The milk production in Northwest Europe will structurally decrease in the coming years. This will have consequences for the operational and financial performance of dairy companies. In response, dairy processors can focus on, for example, protein ingredients with higher added value, suggests Rabobank in a sector report.
With the abolition of the milk quota in 2015, milk production received a significant boost over the past ten years. Especially Denmark, Germany, the Netherlands, and Belgium were at the center of a growing European milk production, writes dairy analyst Richard Scheper. The expansion of trade agreements, periods of healthy margins, and declining interest rates supporting investments also contributed to this. Dairy farms are now facing various challenges, such as reduced profitability, environmental restrictions, labor availability, business succession, and extreme weather conditions.
Scheper also indicates that the peak in Dutch milk supply is behind us. With approaching deadlines for water quality regulations and stronger ammonia reduction goals, the development of milk production may turn out to be even lower than expected, according to Scheper. This increases the pressure to, among other things, reduce the dairy herd.
Regardless, contraction
Two scenarios, a base scenario and a more pessimistic scenario, are outlined. In the base scenario, milk production in Northwest Europe will decrease by 7.4 million tons (13%), to 50 million tons from 2023 to 2035. This will almost negate all production growth since 2010. According to a more pessimistic scenario, milk production will decrease by 11.5 million tons (20%) from 2023 to 2035, with the sharpest decline between 2025 and 2030. An essential difference between the two scenarios, according to Scheper, lies in the speed of the decline, with greater pressure on the dairy industry in the less favorable scenario.
Whatever the outcome, in both scenarios, Scheper highlights the need for dairy companies to adjust their strategy. Or at least focus on high-quality protein ingredients, branded products, and cheese. This is to offset additional costs and a reduced export position. Processing capacity will exceed milk supply, resulting in less condensed milk and whole milk powder, according to Scheper.
