Analysis of the European Dairy Market:The Impact of Quota Expiry and the Russian Trade Embargo

Maya Price | Ilona Lebed | Josh Wong

TABLE OF CONTENTS

Introduction............................................................................................................................................... iii

Glossary...................................................................................................................................................... iv

Part 1: European Union..............................................................................................................................1

Farm Level: Data and Trends...................................................................................................................2

Dairy Cows...........................................................................................................................................2

Processing Level: Data and Trends..........................................................................................................4

Cows’ Milk Collection..........................................................................................................................4

Heifers and Slaughtering.....................................................................................................................6

Dairy Processing..................................................................................................................................9

Product Mix.........................................................................................................................................6

Domestic Market Situation....................................................................................................................15

Extra-EU Export Mix and Trends in Main Producers..............................................................................17

Export Mix.........................................................................................................................................17

EU Dairy Exports to Russia.................................................................................................................27

European Union: Dairy Export Trends...................................................................................................34

Part 2: Trends in Global Trade Flows........................................................................................................40

New Zealand..........................................................................................................................................40

Australia................................................................................................................................................43

Part 3: Russian Dairy Industry..................................................................................................................46

Impact of Embargo on Production & Consumption...........................................................................46

Production Level Changes..................................................................................................................47

Conclusion.................................................................................................................................................64

Annex 1: European Union ……………………………………………………………………………………………………………………..65

Annex 2: Global Trade Flows …………………………………………………………………………………………………………………75

Annex 3: Russia …………………………………………………………………………………………………………………………………….83

Annex 4: Sources ………………………………………………………………………………………………………………………………….86

Exhibits ………………………………………………………………………………………………………………………………………………..87

ii

INTRODUCTION

This report will focus on two factors that have made, and continue to make, a significant impact on the global dairy market. First, the lifting of the European Union (EU) milk quotas. Secondly, the Russian trade embargo on EU agricultural exports.

Consider the following timeline:

2003: CAP ‘Mid Term Review deal’ agrees that milk quotas should be abolished in 2015 2008: Confirmation that quotas will expire in 2015 March 2014: EU sanctions on Russia August 2014: Russian trade embargo on agricultural imports from EU March 31, 2015: Expiry of EU milk quotas

In 2008, EU farmers received official notice that milk quotas would expire in 2015, although general public knowledge of the planned expiration goes as far back as 2003. In order to facilitate the transition away from the quota regime, quota limits gradually increased beginning in 2010. As a result, some farmers expanded their herds in the expectation of being able to increase post-quota sales. The shock of the Russian trade embargo meant the unexpected loss of Europe’s primary dairy export market. In light of such a major restriction on the dairy trade, farmers had to reevaluate their expansion plans.

The sections that follow compare data from the European and Russian dairy industries; both before and after the embargo and quota expiry. This data reveals patterns of change in domestic production in the EU and Russia, as well as the product mixes they export and import. This report seeks to provide an analysis of the implications of such changes for Darigold, a major player in the world dairy market.

iii

GLOSSARY

Terms1 and Abbreviations

Heifer: a female bovine aged two years and over that has not yet calved.

Cow: a female bovine that has calved (including any aged less than 2 years).

Dairy Cow: a cow kept exclusively or principally for the production of milk for human consumption and/or other dairy produce, including cows for slaughter (whether fattened or not between last lactation and slaughter).

Milk production: covers total farm production of milk. Farms produce milk for two distinct purposes: to distribute to dairies (milk collection) as well as for domestic consumption, direct sale and cattle feed.

Milk collection (aka milk deliveries): the portion of a farm’s milk production that is collected on the farm, then delivered to dairies for processing.

Public intervention: the buying-in of butter and skimmed milk powder (SMP) into public stocks. Intervention stocks belong to the European Commission, while private storage is aided but the stock ownership remains with private operators. In September 2015, as part of the solidarity package2, the period for which storage is aided was prolonged (from 210 to 365 days) and the premium increased.

Private storage: the granting of a financial support (aid) for private storage of butter, SMP and cheese. This aid can help operators to take products temporarily off the market, as an alternative to public intervention.

Special intervention measures: specific ad-hoc measures to be mobilized in case of emergency or significant disturbances. Include: measures against market disturbance; measures concerning animal diseases and loss of consumer confidence; measures during periods of severe market imbalance.

N/A: Can indicate either not applicable or not available.

MT or MT: Refers to metric tons (1 Metric ton = 1.1 US tons)

Tons: Refers to U.S. tons (1 US ton = .91 Metric tons)

1 Sources: Eurostat Agriculture glossary; European Commission2 Q&A on the solidarity package

iv

Export Mix Products, as classified by the Harmonized Tariff Schedule

Fresh milk/cream: milk and cream, not concentrated nor containing added sugar or other sweetening matter (HS4: 0401)

SMP (skimmed milk powder): milk, concentrated, in powder, granules or other solid forms, of a fat content, by weight, not exceeding 1.5% (HS6: 040210)

WMP (whole milk powder): milk, concentrated, in powder, granules or other solid forms, of a fat content, by weight, exceeding 1.5% (HS6: 040221)

Concentrated milk: calculated using the methodology: [0402* – (SMP + WMP)]

*HS4: 0402 = milk and cream, concentrated or containing added sugar or other sweetening matter

Note that since two different databases were used to compile total export data in order to separate SMP from WMP, export data for concentrated milk is estimated. Therefore, it is included in the export mix but is not included in analysis of either percentage or volume changes in exports.

