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End of an era for EU dairy farmers

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A day of mixed emotions for European dairy producers on Tuesday.  After more than 30 years, EU milk production quotas end at midnight.  Some welcome the opportunity to modernize, expand and better compete on the global market.  Others oppose the move fearing it will result in a rapid growth in milk production in a market already facing oversupply.

Under the quota system, producers were limited in the amount of milk they could produce facing stiff penalties for exceeding the quota.  There are reports that a number of dairy producers have been withholding milk from the market for the past few days waiting to move it once the quotas expire.  The Irish Independent says some farmers have been gearing-up production for April 1st and have had to dump milk or feed extra calves to avoid penalties.  The report says; “Fleets of trucks will be standing in yards tonight ready to collect supplies after midnight.”  There are concerns about how processors will be able to handle the extra milk.

Some dairy producers are using their tractors to clog the streets of Brussels in protest to the end of the quotas.  The farmers are demonstrating in front of EU headquarters saying the change will bring about the demise of small farms in the Union.  They contend increased milk production will put further pressure on prices forcing small farms out of business.  In the end, there will be fewer, larger farms.

Those who favor an end to the quota system say it will make European producers more competitive with the U.S. and New Zealand on the global market.  Their argument has been that as global demand increases, the quotas have limited European production and with it the ability to supply that increased demand.  There is a surplus of production on the world market right now but many believe that is a temporary situation.  Another argument for dropping the quota is that there is a shortage of young farmers in Europe who want to operate the small dairies.

A number of European dairy processors have been expanding in anticipation of more milk coming.  Another change, Euronext will begin offering dairy derivatives including futures and options for skim milk powder, whey powder and butter on April 13th.  As part of the introduction, the exchange will waive all trading fees through June 30th

The rest of the world is watching to see just how European producers will react.  Some predict rapid increases; 20 to 50 percent in production in Germany, Ireland, the Netherlands, Denmark and Poland by the year 2020.  Others question that number saying land prices and environmental regulations will hinder expansion.

Rabobank Global Dairy Strategist Tim Hunt does not expect an explosion of production in Europe.  To start with, production quotas have been ramping-up in recent years in preparation for this day.  Secondly, the price of milk was so high last year it was economically viable to exceed quota and pay the fine.  In addition, he thinks the cost of production and Europe and environmental regulations are going to make expansion challenging.  Hunt talks about the change.

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