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Poland emerges a winner three years on from end of EU milk quotas

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Three years on from the abolition of EU milk production quotas, Poland has emerged as the biggest Eastern European winner.

Saying ‘goodbye’ to the quota system has given an especially big boost to the country that has risen to become the fourth-largest producer and extra-EU exporter of dairy in the bloc. It is the result of freedom from production limits since 2015, along with some structural changes to the industry.

Polish milk output has taken off, rising 4% year-on-year in 2017 - more than a half of the whole Eastern and Central European bloc’s production in the same period.

Since 2015, the dynamics of milk production growth have been higher than the EU average, with BNP Paribas suggesting, that since 2014 (before the end of quotas), output has grown by 9.5%.

Jakub Olipra, economist at Credit Agricole Bank, told IEG Vu that Poland has been one of the biggest winners in the abolition of quotas. Production has significantly increased and the dairy sector has become more developed and focused.

“Of course, we have some problems, as there is still low consolidation in dairy production, but judging by the current structure and the prices, we can observe that the Polish dairy sector is quite flexible to the changes,” he said.

But how did the consolidation process in Poland come about?

At the new policy’s inception, the most hard-hit were the smallholder farms. Michal Kolesnikow, food and agriculture consultant, told IEG Vu, that farmers suffered from low milk prices, increasing debt, dependence on feed from outside the farm and generally bad farm management.

However, big cooperatives went through the changes quite successfully. They have experienced losses at times, but eventually emerged more consolidated than before. This has been with the help of increasing production capacity, says Kolesnikow. The largest players, Mlekovita and Mlekpol, invested heavily in new equipment (new drying towers), as well as achieving success through organic growth and mergers and acquisitions.

Kolesnikow suggests that Polish milk production has since been slowly moving to the northeastern part of the country, while almost disappearing in the south and southeast.

He added: “Northeastern Poland became a cluster of dairy production and that means even more specialisation and a further increase in the share of Polish milk production. Milk production is increasing in the region, farms and dairy plants are growing bigger.”

But it was mainly the favourable structure of dairy production that helped during the transition period.

Kolesnikow said: “The share of butter and cheese in Polish dairy companies’ production is bigger than on average in the EU and slightly bigger than in Germany. Those product groups fared a bit better in recent years.”

Eastern and Central European 2017 Milk Production

The latest full-year 2017 EU data shows that Central and Eastern European member states have increased their total milk collections, with a rise in the value-added dairy category and larger dips in powders. These countries are part of the so-called New Members (NM-10) states: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, Slovakia. (Cyprus and Malta, which make up the rest of the NM-10 make up the other two). In 2017, these eight countries produced a total of 20.5 mln tonnes of milk, up by 3% from 2016. The largest two producers, Poland and the Czech Republic, grew deliveries the most: by 4% and 1% respectively.

The main commodities have been drinking milk, butter and cheese. It is clear that the countries significantly lessened the production of the currently stockpiled skimmed milk powder (SMP) from 204,600 tonnes in 2016 to 188,600 tonnes in 2017, which is a -8% dip year-on-year. The region produced the most drinking milk – around 67% of total product input. Cheese occupied a 24% share of production, while butter constituted around 5%. Production across all commodities remained stable compared to 2016 and 2015, with cheese witnessing a 4% jump.

At the same time, production of SMP and whole milk powder (WMP) in 2017 contracted by around -8% and -9% respectively. The group’s largest producer, Poland, grew its drinking milk and cheese production, while WMP suffered a reduction last year. Interestingly, SMP manufacturing rose despite falling wholesale prices. However, their losses could have partially been offset by a 4% growth in butter output and higher butter prices. Czech SMP production decreased, while WMP, the most expensive in the bloc, grew marginally. Cheese production remained positive last year, with volumes up 4%.  

Looking ahead

Pawel Wyrzykowski, agricultural markets analyst with BGZ BNP Paribas, told IEG Vu that favourable environmental conditions were going to be one of the main drivers of Poland’s dairy growth. Cheaper prices for feed, land and labour than the EU-15 average will contribute too.

Olipra estimates, that milk output will grow by an annual 4-5%. And in six years’ time Polish production will surpass the Netherlands’. This will happen due to the Netherlands geographical and natural limitations, such as land, as well as higher prices.

Simultaneously, Olipra said, Italy’s production will increase as significantly as Polish and might be a serious competitor.

Olipra pointed out that the countries that have secured the most success after the end of quotas - Poland, Italy and Ireland - have benefited from natural pastures for grazing, making it much easier to organically increase production.

And with the notheastern Poland’s “dairy hub”, the conditions for further development of the Polish sector are favourable. Kolesnikow says that growing corn for silage is better suited to the region than growing corn for grain, which can further support the growth of the national dairy herd.

When asked if domestic producers would back the return of quotas, Olipra said that they certainly would two years ago, as the market lacked stability. Now, he says, cooperatives would be the main supporters of a free EU market.

“On the bright side, the abolition made the EU and Poland global dairy market players. If the milk quotas were still intact, we could not benefit as much. It was a very good decision to abolish this quota,” said, adding: “The EU even surpassed New Zealand export volumes.”

A threat from the East

But is there a threat to Polish production from the East?

Ukraine appears to be the closest non-EU competitor to the Polish sector. In 2017, Ukraine exported just over 219,000 tonnes of dairy produce – up by 34% year-on-year. This was around 150,000 tonnes short of Polish volumes, still a large gap. But milk production in both countries is very similar: Poland produced 11.1 mln tonnes of milk in 2017 (according to Eurostat), while Ukraine’s volumes reached 10.3 mln tonnes (according to CLAL).

And with Ukraine becoming more and more involved with the EU through various agreements and partnerships, Poland faces growing competition.

However, experts suggest, Ukraine is being threatened by the spread of Polish influence as well.

Maks Fasteyev, senior dairy analyst at Infagro, told IEG VU: “There are ‘threats’ from the western neighbour - Poland, which significantly increased the production and processing of milk after the abolition of quotas and, at the moment, is winning a share of cheeses on the Ukrainian market.”

The abolition of EU production quotas generally had a directly-proportional effect on Ukraine.

He added: “Ukrainian business, as well as European and global, has been at a loss from the dairy market exchange in price terms, partially caused by the abolition of quotas. The only thing that saved the industry was the devaluation of the hryvnia (UAH) in the same period.”

The volume of Ukrainian milk going into processing is growing, up by around 2% in 2017 (according to CLAL). Growth for 2018 is forecasted to be stable too. But will it match up to the same rapid growth in Poland?

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