Fermented milk products: buttermilk, curdled milk and cream, yogurt, kephir and other fermented or acidified milk and cream, whether or not concentrated or containing added sugar or other sweeting matter or flavored or containing added fruit, nuts or cocoa (HS4: 0403)

Whey: whey, whether or not concentrated or containing added sugar or other sweetening matter; products consisting of natural milk constituents, whether or not containing added sugar or other sweetening matter, not elsewhere specified or included (HS4: 0404)

Butter: butter and other fats and oils derived from milk; dairy spreads (HS4: 0405)

Cheese: cheese and curd (HS4: 0406)

v

PART 1: EUROPEAN UNION: OVERALL PICTURE

Main Dairy Producers in the EU-28

Part 1 focuses on data from eight European Union member states identified as the EU’s main dairy producers based on their scope throughout the EU dairy industry.

EU-28 MAIN DAIRY PRODUCERSGermany (DE) Netherlands (NL)

France (FR) Poland (PL)3

Ireland (IE) Spain (ES)

Italy (IT) United Kingdom (UK)

MAIN PRODUCERS’ SHARES WITHIN EU DAIRY INDUSTRY

(2015)Dairy Cows 76%

Cows’ Milk Collection 80%

Butter Production 84%

Cheese Production 83%

SMP Production 80%

Milk Powder4 Production 69%

Butter Exports 80%

Cheese Exports 86%

SMP Exports 79%

WMP Exports 70%

Whey Exports 91%

3 Poland is the only country of the eight main producers that is not part of the EU-15 (the 15 EU Member States in 2003), but rather the EU N-13 (the 13 Member States that joined the EU in 2004, 2007, and 2013). 4 Within the context of this report, unless otherwise specified, “milk powder” refers to the aggregate of milk powder cream, whole milk powder, and partly-skimmed milk powder.

Farm Level: Data and Trends

Dairy Cows: Key Findings

Since 2010 (the start of gradual quota increases in preparation for the quota expiry in 2015), the majority of main producers saw some growth in herd size.

The most significant growth in percentage terms occurred in Ireland; an increase of 233,000 head (+23%). The most significant growth in numbers occurred in Italy; an increase of 311,000 head (+18%)5.

Poland’s dairy herd, in contrast, has decreased by 395,000 (-16%) from 2010 numbers; more than any other main producer.

The distribution of percentage shares of total EU dairy cows among main producers (which together account for 76% of the EU total dairy cow population) has remained relatively constant since 2010. No country has grown or decreased their share by more than 2%6. Changes in share seem to follow changes in numbers; Poland’s share decreased from 11% in 2010 to 9% in 2015; Italy’s share increased from 7% to 9% over the same period.

Trends and Forecast: 2014-2016

From 2014-15, of the main producers, the dairy herd shrank in DE, ES, FR, IT, and PL; it grew in IE, NL, UK.

The total EU-28 dairy herd grew to 23.4 million head in (0.4%) in 2015, but shrank to an estimated 23.2 million head (-0.8%) in 2016. It is forecasted to shrink by another 0.8% in 20177, with decreases of as much as 2% in the EU-N138.

Despite a drop in dairy cow numbers, milk yield per cow rose 2% in 2015, then another 2.2% in 2016. This could be attributed to genetic improvements in dairy cows and more efficient milking techniques.

5 See Annex 1: Table 1.1 for total dairy cow numbers 6 See Annex 1: Figure 1.3 7 Source: Winter 2016 Short Term Outlook for EU arable crops, dairy and meat markets; p. 24 (referred to hereafter as EU ST Outlook Winter 2016) 8 Source: Autumn 2015 Short Term Outlook for EU arable crops, dairy and meat markets; p.8. The EU-N13 countries (which of the main producers considered in this report include only Poland) were strongly affected by the Russian import ban and are going through a restructuring of milk production.

2

Spain Ireland NL Italy UK Poland France Germany -

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Total Dairy Cows in Main Producers ('000 Head)Source: Eurostat

2010 2011 2012 2013 2014 2015

In 2015 the combined dairy cow population of the main producers was nearly 18 million head, 76% of the EU total of 23.4 million head.

3

Processing Level: Data and Trends

Cows’ Milk Collection9 and Deliveries to Dairies: Key Findings

Note on Implications of Increased Post-Quota Milk Deliveries: Under the EU quota system, milk deliveries had to be made within the member state where the milk was collected at the farm. Deliveries made to other member states were counted as imports. Since the quota expiry, milk deliveries to neighboring states are instead counted as domestic deliveries. For this reason, there is risk of double counting deliveries, thus skewing the recorded total milk collection10.

Trends in Milk Collection and Deliveries

Despite lower milk prices paid to farmers, from 2014 to 2015, milk deliveries to dairies rose in the EU-28 and in each main producer, although at different rates. Factors favorable to higher milk deliveries included mild autumn weather, affordable feed prices and low energy costs11.

From 2014-2015, Ireland (+773, 000 MT or 13%) and the Netherlands (+853,000 MT or 7%) had the greatest growth in milk collection in both volume and percentage terms. France (+44,000 MT or 0.2%) and Italy (+77,000 MT or 0.7%) had the least12.

After IE and NL, Poland had the greatest increase in milk deliveries; this despite a drop in dairy cow numbers and an increase in slaughtering.

In volume terms, milk deliveries are consistently highest in Germany and France, followed by the UK (with total volume around half that of DE and FR), and are lowest in Spain and Ireland. Ireland’s monthly milk collection trend lines differ from those of other main producers; the large spikes and dips seem to follow a seasonal pattern characteristic of pasture-based dairy farming.

Forecast: 2016

EU milk deliveries are generally expected to increase, with the most significant growth in Ireland and the Netherlands. In contrast, EU countries in the east (i.e. Poland) are forecasted to see a stabilization in deliveries; a reflection of recent herd developments13

9 ‘Milk collection’ refers to milk collected on the farm and delivered to dairies for processing. ‘Milk collection’ and ‘milk deliveries’ are used as equivalent terms within this report. See glossary for further explanation. 10 Source: EU ST Outlook Winter 2016, p.10 (see inset) 11 Source: EU ST Outlook Winter 2016, p.912 See Annex 1: Figure 1.7 for percent changes in milk collection of all EU countries. 13 Source: EU ST Outlook Winter 2016, p.10

4

Heife

rs and Slaughtering: Key Findings

An increase in numbers of heifers around 2012-2013 could be an indication of farmers intending to expand their dairy herds in expectation of greater post-quota production capability. The main producers generally saw increases in young heifers around this time, with lower slaughtering rates (Spain was an exception). The same can be said of older heifers, with Italy, Poland and the Netherlands being exceptions. Even so, the trend is not pronounced enough to make a definite connection.

