Milk quotas were first introduced in 1984 with the purpose of preventing overproduction. During the early 1980’s this had become a likely result of market support and export subsidies that were set up to maintain a viable agriculture of the EU. In the course of the following decades, several reforms were implemented that oriented EU’s agricultural production to perform in a more liberal market environment. Other measures were developed in order to protect milk producers and in 2003 it was proposed that milk quotas would be to expire in March 2015.
However, the average price of milk in EU started to fluctuate already in 2007 with the onset of the global world food price crisis which was the result of droughts as well as rising oil prices. Initially food prices rapidly soared but this increase was revoked by the recession beginning in the following year. As economies everywhere recovered, food prices started to increase again. Not coincidentally, these trends are also well reflected in the average EU milk price.
An interesting observation from the plot above is that up until 2007 there was a persistent yearly trend in the milk price. Historically it tends to be the lowest in May and peak during winter months. One explanation could be increased milk production during grazing season.
Returning to the 40-year period, milk price in individual countries does not seem to diverge from the EU average, albeit with some notable exceptions.
During late 1970’s and for a decade starting from 1983 milk price was prominently higher in Italy in comparison to other member states.
Milk price in the Eastern European countries that joined the EU in 2004 was initially much lower than elsewhere in the EU but in most cases converged during the following few years. Only in Latvia and Lithuania it was the global food price crisis in 2007 that eventually drove milk prices to the EU level.
From 2007 onwards milk price has been considerably higher in Cyprus and Malta. This may be due to the short expiraton time of milk which complicates its transportation. As a result, price of milk is less responsive to trends in EU market where physical boundaries inhibit transportation.
Fluctuations of milk price during the past 10 years are interesting but last few years have brought about increased public interest. When the limits on milk production were eventually lifted in March 2015, the situation in EU’s milk market suddenly changed. Previously the change in production of milk had been linked to its price: when price of milk was high, production increased, while lower price resulted in lower production than a year before (compare the bottom 2 time series below). When milk quotas ended, production abruptly surged whereas the previous decrease of price continued. In order to withstand the low price, farmers increased milk production, which further contributed to oversupply and resulting decline of price. In May 2016, milk production in EU was higher than it had been during the previous decade while price of milk had dropped to very low 2009 level. Although by now EU’s milk market has more or less stabilized, the price and supply of milk has still not entirely balanced.
Milk price in EU reveals some interesting trends when broken down to yearly trends or developments in different countries. Although average price of milk in EU well reflected the global crises that destabilized food prices, changes in production had until March 2015 been linked to price. End of milk quotas can be seen as directly responsible for termination of that relationship and (temporary) increase of volatiliy and uncertainty of EU milk market.
This post was originally written in rmarkdown and the code can be found here.