The end of EU milk caps has lifted Irish spirits, but USDEC research shows clouds blocking sunny government forecasts. 

Only a week has passed since Ireland celebrated the beginning of a new dairy era with “end-of-quota” parties, ceremonial milkings and a bold prediction by Agriculture Minister Simon Coveney that Irish milk production will increase 50 percent in five years, leading to 10,000 new rural jobs.

But the euphoria surrounding the long-awaited end of European milk production caps has dimmed somewhat with the country’s largest daily newspaper running a series of skeptical articles titled “the Milk Bubble.” In addition, Ireland’s largest dairy farmer (850 cows) has been prominently quoted saying he is “nervous” about the government’s predictions and seriously doubts more “white gold” will lead to thousands of jobs on the farm.

“European Union: The Impact of the Removal of Milk Quotas in 2015,” a research report by the U.S. Dairy Export Council, provides further reasons for less exuberant Irish optimism. It did forecast Ireland will be among the European Union’s six winning countries with the lifting of the quotas. Under the most-likely scenario foreseen by USDEC, Irish milk production will grow at an annual rate of 4.6 percent through the year 2020. If a 4.6 percent annual growth rate is realized, the total growth by the year 2020 will be about 30 percent.

But an increase of 50 percent? Ross Christieson, USDEC’s senior vice president, market research and analysis, says the data doesn’t support that lofty number.

“Maybe the Irish politicians are full of bluster, or maybe an increase of 50 percent in volume is a wildly optimistic estimate of golden times for the Irish,” said Christieson. “But if milk prices stay anywhere near where they are right now there is no way Ireland will get to 50 percent. In the dairy industry, people sometimes view volume as king. But if volume does not prove profitable are the Irish farmers kings?”Irish_cow

The USDEC research has been condensed into an USDEC Executive Brief, “5 Data-Based Forecasts about the end of EU Milk Quotas,” for subscribers of the U.S. Dairy Exporter blog.

The full, 334-page research report goes into greater detail than the brief, identifiying eight likely challenges for Ireland to achieve a 50 percent increase by 2020:

1. Anticipated volatility in raw milk price levels post 2015, with fluctuating supply and demand levels which are affected by weather, fluctuating exchange rates and short term changes in demand.
2. Expected increases in the cost of borrowing. With borrowing costs currently at record lows, interest rates are likely to rise post 2015.
3. Access to new markets, notably China. Whereas China has a tariff-free agreement with New Zealand, it does not have one with the EU.
4. A high production price relative to Oceania. It is suggested that average Oceania raw milk production costs are about €26 for 100kg of milk, compared to around €29 in Ireland (Teagasc Outlook 2014 Economic Prospects for Agriculture). From this, it is deduced that the cost of production for incremental milk in Ireland needs to fall by up to 20%.
5. Access to labor.
6. High cost of buying land. The price of rented land has increased, as milk producers and tillage farmers compete for availability. This could mean that Ireland’s competitive edge based on cheap grass could quickly become eroded, as has happened in New Zealand.
7. Land availabilty. While a limited number of farmers may be able to buy small amounts of land to increase the size of their holdings, few will be able to buy substantial quantities. The likelihood is that the average farm size will increase over time, as some farmers exit production and lease land to other farmers.
8. Extreme weather conditions. Milk production was affected by bad weather in 2012 and also in 2009.

While Ireland is expected to have the largest percentage increase in the EU, Germany will have the largest volume increase, the USDEC study noted. Because Germany is already the largest milk-producing country in the EU, a projected annual growth of 1.8 percent will keep it the leader in terms of volume.

Across the entire EU, milk production is expected to increase 11 percent by 2020 compared to 2013 levels. A large majority of the increase—76 percent—will come from just six countries—Ireland, Germany, France, Poland, Denmark and the Netherlands.

Additional dairy commodities produced by the EU will mean increased competition with the United States and other dairy-exporting nations.

“The message for U.S. dairy exporters is that in the long term emerging markets will be strong,” said Christieson. “If the Europeans produce the milk we think they will it will not oversupply the market. But it will be a more competitive market. We need to keep improving.”

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