On the other hand, increases in slaughtering in 2014 could be a reaction to the Russian embargo. From 2014-15, young heifer slaughtering rates rose in Poland, the UK, Italy and Germany. Slaughtering rates of older heifers rose in Spain, Italy, Germany, and France. This may relate to the embargo, but could also be due to other factors.

Higher cow and heifer slaughtering rates have been attributed to “continued low milk prices and the ongoing restructuring of milk production in the EU”14. Slaughtering of dairy cows in the EU-15 increased by 3.3% in 2015; of heifers it increased by 5.3%. The EU-15 figure hides

14 Source: EU ST Outlook Winter 2016, p.13

5

Jan '13Mar '1

3May '1

3Jul '1

3Sep '13

Nov '13

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0

1,000

2,000

3,000

MONTHLY COWS' MILK COLLECTION ('000 MT)Source: Eurostat

Germany Ireland Spain FranceItaly NL Poland UK

% CHANGE IN MILK DELIVERIES: 2014-15

IRELAND 13.3%NETHERLANDS 6.8%

POLAND 2.7%EU-28 2.5%

UNITED KINGDOM 2.5%SPAIN 2%

GERMANY 1.6%ITALY 0.7%

FRANCE 0.2%

% CHANGE IN MILK DELIVERIES: 2014-15

IRELAND 13.3%NETHERLANDS 6.8%

POLAND 2.7%EU-28 2.5%

UNITED KINGDOM 2.5%SPAIN 2%

GERMANY 1.6%ITALY 0.7%

FRANCE 0.2%

decreased slaughtering rates in Ireland, the Netherlands, and the UK between 2014 and 2015; countries which kept cows to increase their dairy herds.

In 2015 Poland had the greatest increases in beef meat production (+60,000 MT or 14%), mainly coming from the milk herd. Spain was a close second (+58,000 MT or 10%).

Ireland consistently has highest the slaughtering rates of the main producers (around 50%), which could be related to its pasture-based dairy industry. Poland and Germany consistently have the lowest.

Although Germany and France have comparable dairy herds, France has more heifers and higher slaughtering rates. This could be explained by the fact that 86% of cows in Germany are dairy cows, compared to only 47% in France15; France may slaughter more cows to facilitate beef production. From 2014 to 2015 beef meat production rose by around 30,000 MT (about 5%) in France; in Germany there was little change16.

Forecast: 2016

In 2016 it is expected that “fewer heifers and cows will be retained for increasing production capacity”; that “the low level of the milk price in the EU may lead to further restructuring of culling of surplus cows and heifers”17.

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

France Germany UK Italy Ireland Poland Spain NL

0

500

1,000

1,500

2,000

2,500

3,000

Heifers (1 year old) in Main Producers ('000 Head)2010-2015

Source: Eurostat

Not for SlaughterFor Slaughter

15 See Annex 1: Figure 1.516 See Annex 1: Graph 11 17 Source: EU ST Outlook Winter 2016, p.13

6

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

2010

2015

France Germany UK Italy Ireland Poland Spain NL

0

500

1,000

1,500

2,000

2,500

3,000

Heifers (2 years old and over) in Main Producers ('000 Head)2010-2015

Source: Eurostat

Not for SlaughterFor Slaughter

Note: The distribution of heifers between the main producers does not reflect the distribution of dairy cows. Compared to the size of their dairy herds, Poland has relatively fewer heifers; France has relatively more.

7

2010 2011 2012 2013 2014 20150%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Slaughtering Rate: 1-year-old HeifersSource: Eurostat

EU-28Germany IrelandSpainFranceItalyNetherlandsPolandUnited Kingdom

2010 2011 2012 2013 2014 20150%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Slaughtering Rates: Heifers 2-years old and overSource: Eurostat

EU-28Germany IrelandSpainFranceItalyNetherlandsPolandUnited Kingdom

8

Dairy Processing: Key Findings

Note: Data18 used for the following production analyses was either unavailable or confidential for the following countries and products. For this reason, some percentages may be slightly skewed.

NL – cream; drinking milk IT – all milk powders; concentrated milk UK – all milk powders; concentrated milk IE – milk powder (excl. SMP); concentrated and fermented milk; cheese

Production Levels and Trends: 2014-2015

In 2015, total dairy production rose in Ireland (+16%), Netherlands (+5%), Poland (+3%), and Germany (+1%). Total dairy production decreased in the UK (-1%), France (-2%), Spain (-3%), and Italy (-4%).

In 2015, the main producers processed more: Butter19 notably in DE and IE SMP notably in DE and IE Cream20 notably in IT and UK Fermented Milk notably in ES and UK Cheese notably in NL and PL

In 2015, the main producers processed less: Milk powders notably in FR and PL Drinking milk notably in DE and ES

Annual change in production of the products above was not significant. In the main producers, overall production decreased by 310,000 MT (-1%). This compared to a decrease of 218,000 MT in the EU-2821 (-0.4%).

Although milk powders account for the lowest shares of dairy production, in both 2014 and 2015, SMP production was over twice that of production of all other milk powders combined.

