Due to the expected decline in milk production, dairy farmers and dairies are faced with major choices. They must invest in sustainability and animal welfare, but also find a market for their increasingly expensive products. This may not turn out so bad for (permanent) dairy farmers.
According to it, Dutch dairy farming and the dairy processing industry are on the threshold of a new and uncertain era Financieele Dagblad. The processing plants were built at a time when the milk pool was growing and, after the lifting of the milk quota in 2015, would continue to grow. New factories sprang up. That time is over and growth has turned into contraction.
The EU is considered the largest cow's milk production area in the world. Production (144 million tons) in the 27 countries is declining because the declining numbers of animals are not expected to individually produce significantly more milk. In the US, the second largest production area (103 million tonnes), an increase in production is expected by the USDA. Both a slight increase in the number of cows and milk yield contribute to this.
India continues its usual annual increases of at least 2,5% to 99,5 million tonnes of cow's milk production (excluding buffalo milk). The result is mainly due to increases in livestock numbers. The average milk yield per cow is 1.600 kilos and - barring climate change - has great growth potential. Buffalo milk production is estimated at 95 million tons. Despite being limited to low-yield locations in the north and west of the country, milk production in China continues apace. About 2023 million tons were to be reached by 41 with increasing number of cows and milk yield.
In Russia, milk production is only moderate at 32 million tons (about the same as German production), despite the size of the country. The increase in the number of cows is stagnating. The average milk yield is 5.000 kilos, the improvement potential is significant. Russia imports the necessary dairy from Belarus. New Zealand, the largest dairy export region in the world, has been at the top of its capacity limits for some time.
The main production and consumption area is the EU-27. The US is in second place with additional import needs. Dairy is popular in many countries with high and rising incomes. The main producers with an export surplus are the EU and the US. India also produces and consumes significant quantities. Skimmed milk powder is popular in many importing countries. New Zealand is the world's leading exporter of dairy products. 95% of milk production is sold in processed form on international markets. More than 50% of this is whole milk powder, most of which finds its way to China. Butter, cheese and skimmed milk powder follow the same path in Southeast Asia. The second largest exporting country is the EU-27, as the cheese export champion. The US mainly exports skimmed milk powder and cheese, especially to Mexico. Russia's imports mainly come from Belarus. International trade in dairy products has slowed in recent years due to a decline in demand in China due to economic stagnation.
Research by Wageningen Economic Research predicts a decline in production of 20% to 25% by 2030. By 2050, the decline may increase to around 35%. Other forecasts already see a decline in the dairy cow herd by a third in the short term. Which is caused by it new surplus of manure due to the loss of the derogation and tightened standards.
New opportunities that can also turn out to be threats
A new situation is emerging with both challenges for milk processors and opportunities for Dutch dairy farmers. Less milk production could mean that Europe turns from a net exporter of dairy to a net importer, but that milk must come from somewhere.
It is also conceivable that consumption in the EU will drop significantly because consumers find dairy products too expensive. In that case, despite the shrinkage too wide a supply on the internal market. In the EU, production will in any case become more expensive and will have to yield higher margins than elsewhere in the world. In such a market situation, European food sellers will mainly want to import cheaper dairy from outside the Union, but this must be available on the world market.
If Europe remains prosperous and there is high demand on the market outside the EU, dairy will become scarcer and more expensive in the EU. Farmers will have little to complain about. Even the damned milk from foreign farmers can then come to us if demand exceeds the supply available within the EU. But if the EU becomes less prosperous, then, as outlined above, dairy will become too expensive for European consumers and farmers and factories will find it difficult.
Result of strict environmental policy
The expected decline in milk production is mainly due to stricter European nature and environmental policies. This leads to less space for dairy farms. In fact, the government's outstanding buyout schemes and a lack of business succession determine the future of milk production and therefore the Dutch dairy industry. Young farmers now prefer to choose a job outside the farming sector due to the uncertainty about the space that politicians still grant them.
FrieslandCampina, by far the largest milk processor in the Netherlands, predicts increasing competition for available milk as global demand for dairy continues to rise, but raw material production around its factories in the Netherlands, Germany and Belgium is declining. To fill their factories, FrieslandCampina and other Dutch dairy companies try to attract as many farmers as possible. This trend is not unique to the Netherlands, but occurs throughout the EU.
Which consumers prefer more expensive dairy products?
Due to the expected decline in milk production, dairy farmers and dairies are faced with major choices. They must invest in sustainability and animal welfare, but also find a market for their increasingly expensive products across the board. Consumers must want that and be able to accept it; that is not just obvious.
Declining milk production offers opportunities for a redistribution of the market, which offers the remaining dairy farmers opportunities for better prices. However, if the economy in Europe shrinks due to declining industrial activity - which does not seem unthinkable (by subsidies from outside the EU in combination with high carbon requirements too quickly) - and no new economy develops, the EU dairy market will shrink further due to a drop in demand. In that case, expensive European dairy must be able to find a place on the world market.
The FD is optimistic. The newspaper sees the future of the Dutch dairy industry depending on the flexibility and innovative power of dairy farmers and dairy processing factories. With smart strategies they can respond to changing market dynamics. They then focus on the production of specialized dairy products for both the domestic and international markets, which may become richer than the domestic market. The key to success would lie in 'valuing' the milk: making maximum use of the available milk for products that meet specific consumer needs, such as sports nutrition, senior food, tasty cheese and milk powders.
Meanwhile, the global dairy trade continues to grow, with countries like China driving global demand as importers. This offers opportunities for countries and companies that are able to adapt to the new reality in the EU, in which sustainability and animal welfare are indispensable. To turn this into opportunities, innovation in production methods is required in combination with commercial market insight. Especially now that the economic tide in the Netherlands is up cuts seem to force and a period of economic headwind appears to be entering after the last sunshine of the Rutte cabinet, it is important for Dutch dairy farmers and dairy processors to make wise choices now.
This article is part of the content collaboration between Boerenbusiness en foodlog.