this decrease in milk production. EU milk production is expected to recover in 2007 as efficient milk producers pick up abandoned production quota from their inefficient colleagues, but milk production is not forecast to match 2005 production levels yet, despite the second of three annual 0.5 percent quota increases. European dairy producers complain that big increases in prices for dairy products haven’t sufficiently filtered through to milk producer prices yet, while feeding costs have increased significantly because of increased grain prices and constrained fodder production as a consequence of the widespread draught in April 2007.

Exports and domestic consumption of cheese showed robust growth in 2006 and this trend is forecast to continue in 2007. Because cheese production is the preferred use for milk deliveries, the decrease in milk deliveries in 2006 led to a significant decrease in butter, Non- Fat Dry Milk (NFDM) and Whole Milk Powder (WMP) production. While domestic consumption of butter and WMP slightly further increased, the halt of subsidies for the use of NFDM in feed resulted in a decrease in EU NFDM consumption. The decrease in butter production was supplemented from EU intervention stocks.

Forecasts for 2007 are that increased milk deliveries will end up in increased cheese production and fresh dairy products, leaving no room for production increases for butter, WMP and NFDM. EU cheese production increased by 4 percent in the first quarter of 2007, as this coincided with the last quarter of the 2006-2007 milk quota year. However, this increase in cheese production is forecast to slow as a result decreasing milk deliveries again over the 2007 summer period. EU domestic cheese consumption and exports are forecast to continue their trend increase in 2007. Changes may occur on the disappearance side for other dairy products. The halt to subsidies for incorporation of NFDM in feed is forecast to further decrease domestic consumption and free up more NFDM for exports. Exports of WMP could be reoriented to other destinations as a result of decreased demand from African countries because of high prices and the end of export subsidies for WMP. EU butter intervention stocks were depleted at the end of March 2007 and high butter prices will probably not allow any rebuilding of EU butter intervention stocks in the course of 2007.

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