18 Sources: Eurostat database; European Commission Milk Market Observatory 19 ‘Butter’ includes butter and other fats and oils derived from milk; dairy spreads 20 Cream for direct consumption 21 See Annex 1: Figure 1.8 for EU-28 production levels 2014-15

9

2014

2015

2014

2015

2014

2015

2014

2015

2014

2015

2014

2015

2014

2015

2014

2015

Germany

Ireland Spain France Italy NL Poland UK

0

2,000

4,000

6,000

8,000

10,000

12,000

MAIN PRODUCERS: PRODUCTION LEVELS ('000 MT)Jan-Dec 2014 | Jan-Dec 2015

Source: EurostatCheeseFermented milkDrinking milkConcentrated milkCreamMilk Powders (excl. SMP)SMPButter

TOP PRODUCERS, BY VOLUME (2015)

Product22 #1 Producer #2 ProducerCombined Share of EU

Total ProductionDrinking milk United Kingdom Germany 39%Cheese Germany France 46%Fermented milk Germany France 44%Cream Germany France 38%Butter Germany France 46%SMP France Germany 55%Concentrated milk Germany Netherlands 76%Other milk powders Netherlands France 42%

Germany and France are the top two producers of most dairy products. Netherlands produces large portions of total EU concentrated milk and milk powder, while the UK produces large amounts of drinking milk.

22 Ordered from greatest to least in terms of EU-28 overall production totals.

10

Jan '13Mar '1

3May '1

3Jul '1

3Sep '13

Nov '13

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0

50

100

150

200

250

Monthly Cheese Production ('000 MT)Source: Eurostat

Germany Spain France ItalyNL Poland UK

TOP CHEESE PRODUCERS 2015Total Produced Share

GERMANY 2.32 million MT 26% EU TotalFRANCE 1.78 million MT 20% EU Total

GREATEST VOLUME CHANGES IN CHEESE PRODUCTION: 2014-15 Total Produced % Change

NETHERLANDS .85 million MT 10%ITALY 1 million MT -5% GERMANY 2.3 million MT 1%

11

Jan '13Mar '1

3May '1

3Jul '1

3Sep '13

Nov '13

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0

10

20

30

40

50

Monthly Butter Production ('000 MT)Source: Eurostat

Germany Ireland Spain FranceItaly NL Poland UK

TOP BUTTER PRODUCERS 2015Total Produced Share

GERMANY .52 million MT 25% EU TotalFRANCE .45 million MT 21% EU Total

GREATEST VOLUME CHANGES IN BUTTER PRODUCTION: 2014-15

Total Produced % Change

IRELAND 200,000 MT 20%

GERMANY 517,000 MT 6%

12

Jan '13Mar '1

3May '1

3Jul '1

3Sep '13

Nov '13

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0

10

20

30

40

50

Monthly SMP Production ('000 MT)Source: Eurostat

Germany Ireland Spain France NL Poland

TOP SMP PRODUCERS 2015Total Produced Share

FRANCE .44 million MT 29% EU TotalGERMANY .4 million MT 26% EU Total

GREATEST VOLUME CHANGES IN SMP PRODUCTION: 2014-15 Total Produced % Change

IRELAND 127,000 MT 79%GERMANY 400,000 MT 12%

13

Jan '13Mar '1

3May '1

3Jul '1

3Sep '13

Nov '13

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0

5

10

15

20

25

Monthly Production of Milk Powders (excl. SMP) ('000 MT)Source: Eurostat

Germany Spain France NL Poland

TOP MILK POWDER PRODUCERS 2015Total Produced Share EU Total

FRANCE 139,000 MT 21% NETHERLANDS 140,000 MT 21%

GREATEST VOLUME CHANGES IN MILK POWDER PRODUCTION 2014-15Total Produced % Change

FRANCE 139,000 MT -4% POLAND 34,000 MT -12%GERMANY 121,000 MT 4%

14

Product Mix: Key Findings

The product mix in the EU remained relatively stable from 2014 to 2015. Drinking milk and cheese accounted for the majority of production; concentrated milk and milk powders accounted for the least. This mix differs between main producers.

Product mixes between countries point to relative specialization in some main producers. For instance, the UK and Spain produce relatively more drinking milk, with UK producing greater volumes. Italy produces relatively more cheese.

Drinking milk55%

Cheese16%

Fermented milk14%

Cream5%

Butter4%

SMP3%

Conc. Milk2%

Milk powder (excl. SMP)1%

EU-28 PRODUCT MIX 2015Source: Eurostat

See Annex 1: Figure 1.8 for total EU production levels.

15

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

France: Product Mix 2014-15Source: Eurostat

Concentrated milkMilk powder (excl. SMP)SMPButterCreamFermented milkCheeseDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese 0.9% 1.8 millionButter 0.5% 448,000Skimmed milk powder -0.2% 442,000Milk powder (excl. SMP) -4.3% 139,000Cream -0.2% 473,000Concentrated milk -9% 73,000Drinking milk -2.6% 3.3 millionFermented milk -3% 1.6 million

TOTAL -2% 8.2 million

16

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Germany: Product Mix 2014-15Source: Eurostat

Milk powder (excl. SMP)SMPConcentrated milkCreamButterFermented milkCheeseDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese 1% 2.3 millionButter 6% 517,000Skimmed milk powder 12% 400,000Milk powder (excl. SMP) 4% 121,000Cream -0.2% 567,000Concentrated milk -0.2% 412,000Drinking milk -5% 4.9 millionFermented milk 2% 1.9 million

TOTAL 1% 11.2 million

17

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14Aug '14

Sep '14Oct '

14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15Aug '15

Sep '15Oct '

15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ireland: Product Mix 2014-15Source: Eurostat

SMPCreamButterDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese N/AButter 20% 200,000Skimmed milk powder 79% 127,000Milk powder (excl. SMP) N/ACream 25% 15,000Concentrated milk N/ADrinking milk 6% 522,000Fermented milk N/A

TOTAL 16% 864,000

18

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Italy: Product Mix 2014-15Source: Eurostat

