Going for Growth

This is about to shake up the price of milk

Anmar Frangoul | Special to CNBC.com

Europe's farmers have always said they have had a tough time of it: whether it's rising rents, weather, disease, government controls or cash squeezes from retailers.

But the scrapping of a long-hated piece of red tape -- milk production quotas -- will create new opportunities and risks for the European Union's farming industry as well as affect the cost of your daily pint of milk and countless other food.

The EU's milk production quotas were originally introduced in 1984 when farmers, eager to exploit a guaranteed price of milk regardless of demand, literally flooded Europe with dairy goods. The resulting so-called "butter mountains" and "milk lakes" were a symptom of government micro-management.

The quotas hit some countries harder than others. Ireland's efficient, productive dairy farmers had a difficult time bringing their production levels to the new limit.

The decision to scrap quotas was made in light of increased global consumption of dairy products. The Commission stated that quotas were stopping EU farmers from responding to demand.

Stuart Pearce | age fotostock | Getty Images

EU Commissioner for Agriculture and Rural Development, Phil Hogan, said the decision to end quotas would be "both a challenge and an opportunity" for the EU's farmers.

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The end of the quotas will likely see farmers across the region ramp up production to meet growing demand. Dairy exports from the EU have increased by 45 percent over the last five years, according to the European Commission, even with the quotas in place, and it said prospects for further export growth "remain strong."

Mike King, vice chairman of the Royal Association of British Dairy Farmers, said the post-quota world will see farmers faced with big decisions – but could spur growth for some.

"They'll see a lot more (price) volatility… For those guys who are considering or weighing up their options in the industry, it may bring that decision to either cease production or expand. It's one or the other," King, who runs a dairy farm with 500 cows in south Gloucestershire with his brother, told CNBC.

The ramping-up of production would, however, affect farmers in terms of prices.

"There'll be more pressure, there'll be more milk," King added. "That puts the U.K. price down, and that's under great pressure at the moment."

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How will price be affected? Alan Renwick, Professor of Agriculture and Food Economics at University College Dublin, told CNBC in an email that, "There is a general feeling that global demand will be strong – due to emerging middle classes, population growth – which on average will help support price. However, the volatility around this is likely to be great."

For Renwick, production growth is likely to vary across Europe. "A number of higher cost regions have been protected by the quota regime and these areas may witness a decline. On the other hand more competitive… countries such as Ireland have been constrained by quota and are likely to witness growth – Ireland has a target for a 50 per cent growth in volume by 2020."

Renwick added that one way to look at growth opportunities was to "follow the money."

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"By this I mean look at where processors have been investing in new processing capacity… As I mentioned, Ireland is one area, [and the] West of France, Denmark, Netherlands, some parts of Germany all appear to be making these investments."

"They are making these investments as they believe there will be growth in regions," Renwick went on to add. "The reasons vary between countries but [it] comes down to a belief in competitive advantage."

Not all small producers are concerned about falling prices, however. Fiona Provan, who runs The Calf at Foot Dairy in the village of Somerleyton, Suffolk, charges £2.50 per liter for her milk, and says it's "proper milk, proper price". By comparison, the cost of just over one liter of milk in the UK falls somewhere between 70 and 90 pence.

Provan runs a micro dairy with just 12 Jersey cows, which are fed only on grass and milked just once a day. "The people that buy our milk understand that it's a completely different product," Provan told CNBC in a phone interview. "The consumer is now starting to take an interest in… the provenance of the food, and what they're putting in their bodies."