OC&C: Supermarkets to use low milk prices for edge

07 April 2015 Consultancy.uk

Wednesday 1 April 2015 was a historic day for the European dairy industry. The milk quota, which regulated the production of milk across the region for 31 years, has been lifted. With the market liberalised, prices are expected to drop, providing a window of opportunity for retailers looking to differentiate themselves and lure customers as well as producers looking to freely expand production.

In early 1980s overproduction of dairy products created infamous ‘milk lakes’ and ‘butter mountains’. In a bid to stem overproduction, the then European Economic Community, now the European Union, created a Common Agricultural Policy under which there was an agreed quota on the production of milk. This quota set a limit on the amount of milk a member state could produce before a super-levy was levied. The effect of the quota has been a stemmed production of EU-based milk and milk derivatives.


The European Union last Wednesday lifted the 31-year-old milk production quota, allowing European farmers to produces and sell as much as they can across EU region and the world. The effects of the removal of regulations has experts divided, with some suggesting that it will lead to over production and others that it will increase completion and price wars that will benefit consumers and distributers across the region.

According to Romuald Schaber, president of the European Milk Board, the changes make it "inevitable" a boom in production would cause "chronic price collapses". "The next crisis is on its way," he adds. Rob Harrison, dairy board chairman of the National Farmers Union (NFU) in Britain, says: “Farmers and dairy processors here do have some concerns about how other EU countries will react to the ending of quotas. Some are rapidly increasing their output without an end market for these goods." However, another NFU spokesperson suggests that there would be "no impact whatsoever" on milk prices for consumers, adding that people "won't see any changes on the supermarket shelves".

From the side of business consultants, there is a prediction that a "flooding in" from across the EU could cause prices to "plummet" as retailers put farmers under pressure. Will Hayllar, partner at consulting firm OC&C Strategy Consultants, suggests that a potential price war from suppliers offers retailers the opportunity to attract customers. “All consumers are really looking for is low prices, and as a result supermarkets use milk as a key price fighting product, reducing prices to drive footfall into their stores and demonstrate their value for money credentials."

Supermarkets to use low milk prices for edge - OC&C

Some regions like Ireland expect to benefit from the changes, with a study by the Irish Farmers Association (IFA) estimating that the removal of quotas will create 9,500 extra jobs in Ireland, and upwards of €1.3 billion annual additional export revenue. "Facts would suggest that Irish dairy farmers are well placed to capitalise on the end of quotas, and in so doing help develop the dairy and agribusiness sector with major increases in direct and indirect employment," IFA National Dairy Committee chairman Sean O'Leary says.

Germany's national farmers' association DBV, too sees benefits in the removal of the regulation. "The end of quotas brings more freedom for commercial decision-making about how much milk to produce, gives more responsibility for developing your own farming company but also more fluctuations in milk prices," says the DBV said in a statement.

With the recent collapse of demand from China for powered milk products as it taps into built up reserves, the removal of the EU levies is likely to place further pressure on international milk commodity prices already at a five year low.


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