European dairy bottom is in

While irrefutable evidence is still scarce and it may be too early to call, auxiliary signals like global price developments for dairy products, European product prices (Excel link) and supply drop, indicate that the European dairy market has begun to see signs of life. Some optimists agree.

Since the European milk quota system ended in the 1st quarter of 2015, it has been a production bonanza, but a price bloodshed for the entire sector. All major producers in Europe increased their production (pdf link) in 2015, some by significant margins (like France, +10% YoY and the UK, +8% YoY) and some by RIDICULOUS margins (like the Netherlands, +30% YoY and Ireland, +35% YoY). It has been 18 months since the end of the quota cap ended and this year and a half has been all about managing the supply glut and finding a new equilibrium. Basically every dairy farm in the EU has been operating at a loss during this period. Herds have been contracting, some financially weaker farms even shutting down. The abovementioned recent price uptick signals that maybe a new equilibrium has been reached and at least some farms in Europe will be able to make money again.

It is also worthy to note, that while market distortions in general are bad (and the EU’s Common Agricultural Policy is probably the largest centrally managed market distortion scheme in history), being one of the few free market enthusiasts in a town full of distortionists is not a solid business plan. Since EU policy gives quite a bit of leeway for member state governments to support their agricultural sector (in theory, there are strict rules, in practice, where there’s a will, there’s a way), the latest crisis has seen quite uneven results in the dairy farm sector of different EU member states. Ireland (an aspiring mini New Zealand of the European dairy market) and the Netherlands have seen their government support their dairy farms quite heavily with various measures and as a result, the post-quota “new normal” finds them with a significantly larger market share. Those governments that did not go out of their way to help their domestic dairy sector, are left with an overall more resilient sector but with a smaller market share.

One thing that has not been particularly affected by all this – grazing ground prices ;).