So milk quotas are gone?

As of Wednesday 1 April, farmers across Europe are no longer restricted by European Union imposed milk quotas, which means they can now produce as much milk as they like. Milk quotas were introduced in 1984 so it’s a pretty big deal.

Hang on a second, that’s April Fool’s Day. Is there a connection?

Irish farmers will be hoping there isn’t. After 31 years of being held back by quotas, most farmers are looking forward to the chance of being able to milk more cows. Up to now, quota was the biggest constraint to increasing production. From now on, access to land is going to be biggest constraint for most farmers.

So it’s a good thing then?

In general, yes! The global demand for dairy products is increasing by about 3-4% per year. Ireland and New Zealand are unique in the world in that both countries can produce milk at relatively low cost, because of our competitive advantage in growing high quantities of good quality grass. Since quotas were introduced in Europe, New Zealand’s dairy industry has grown by four times, whereas Ireland has remained more or less static. Irish farmers see this as a missed opportunity for growth.

So everybody is happy that milk quota is gone?

Farmers in some EU countries like France would prefer if quotas remained because they fear an expansion of EU milk output will flood the market and prices will drop.

That sounds reasonable to me

There are only a couple of countries in Europe that are expected to increase milk output. Ireland is the most bullish of these targeting a 50% increase in milk output by 2020. While this seems large, most of this increase is going to be traded on the global dairy market. As Ireland is a relatively small player it shouldn’t impact much on the global prices, especially in the medium to long term.

But I heard prices are already falling?

Yes, prices across the world have dropped from the highs of 2013. This is mainly due to an increase in global supply, particularly in the United States and a drop in demand from countries like China as their economy slowed a bit. Right now, Irish dairy farmers are getting about 30 c/l for their milk and this time last year they were getting about 40 c/l.

Will prices drop further now that quotas are gone?

It’s possible that they will drop more but whether this is related to quotas going or not is unclear. Irish farmers have been told to expect more ‘price volatility’ but this is more to do about competing in the global marketplace than quota removal. Changes to the EU Common Agricultural Policy (CAP) in 2005 have made Irish farmers more exposed to fluctuations in global milk price.

Remember the butter mountains during the 1990s? Well they existed because the EU bought domestic milk products when prices were low and sold them when prices were high,which meant that farm gate prices remained constant. As this no longer happens, farmers need to be able to budget for high and low milk prices – and survive both!

So what’s the first thing farmers will do now that quotas are gone?

Probably milk their cows, like every other day! While the end of quotas is a momentous day, most farmers will treat it with a sigh of relief. For 31 years dairy farmers have had the threat of superlevy hanging over them.

Superlevy is a fine that has to be paid on every litre of milk a farmer produced over his or her quota. The fine was quite substantial at 28 c/l and the overall fine for Ireland this year will be about €75 million. The massive collective sigh of relief from Irish dairy farmers is that this is the last year a superlevy fine will have to be paid.