The end of quotas frees efficient European dairy farms to expand.

Chines mothers are feeding their infants more milk-based formula. Aspiring Russians have grown addicted to decadent foreign cheeses. In most emerging markets the consumption of dairy products is growing. So it looks like the perfect time for one of the world’s biggest dairy-farming regions to throw off its shackles. Next month the European Union is due to abolish its national quotas on milk production, allowing those big dairy producers being held back by their limits—including Germany, the Netherlands, Poland, Denmark and Ireland—to expand output and seek new export markets.

The quotas were a bad idea introduced in 1984 to try to fix the ill-effects of another curdled policy. The EU’s price-intervention scheme, by which it bought farmers’ output whenever milk prices fell below a certain level, was leading to overproduction, and politically embarrassing “milk lakes” and “butter mountains”. Over the past decade or so, intervention prices were reduced, and inflation was allowed to undermine them further; since 2009 national quotas have been raised by 1% a year. At the same time, the world price for milk has risen, bringing it closer to European levels (see chart). All this means that the scrapping of quotas should not cause too much short-term disruption.

The most efficient farmers who can make money at current prices, especially in the northern “milk-belt”, have been preparing to make the most of their freedom. Ireland has an official, if implausible, goal of increasing dairy output by 50%. Some say the Netherlands, Europe’s biggest exporter, could raise production by up to 20%. Torsten Hemme of IFCN, a dairy-farming research outfit, thinks exports to non-EU countries will double by 2024, and Europe will overtake New Zealand as the biggest net dairy exporter.

Both New Zealand and America, the world’s third-biggest exporter, have expansion plans of their own, of course. Demand can be unpredictable. Russia’s ban on dairy imports last year, in retaliation for Western sanctions over the Ukraine conflict, hit its European suppliers hard. Prices can be volatile, too: they have plunged since early 2014. Many farmers say this unpredictability makes them cautious about expanding.

As efficient northern dairies grow, and competition from America and New Zealand increases too, will cows disappear from southern Europe’s hillside pastures? That need not happen, says Vincent Chatellier of France’s National Institute of Agricultural Research, if their dairies focus on premium-priced products. Klaas Johan Osinga of the Dutch farmers’ association notes that although the EU’s support mechanism is being dismantled, national governments are being given new powers to aid vulnerable farmers. Europe used to be a land of milk and money for dairy farms. As they face up to the rigours of the world market, restructuring is likely to gather pace.

Source: economist.com