European milk quotas have been scrapped, marking the end of three decades of government intervention to control the production and price of milk in Europe.
The complete liberalisation of the milk market will bring down prices for consumers, which is not always good news for farmers. They will be hoping that increased demand from China, which favours imported milk after domestic milk scandals, will make up the gap.
Milk companies aren’t being shy about boosting production. Ireland has already said it increase supply 50 per cent by 2020, while the Netherlands and Germany, Europe’s largest producer, are increasing production 20 per cent, according to reports.
Not every milk producer plans to flood the market straight away. Dairy farmers in France are holding back to see what kind of demand is available.
Dairy farmers in the UK are also wary. James Hole, a Somerset Dairy farmer, told the BBC: “All they are going to end up doing is create huge milk pools coming out of Europe. Long term there will probably have to be another form of capping. I can't see how they can just make it a free-for-all.”
Belgian farmers staged a protest in Brussels the day before the quota was removed, fearing that smaller farmers would be driven out of business.
The milk quota was introduced in 1984 at a time when milk supply far outstripped demand, prompting fears of "rivers of milk and mountains of butter".
The European government stepped in to buy up milk and dairy stock to shield prices. Since the quota was introduced, the government has had to intervene far less, as shown below:
The milk quota has been raised by one per cent every year since 2009 to prepare farmers for its removal.
Production of dairy products has increased since 2009 and that projection is expected to continue (see chart below).
China is driving demand for European milk after a tainted milk scandal in 2008 left six people dead and hundreds of thousands sick. Since then, demand from China has prompted rationing in Europe, trafficking probes, smuggling and even art made of formula tins by Ai Weiwei.
Despite this demand, dairy producers are operating with thin margins. In Germany, many farmers receive as little as €0.28 a litre. They are investing in cost cutting equipment like new carousels that can help squeeze profits from ever smaller margins.
French farmers have found a different way around the problem. They are focusing on value-added products, like artisan cheeses. Produced in tightly controlled, often regulated environments, French cheese can command higher prices.
"We aren't interested in increasing volume, but increasing value," said Patrick Roulleau, head of the Sevre cooperative in western France.