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Outlook and challenges

As follows from the modelling analysis, one would expect that, based on the evolution of structural factors, the milk price will show a gradual increase both in the EU and on the world market. According to the OECD-FAO (2010) outlook, world milk production is expected to grow at about 2% per annum over the period 2005-19, while the increase of milk output in the European Union will be limited to only 0.1% per annum. According to the FAPRI projection, the growth of EU milk production may be 0.4% per annum, which is substantially higher than the OECD-FAO projection, but still among the lowest growth rates observed in the world. World trade in dairy products is projected to increase at about 1% per annum, which is less than the average increase in production. This reflects that dairy production in exporting countries is projected to grow less fast than production in importing countries. However, New Zealand is projected to increase its market share, which is already high, even further in the future. As such, the impact of weather on New Zealand’s milk production, which was already a factor contributing to the recent price volatility, may become even more critical in the future. The OECD-FAO projections show a gradual increase in world market prices for butter, cheese and SMP. Since this price increase exceeds expected inflation, the period of declining real dairy prices has come to an end, according to these recent projections. The OECD-FAO projected milk price for the EU in 2019 is EUR 28/100 kg (FAPRI projects a price of about EUR 29.5/100 kg), which although higher than the intervention price, still implies a real price decline of about 3%. As such, the development of the milk price in the European Union is less favourable than the one projected for the world market.

Neither the model simulations nor the outlook projections account for price volatility caused by ‘non-normal’ factors and shocks. However, as argued by Keane and Connor (2009), price variability for dairy products (butter, SMP) on the world market is larger than has been the case on the EU market. Since 2000, they observe increasing price volatility in the EU dairy market. With the European Union being more oriented to the world market, and the increasing integration of dairy with other markets (energy) in the (global) economy, the price volatility faced by EU farmers in the future is expected to increase and become one of the characteristics of the new environment. In order to cope with this challenge, new forms of risk management and the availability of up-to-date and independent surveillance information on developments on EU and world dairy markets will become important.

Other challenges relate to sustainability, biodiversity, regional and climate issues. Abandoning the milk quota may lead to a significant reallocation of regional milk production in the European Union, with inefficient regions (e.g. mountainous areas) losing production. Although this may be considered a gain from an efficiency perspective, to the extent that dairy farming in such regions contributes to sustainable land management, the preservation of biodiversity and/or rural viability, from a broader policy perspective alternative targeted policies (such as tailored agri-environmental schemes) may be needed to avoid politically unacceptable losses in this regard.

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