ButterCreamFermented milkCheeseDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese -5% 1 millionButter -6% 94,000Skimmed milk powder N/AMilk powder (excl. SMP) N/ACream 26% 165,000Concentrated milk N/ADrinking milk -4% 2.5 millionFermented milk -20% 251,000

TOTAL -4% 3.97 million

19

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Netherlands: Product Mix 2014-15Source: Eurostat

SMPMilk powder (excl. SMP)ButterFermented milkConcentrated milkCheese

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese 10% 847,000Butter 7% 150,000Skimmed milk powder 6% 69,000Milk powder (excl. SMP) 0.3% 140,000Cream N/AConcentrated milk 3% 393,000Drinking milk N/AFermented milk -1% 302,000

TOTAL 5% 1.9 million

20

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Poland: Product Mix 2014-15Source: Eurostat

Concentrated milkMilk powder (excl. SMP)SMPButterCreamFermented milkCheeseDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese 3% 785,000Butter 10% 188,000Skimmed milk powder -4% 141,000Milk powder (excl. SMP) -12% 34,000Cream 1% 255,000Concentrated milk -1% 35,000Drinking milk 4% 1.6 millionFermented milk 5% 532,000

TOTAL 3% 3.6 million

21

Jan '14Mar '1

4May '1

4Jul '1

4Sep '14

Nov '14

Jan '15Mar '1

5May '1

5Jul '1

5Sep '15

Nov '15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Spain: Product Mix 2014-15Source: Eurostat

SMPMilk powder (excl. SMP)ButterConcentrated milkCreamCheeseFermented milkDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese -1% 167,000Butter 19% 37,000Skimmed milk powder 14% 24,000Milk powder (excl. SMP) -9% 19,000Cream 19% 123,000Concentrated milk -24% 52,000Drinking milk -5% 3.3 millionFermented milk 8% 830,000

TOTAL -3% 4.6 million

22

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

United Kingdom: Product Mix 2014-15Source: Eurostat

ButterFermented milkCreamCheeseDrinking milk

PRODUCT (+/-) 2014-15 VOLUME PRODUCED (MT)

Cheese 2% 418,000Butter -6% 121,000Skimmed milk powder N/AMilk powder (excl. SMP) N/ACream 8% 331,000Concentrated milk N/ADrinking milk -2% 7 millionFermented milk 14% 310,000

TOTAL -1% 8.2 million

23

Domestic Market Situation

Domestic Market Situation: Key Findings

Butter

Butter consumption rose by several thousand MT (+2.3%) in 2015. EU Butter prices are declining but were still above intervention levels at the end of 2015. There is no excess of butter in EU stocks23; this could be thanks to the increase in domestic consumption as well as increased US demand for butter.

Cheese

Cheese consumption was estimated at nearly 9 million MT (up 1.4% from 2014), of which only 61,000 MT were imported. The volume of cheese consumed also accounted for over 90% of all the cheese produced; only around 10% of EU cheese was exported.

In 2015, private cheese storage reached capacity in Italy, the UK, and Ireland, although exports increased from each of these countries.

Whole Milk Powder

As a result of lower production, domestic consumption of WMP24 decreased substantially as compared to recent years, falling by 3.9% (16,000 MT). This compared to a 33.7% increase in consumption in 2012, and a 1.4% increase in 2014. Consumption could increase over the next year if production follows the forecasted 1.1% increase.

23 Source: EU ST Outlook Winter 2016 24 See Exhibit B: Whole Milk Powder Market Balance

24

Skimmed Milk Powder

Domestic use of SMP25 has grown consistently in recent years and is forecasted to continue to grow in 2016-2017. However, neither increases in domestic consumption nor increased exports have been able to offset the large increases in production in 2014 (+29%), and 2015 (+8.1%). For this reason, SMP stocks, both public and private (see graph 9 below) are higher than they have been in years (although still nowhere near pre-quota levels).

SMP hit a price floor in 201526, creating the need for public intervention.

Public storage: 45,000 MT were offered into SMP intervention stocks within the first 7 weeks of 2016; higher than in all of 2015. Intervention stocks were particularly important to Poland and France.

Private storage: Of the two storage options, the majority went to longer term storage (365 days as compared to 210). Private stocks were used mainly by Germany, Spain, the Netherlands and Ireland.

25 See Exhibit B: SMP Market Balance 26 Source: EU ST Outlook Autumn 2015

25

Extra-EU Export Mix and Trends in Main Producers

Export Mix27 and Trends: Key Findings

The EU-28's export mix did not change significantly from 2014. According to European Commission publications, total EU dairy exports increased in 2015, although here they are shown to decrease (2015 data for the EU-28 was available only through November at the time of data collection).

Greatest to least export totals, 2015:

1. Germany (#2 in 2014)2. France (#1 in 2014)3. Netherlands4. Poland5. Ireland6. Italy 7. Spain8. United Kingdom

Total dairy exports increased in all main producers. Germany saw the greatest increase in overall export volumes (up nearly 160,000 MT, or 29%). Ireland saw the greatest increase in percentage terms (+31%, most of which was exports of fresh milk/cream and butter). France saw the smallest percent change in exports (+5%); a small increase considering its production levels.

Poland’s overall dairy exports increased by 14%, but this figure hides the fact that dairy exports decreased for all products excluding fresh milk (148% increase) and whey (16% increase). Of all the main producers, Poland saw the greatest changes in terms of its export mix.

27 See glossary for definitions of products included in export mix.

26

GER-MANY

FRANCE NL POLAND IRELAND ITALY SPAIN UK0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

MAIN PRODUCERS2015 EXPORT VOLUMES (MT) & EXPORT MIX

Source: Eurostat

Fermented Milk Products Fresh Milk & CreamWheyWMPSMPButterCheese

18%

18%

21%

15%

10%

9%

4% 5%

EU-28: Dairy Export Mix 2015 (Jan-Nov)to third countries

Source: Eurostat COMEXT

Cheese

SMP

Fresh milk/cream

Whey

WMP

Conc. milk

Ferm. products

Butter

The EU-28 export mix from 2015 is comparable to that of 2014. The greatest changes were the share of fresh milk exports (up 3% from 2014), as well as cheese and whey exports (down 2% from 2014).

