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The end of milk quotas

Rocío Antón. Journalist. @rocio_anton

Ricardo Migueláñez. Agricultural Engineer. @rmiguelanez

The elimination of European Union milk quotas as from March 31st 2015 creates a new context in Spain in which some players are hopeful about potential new market opportunities, while others are uncertain about the impact of the regulatory change.  

The quota system, which has been in force in Europe since 1984, was created to stabilize the market and control surpluses, limiting the amount of milk that each Member State can produce. In the case of Spain, which began applying the regulation when it joined the EEC in 1986, the quota has always confined the sector as it is much lower than domestic consumption needs.

As Luis Calabozo, General Director of the National Federation of Dairy Industries (FENIL), tells Wikispanishfood.com, censuses were organized to determine the milk quota; however, since the process overlapped with the implementation of VAT in Spain, production was deemed to be lower than it was.

Spain's wiliness, in this case for not declaring real production numbers, created a situation that has weighed on it since it joined the EEC. As a result, the Spanish sector was only authorized to produce five million tons of milk per year, when real production was around seven million and domestic consumption exceeded eight million. According to Calabozo, other countries received quotas that were 20% higher than their consumption needs.

This resulted in the current asymmetries: the main producers in Europe are Germany (over 30 million tons), France (around 26 million), and the Netherlands (around 12 million), with quotas that are much higher than Spain's, which is currently 6.5 million tons. This quota is too low to cover domestic demand, which amounts to around 9 million tons, with the result that Spain must import approximately one-third of the milk it consumes.

Opportunities in contrast with current inflexibility

For Calabozo, the change in the European dairy sector's regulatory framework provides "possibilities which contrast with the do-nothing policy" of the quota regime and, in this context, Spain will have the opportunity to "explore its productive and transformative potential".

He recognizes that Spain is starting out with a disadvantage compared with other European countries, but he is certain that its prepared to enter a new era without quotas.

According to Calabozo, production of cow's milk in Spain has expanded by 650,000 tons since January 2010 and, during that same period, exports of cow's milk increased by 350,000 tons. In his opinion, this data shows that, despite limitations, the sector takes advantage of all opportunities, in terms of both higher quotas and in the international markets. “The sector is capable of addressing the challenges, and of innovating, investing and preparing itself", he says

He cites projections from the International Farm Comparison Network (IFCN), which estimates current global milk production to be around 780 million tons, increasing to over 1 billion tons by 2023 to meet global demand, driven by emerging markets such as China, India and some African countries.

"Spain aspires to take advantage of these opportunities in global markets, and just as our European rivals see the appeal in expanding beyond the EU, we also see greater opportunities within Spain", he added.

Moreover, "the Spanish industry's greatest challenge is to ensure the sustainability over time of quality milk to meet market demand. In view of this, it's necessary to incentivize production, ensure it is a profitable sector, and guarantee the viability of dairy farms".

Growth in production of 2-3% per annum

The head of Livestock of UPA, Román Santalla, expects Spanish farms to increase production by an average of 2 to 3% per year. In his opinion, the elimination of the quotas has both positive and negative consequences.

With regard to the latter, he cites the financial situation of dairy farmers after "85% of the sector had to undergo restructuring" and the fact that Spain is entering this liberalization "in worse conditions" than Germany, France and the Netherlands, which "have always been advancing full steam ahead".

However, he notes that "the end of the quotas eliminates production barriers and offers the possibility of reconquering the domestic market and accessing international ones”. Santalla notes the importance of "working together, first with consumers, with a view to offering them a high quality Spanish product, and also with the industry in Spain and with the explicit support of the administrations".

Gaspar Anabitarte, head of dairy sector in COAG, believes the Spanish industry "is very weak" compared with other countries, and has "very high" production costs. He also warns that large surpluses at EU level could cause prices to drop in Spain.

Accordingly, he advocates for the development of a production model with costs which are "easier to assume", and defends the need for market regulation measures to adapt production to consumption of dairy products in Europe. "The quotas have been disastrous for us, but there are other systems for regulating production", he underlines.

José Luis Antuña, head of the dairy sector at Cooperativas Agroalimentarias, is “moderately optimistic” about the elimination of quotas, which will allow Spain to  reduce part of current imports through domestic  production and enter international markets with no production limits.

Weakness in terms of international demand

"This is an opportunity and dairy farms have made a qualitative leap in efficiency, costs and improvements in management" he says, before warning about difficulties in international markets, such as "scant capacity to regulate excess production when international demand declines".

Antuña notes that Spanish production is focused mainly on mass consumption, which is a weakness in terms of meeting international demand as it is more focused on powdered milk. In this regard, Calabozo is convinced that as production expands, the dairy industry will increase its diversification.

Antuña also notes that, following the elimination of the quotas, working groups will be created to monitor the sector and resources in the event that prices slide dramatically, and he advocates analyzing the performance of operating margins (having consideration for both price performance and the cost of raw materials).

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30/10/2017