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Milk producers reacted differently at quota expiration

The milk market has for many years been characterised by regulations and quotas, but in 2015 the EU's milk quotas were lifted. Researchers from Aarhus University, along with researchers from five other European countries, have investigated how the end of the milk quotas has affected milk production in Europe.

2021.01.14 | Camilla Brodam

Photo: Colourbox

Since Denmark became part of the EC in 1973, European milk production has been subject to different strategies and market conditions. In the early 70s there was an underproduction of food in Europe and therefore the strategy was to produce as much as possible. But by the early 1980s, there had been an overproduction that led to the creation of milk quotas in 1984 creating a national ceiling for how much milk a country was allowed to produce.

"Over the years, the EU's market organisations have gradually been reformed. One of the ways in which milk producers have been supported in the past was through minimum prices and support purchases, whenever global milk prices were very low. It ensured a stable milk price, but it also created problems in relation to the WTO, who called it competition distortion,” says researcher Martin Thorsøe from the Department of Agroecology at Aarhus University.

In 2015, milk quotas were lifted and EU farmers were able to produce the amount of milk they wanted. This was a major change, and a team of researchers has investigated what has happened after the phasing out of milk quotas in Denmark, Greece, France, Latvia, and the United Kingdom. 

“It is very interesting to look at what has happened after the quotas were lifted, so we have investigated what has happened to the market, and not least what has happened to the milk producers. After many years of completely stable market conditions, the production systems have had to adapt to completely new conditions. It has required adaptation. We have looked more closely at how the systems have reacted to the changes across the five European countries, ”says Martin Thorsøe. 

Widely different reactions

The research was carried out as part of the EU project SUFISA, which provided access to very large data collections.

“At SUFISA, we have conducted individual interviews with people in the value chain, held focus groups with producers, made questionnaires, and compiled it all into national reports. Those reports have helped us to create really good and comprehensive overviews of the development of the milk market and the implications for the producers in the five countries we represent,” says Martin Thorsøe.

There is a big difference in how the dairy industry has reacted in the five different countries. For example: producers in Denmark have chosen to gradually increase production after the end of the milk quotas, and farmers have tried to reduce the production costs by expanding production locally. On the contrary, dairies in England and France, for example, have introduced capacity constraints to ensure stable production and imposed new informal production restrictions on producers. In Greece, which already had a small and fragmented dairy sector, farmers did not have the finances to adapt strategically to the new lower prices and production has declined here.

"There are countries that have experienced problems. This is partly because one has not been able to produce milk at a lower milk prices, and partly because it has been difficult to deal with the fluctuations that come in prices when the market arrangements that previously ensured a stable price do not exists any longer,” says Martin Thorsøe.

Two types of response

The researchers have set up a table in which you can clearly see the reactions in the different countries at farmer level and dairy level, respectively.

"Here you can see how the systems have reacted in the different countries. Overall, there is a response on two levels to the changing market conditions,” says Martin Thorsøe. “It is important to note, that there is a difference in ownership of the dairies, which affects their way of reacting. In Denmark, we have cooperative dairies, which means that the farmers decide who sits on the Board of Representatives, and thus the farmers have some say in the company's strategy. In other countries, the dairies are private, such as in some places in France, Latvia, Greece, and the United Kingdom. It has an impact on how changes in the market are handled. We have also included this in our overview table.”

Tabel 1. The strategic response of farming systems following market liberalization and increasing price volatility (Aubert et al., 2018Grivins et al., 2018Maye et al., 2018a2018bThorsøe and Noe, 2018Tsakalou and Vlahos, 2018).

Configuration of milk productionStrategic response of the processors Strategic response of the farming systems 
Denmark

Large-scale and industrialized production facilities. Milk is processed by several cooperatives (Arla is by far the largest).

Historically the Danish dairy industry is very export-oriented as 2/3 of production is exported Denmark.

Gradual increase in production, particularly after the quota abolition.

A strategy dominated by an ambition to conquer market shares on the global market

Crisis response has primarily been to lower production costs per kg of milk, by locally expanding production or converting to organic production to get price premium
France

Great regional differences in production systems. Two main market channels, either cooperatives or private dairies, each of these have approximately the same size. Most milk is sold as standard milk for processing at the dairies

Deliberate capacity restrictions in the processing sector to ensure stable production in an attempt to not destroy the local marketTwo strategies are prominent, either extensification via pasture-based production or intensification
Greece

Small-scale and fragmented dairy sector with few international enterprises. Produce around half of the Greek consumption of cow milk products. 60 % of the Greek dairy sector produce goat and sheep milk

Producer cooperatives are a dominating institution to ensure competitionLacking credit access imply difficulties to formulate a strategic response in the current situation of low prices
Latvia

High share of small-scale farming systems with low productivity and uncoordinated processing system.

Traditionally, milk is wholesaled at spot market, hence, no long-term contracts for farmers who have a weak position in the value chain

Initially low milk prices and reliance on the Russian market.

However, the entrance of a few large multi-national companies has increased prices and boosted production

Emphasis on productivity improvement, implying increasing production. Initially the milk price crisis implied that farmers were forced to sell their milk below the costs of production.

Several strategies are, however, available, including selling at spot markets to the highest bidder, surviving on subsidies or including new revenue streams

United Kingdom

Fragmented dairy sector, a number of different market arrangements exist, both cooperative and private. Supermarkets dominate, particularly the liquid milk market.

About 65 % of dairy production in the United Kingdom is sold as liquid milk, with only 25 % turned into cheese and 10 % into powders and butter

Contracts have become an increasingly important feature of dairy supply chains.

A range of different actors employing different strategies dominate the milk market.

Some processors have introduced an A and B pricing regime to control supply.

Low milk price is an existential concern, but price stability (stable market) is also essential; farmers receive different prices based on the nature of their contract.

However, the crisis has implied an increasing contractualisation, diversification of revenue streams and conversion to organic production

“Our results show that there have been changes in all five European countries that we have examined; some have had bigger problems than others. If we look at Denmark, production has increased after the end of the EU milk quotas, but many producers are challenged by the more unstable milk prices. At the same time, we can see that production has fallen in virtually all the other countries. The latter is an expression of a globalisation of market conditions, and that Danish producers before the end of the milk quotas have had a great desire to expand their production,” says Martin Thorsøe.

Behind the research
Collaborators: Department of Agroecology at Aarhus University, University of Southern Denmark, University of Gloucestershire, Baltic Studies Center, Agricultural University of Athens, and Department of Sustainable Development and International Relations (IDDRI)
Funding: The research is funded by the EU grant agreement no. 635577, H2020-SFS-2014-2 (SUFISA: Sustainable finance for sustainable agriculture and fisheries)
Conflict of interests: None
Read more: The publication: "Responding to change: Farming system resilience in a liberalized and volatile European dairy market" is written by Martin Thorsøe, Egon Noe, Damian Maye, Mauro Vigani, James Kirwan, Hannah Chiswell, Mikelis Grivins, Anda Adamsone-Fiskovica , Talis Tisenkopfs, Emni Tsakalou, Pierre-Marie Aubert, and William Loveluck
Contact: Researcher Martin Thorsøe, Department of Agroecology, Aarhus University. Email: martinh.thorsoe@au.dk 

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