27

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

France: Export Mix 2014-15Source: EurostaT COMEXT

Conc. milkFerm. productsWMPButterCheeseFresh milk/creamSMPWhey

FRANCE : EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese 3% 107,856Butter -1% 36,621SMP 5% 156,065WMP -7% 32,154Whey 7% 178,016Fresh Milk & Cream 6% 152,476Fermented Milk Products 18% 11,031

TOTAL 5% 674,220

FRANCE TOP DESTINATION (MT)

CHEESE (#2 EU EXPORTER) USA (22,494)

BUTTER (#1 EU EXPORTER) China (3,362)

SMP (#1 EU EXPORTER) Algeria (29,299)

WMP Algeria (15,739)

28

WHEY (#1 EU EXPORTER) China (45,855)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Germany: Export Mix 2014-15Source: Eurostat COMEXT

WMPButterFerm. productsWhey CheeseConc. milkSMPFresh milk/cream

GERMANY: EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese 4% 93,836Butter 7% 12,394SMP 24% 147,736WMP 77% 32,154Whey 29% 81,254Fresh Milk & Cream 47% 320,364Fermented Milk Products -9% 34,170

TOTAL 29% 709,569

GERMANY TOP DESTINATION (MT)

CHEESE Switzerland (14,144)

BUTTER USA (1,646)

29

SMP (#2 EU EXPORTER) Egypt (21,053)

WMP U.A. Emirates (4,512)

WHEY China (24,649)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ireland: Export Mix 2014-15source: eurostat comext

Conc. milkFresh milk/creamButterFerm. productsWhey WMPSMPCheese

IRELAND: EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese 34% 39,812Butter 129% 22,501SMP 18% 33,590WMP 0.4% 18,163Whey 24% 25,789Fresh Milk & Cream 426% 2,807Fermented Milk Products 3% 6,633

TOTAL 31% 149,295

IRELAND TOP DESTINATION

30

(MT)CHEESE Algeria (8,967)

BUTTER USA (8,509)

SMP China (5,196)

WMP Nigeria (3,785)

WHEY China (15,180)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Italy: Export Mix 2014-15Source: Eurostat

WMPConc. milkButterFerm. productsSMPWhey Fresh milk/creamCheese

ITALY: EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese 5% 87,111Butter 52% 522SMP 16% 1,243WMP 43% 445Whey 13% 3,235Fresh Milk & Cream 58% 35,681Fermented Milk Products 5% 845

TOTAL 16% 149,295

31

ITALY TOP DESTINATION (MT)

CHEESE USA (32,880)

BUTTER China (228)

SMP China (494)

WMP Libya (270)

WHEY South Africa (900)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Netherlands: Export mix 2014-15Source: Eurostat

ButterFerm. productsFresh milk/creamSMPWhey CheeseWMPConc. milk

NETHERLANDS: EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese 9% 132,646Butter 105% 52,598SMP 6% 64,638WMP -3% 119,367Whey -6% 84,073Fresh Milk & Cream -6% 22,177Fermented Milk Products 109% 32,346

TOTAL 10% 507,845

32

NETHERLANDS TOP DESTINATION (MT)

CHEESE (#1 EU EXPORTER) Japan (20,972)

BUTTER (#2 EU EXPORTER) Singapore (5,274)

SMP Hong Kong (8,827)

WMP (#1 EU EXPORTER) Kuwait (12, 888)

WHEY China (23,016)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Poland: Export Mix 2014-15Source: Eurostat

ButterConc. milkFerm. productsFresh milk/creamWMPSMPCheeseWhey

POLAND: EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese -18% 47,626Butter -21% 2,527SMP -17% 66,696WMP -34% 8,242Whey 16% 103,499

33

Fresh Milk & Cream 148% 97,907Fermented Milk Products -54% 2,976

TOTAL 14% 329,473

POLAND TOP DESTINATION (MT)

CHEESE Saudi Arabia (8,236)

BUTTER Saudi Arabia (399)

SMP Algeria (24,337)

WMP Cuba (3,870)

WHEY (#2 EU EXPORTER) China (30,947)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Spain: Export Mix 2014-15Source: Eurostat

SMPWMPButterConc. milkWhey Ferm. productsCheeseFresh milk/cream

SPAIN: EXTRA-EU EXPORTS: 2014 – 2015

2015 TOTAL (MT)

Cheese 22% 27,012Butter 50% 900SMP 170% 8,673

34

WMP 85% 2,095Whey 27% 18,033Fresh Milk & Cream 22% 42,600Fermented Milk Products 1% 12,711

TOTAL 26% 112,024

SPAIN TOP DESTINATION (MT)

CHEESE USA (11,461)

BUTTER Cuba (214)

SMP Mexico (8,000)

WMP Colombia (864)

WHEY Thailand (6,078)

Jan '14Feb '14

Mar '14Apr '1

4May '1

4Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15

Aug '15Sep '15

Oct '15Nov '1

5Dec '1

5 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

United Kingdom: Export Mix 2014-15Source: Eurostat

ButterConc. milkFerm. productsFresh milk/creamWhey SMPCheeseWMP

UK: EXTRA-EU EXPORTS: 2014 – 2015 2015 TOTAL (MT)

Cheese 33% 26,020

35

Butter 45% 5,424SMP -9% 14,316WMP -8% 35,011Whey -12% 6,525Fresh Milk & Cream 78% 20,208Fermented Milk Products -30% 2,440

TOTAL 11% 109,944

UNITED KINGDOM TOP DESTINATION (MT)

CHEESE USA (7,637)

BUTTER Egypt (1,010)

SMP China (3,003)

WMP Ivory Coast (4,895)

WHEY India (1,163)

EU Dairy Exports to Russia: Key Findings

Total EU-28 Dairy Exports to Russia

The European Commission has taken special intervention measures to mitigate the effects of the Russian embargo on the dairy market. Internally, market measures involve promotion programs aimed at stabilizing domestic prices to avoid oversupply. External market measures aim to find new export markets for EU dairy products28.

