RIP Milk Quotas

April 2015 will mark the end of an era within EU milk production, after more than 30 years milk quotas will be abolished. The UK dairy sector has changed dramatically since the introduction of quotas, in 1984 there were 3.28 million dairy cows in the UK, with 50,625 dairy herds. In 2013 the herd has fallen to 1.78 million cows; and just 14,116 herds. The UK has failed to produce its full quota of milk over the last few years, and it is unclear whether the abolition of quotas will have any immediate impact. Elsewhere in the EU however production has grown sharply this year on the back of high milk prices, low feed costs; and in preparation for the end of quotas. Global demand for dairy products remains strong, particularly in developing nations in Asia, and EU dairy exports to third countries are expected to grow.

Support for the dairy sector will remain, with the EU commission having the option to use crisis measures such as intervention buying and private storage aid, the option of export subsidies will also remain.  The use of PGI (Protected Geographical Indications) for dairy products will also help to safeguard demand for traditional European dairy products, and safeguard producers in some traditional milk producing regions. Production although not constrained by quota’s will instead be limited by the availability of land, labour and capital, by climate; as well as environmental and planning restrictions in some countries. Controversies such as that in the UK over plans for ‘mega’ dairies will deter investment in the sector, and again limit potential growth in production.  Despite this, there will be an acceleration of the trend towards fewer, but larger dairy farming operations. At the EU level production is likely to become more concentrated in key milk producing regions in Northern and Western Europe.

Milk quotas have profoundly influenced the dairy sector in the UK and across the EU for the last thirty years and their abolition are also likely to have significant long term impact. In the post quota world prices will be more volatile than at present (milk prices have already been falling sharply this year). We may see more interest in risk management tools such as milk insurance, and futures markets. As prices and revenues become more and more variable, farmers will need to pay more and more attention to production costs in order to survive.