The total loss in value of EU-28 exports to Russia since the implementation of the embargo totals over 1 billion euros (see table below).

Main Producers’ Dairy Exports to Russia

To compensate for the loss of the Russian market, main producers exported more butter to the USA and China, and more cheese to the USA and Japan.

Prior to 2015, Poland was a main supplier to Russia of butter, cheese, SMP, WMP, and Whey. In 2015, its top destinations (formerly Russia) were Saudi Arabia (for cheese and butter), Algeria (SMP), Cuba (WMP), and China (Whey).

28 External measures can involve promotion programs in external markets, trade negotiations and reduction of trade barriers. Source: European Commission (see page 14).

36

Other major suppliers were: France (butter, SMP, WMP, whey); Netherlands (butter, cheese, whey); Germany (cheese).

Extra-EU export totals did not decrease in any of Russia's former major suppliers in 2015, suggesting that new export markets compensated for the loss of the Russian market, at least in volume terms.

Aug '13Sep '13

Oct '13Nov '1

3Dec '1

3Jan '14

Feb '14

Mar '14Apr '1

4

May '14Jun '14

Jul '14

Aug '14Sep '14

Oct '14Nov '1

4Dec '1

4Jan '15

Feb '15

Mar '15Apr '1

5

May '15Jun '15

Jul '15

Aug '150

50,000

100,000

150,000

200,000

250,000

300,000

EU-28 EXPORTS TO RUSSIA (100KG)Aug. 2013 - Aug. 2015

Source: Eurostat COMEXT

Fresh Milk & CreamFermented Milk ProductsSMPWMPWheyButterCheese

VALUE OF EU-28 EXPORTS TO RUSSIA:

2013-1529% DECREASE IN REVENUE

NET LOSS IN EXPORT VALUE

2014/13 2015/14 2013-15FRESH MILK & CREAM -26% -98% € (51,954,676)FERMENTED MILK PRODUCTS -32% -99% € (51,063,565)SMP -61% -100% € (67,502,553)WMP -26% -100% € (7,871,462)WHEY -32% -97% € (33,873,089)BUTTER -35% -100% € (144,073,525)CHEESE -46% -96% € (962,115,918)

TOTAL 44% 97% € (1,318,454,788)

29 Source: Eurostat COMEXT

37

Aug '13Sep '13

Oct '13Nov '1

3Dec '1

3Jan '14

Feb '14Mar '1

4Apr '1

4May '1

4Jun '14

Jul '14Aug '14

Sep '14Oct '

14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15Aug '15

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

BUTTER EXPORTS TO RUSSIA (100 KG)Source: Eurostat

GERMANYSPAINFRANCEUKIRELANDITALYNLPOLAND

BUTTER EXPORTS PRE- VS. POST-EMBARGOYear Volume (MT) Value (€) Russia’s Rank30

EU-28 2013 35,340 145 million #1 (also in 2014)2015 14 37 million n/a

(2015 Data through November)

MAIN RUSSIAN SUPPLIERS FRANCE NETHERLANDS POLAND

2013 2015 2013 2015 2013 2015VOLUME (MT) 5,736 0 3,554 14 1,830 0% DOMESTIC

BUTTER EXPORTS 17% 0% 18% 0% 62% 0%

2015: Top Butter Export Destinations:

EU-28: USA, Saudi Arabia France: China, Singapore *#1 butter exporter Netherlands: Singapore, USA *#2 butter exporter Poland: Saudi Arabia, Egypt

30 Rank in terms of the top 15 EU historical import destinations (source: Milk Market Observatory)

38

39

Aug '13Sep '13

Oct '13Nov '1

3Dec '1

3Jan '14

Feb '14Mar '1

4Apr '1

4May '1

4Jun '14

Jul '14Aug '14

Sep '14Oct '

14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15Aug '15

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

CHEESE EXPORTS TO RUSSIA (100 KG)Source: Eurostat

GERMANYSPAINFRANCEUKIRELANDITALYNLPOLAND

CHEESE EXPORTS TO RUSSIA: PRE- VS. POST-EMBARGOYear Volume (MT) Value (€) Russia’s Rank

EU-28 2013 256,647 983 million #1 (also in 2014) 2015 4,328 21 million n/a

(2015 Data through November)

MAIN RUSSIAN SUPPLIERS GERMANY NETHERLANDS POLAND

2013 2015 2013 2015 2013 2015VOLUME (MT) 38,386 137 61,274 39 28,873 149% DOMESTIC

CHEESE EXPORTS 38% 0.1% 42% 0% 43% 0.3%

2015: Top Cheese Export Destinations:

EU-28: USA, Japan Germany: Switzerland, Japan Netherlands: Japan, USA *#1 Cheese exporter Poland: Saudi Arabia, Iraq

40

Aug '13Sep '13

Oct '13Nov '1

3Dec '1

3Jan '14

Feb '14Mar '1

4Apr '1

4May '1

4Jun '14

Jul '14Aug '14

Sep '14Oct '

14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15Aug '15

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

SMP EXPORTS TO RUSSIA (100 KG)Source: Eurostat

GERMANYFRANCEUKIRELANDITALYNLPOLAND

SMP EXPORTS TO RUSSIA PRE- VS. POST-EMBARGOYear Volume (MT) Value (€) Russia’s Rank

EU-28 2013 21,262 67.5 million #62015 0 3,600 n/a

(2015 Data through November)

MAIN RUSSIAN SUPPLIERS FRANCE POLAND

2013 2015 2013 2015VOLUME (MT) 3,203 0 2,655 0

% DOMESTIC SMP EXPORTS 4% 0% 13% 0%

2015 Top SMP Destinations:

EU-28: Algeria, Egypt France: Algeria, Indonesia *#1 SMP exporter Poland: Algeria, Vietnam

41

Aug '13Sep '13

Oct '13Nov '1

3Dec '1

3Jan '14

Feb '14Mar '1

4Apr '1

4May '1

4Jun '14

Jul '14Aug '14

Sep '14Oct '

14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15Aug '15

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

WMP EXPORTS TO RUSSIA (100KG)Source: Eurostat

FRANCEIRELANDNLPOLAND

WMP EXPORTS TO RUSSIA: PRE- VS. POST-EMBARGOYear Volume (MT) Value (€) Russia’s Rank

EU-28 2013 2,058 7.9 million Not in top 15

2015 n/a n/a n/a

MAIN RUSSIAN SUPPLIERS FRANCE POLANDYEAR 2013 2015 2013 2015VOLUME (MT) 111 0 240 0% DOMESTIC WMP EXPORTS 0.4% 0% 6% 0%

2015: Top WMP Destinations

EU-28: Oman, Algeria France: Algeria, Senegal Poland: Cuba

42

Aug '13Sep '13

Oct '13Nov '1

3Dec '1

3Jan '14

Feb '14Mar '1

4Apr '1

4May '1

4Jun '14

Jul '14Aug '14

Sep '14Oct '

14Nov '1

4Dec '1

4Jan '15

Feb '15Mar '1

5Apr '1

5May '1

5Jun '15

Jul '15Aug '15

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

WHEY EXPORTS TO RUSSIA (100 KG)Source: Eurostat

GERMANYSPAINFRANCEUKIRELANDITALYNLPOLAND

WHEY EXPORTS TO RUSSIA: PRE- VS. POST-EMBARGOYear Volume (MT) Value (€) Russia’s Rank

EU-28 2013 2,747 34.5 million #52015 324 620,000 n/a

(2015 Data through November)

MAIN RUSSIAN SUPPLIERS FRANCE NETHERLANDS POLAND

2013 2015 2013 2015 2013 2015VOLUME (MT) 5,054 0 4,774 25 5,307 0% DOMESTIC WHEY EXPORTS 3% 0% 5% 0% 6% 0%

2015: Top Whey Destinations

EU-28: China, Indonesia France: China, Indonesia *#1 Whey exporter Netherlands: China, Indonesia Poland: China, Indonesia *#2 Whey exporter

43

European Union: Dairy Export Trends

Total EU-28 Dairy Exports: Key FindingsAs shown by the following figures31, over the past 5 years, the EU-28 has generally increased exports of major dairy products. From 2014-15, changes in exports were less significant than in previous years. Total exports of Whey, SMP and butter have shown the largest fluctuations but have increased the most in volume. The projected evolution of EU dairy exports shows steady increase expected through 2024.32

2015 Shares of Total EU Dairy Exports: Cheese: 28% SMP: 27% Whey: 23% WMP: 15% Butter: 7% Total = 2.58 million tons

J a n -D e c 2 0 1 1 J a n - D e c 2 0 1 2 J a n - D e c 2 0 1 3 J a n - D e c 2 0 1 4 J a n - D e c 2 0 1 50

500

1,000

1,500

2,000

2,500

3,000

EU-28 Total Dairy Exports ( '000 Tons)2011-15

WheyWMPSMPButterCheese

31 Source for all EU-28 dairy export graphs in this section: CLAL.it32 Source: European Parliamentary Research Service Blog (see Figure 8)

44

EU-28 Cheese Exports: Key Findings

Cheese consistently accounts for the highest share of EU dairy exports; 28% in 2015. In 2015, the EU’s top two cheese export destinations were the United States (by far) and Japan. The US, Japan, and South Korea saw the sharpest influxes in cheese imports from 2014-2015.

In 2015, each main export destination increased imports of EU cheese, yet EU total cheese exports decreased by 0.2%. This could be a consequence of the Russian embargo, since Russia had been the number one or number two destination for EU cheese every year since the 1990’s33.

Despite the slight drop in 2015, cheese exports are forecasted to increase by 6% in 201634 for an estimated total of 761,000 MT. This would still not surpass 2013 levels, but if exports increase (as forecasted) by another 13% in 2017, total cheese exports would reach 860,000 MT (a 73,000 MT increase from 2013).

2010 2011 2012 2013 2014 20150

20

40

60

80

100

120

140

160

EU Cheese: Main Export Destinations2010-15

United States Japan Switzerland Saudi Arabia Korea, South

000'

Ton

s

2015/14: US 17% | Japan 48% | Switzerland 2% | Saudi Arabia 24% | S. Korea 60%

33 Source: Milk Market Observatory: EU Historical Trade Series 34 See Exhibit B: Butter Market Balance

45

EU-28 Butter Exports: Key Findings

Although butter is a major export item, it accounts for the smallest share of total EU dairy exports (7% in 2015); the majority of butter produced in the EU is consumed domestically.

EU butter exports have been on the rise since 2013, increasing by 46,000 MT in 2015 (a 34% increase, nearly twice that of the previous year). Following this trend, each main export destination saw a sharp rise in imports of EU butter from 2013 onward. China saw the most drastic growth, quadrupling its imports of EU butter in 2015 as compared to 2014.

Butter exports are forecasted to continue to grow in 2016 and 201735, although less so than in previous years.

2010 2011 2012 2013 2014 20150

5

10

15

20

25

30

EU Butter: Main Export Destinations2010-15

China United States Saudi Arabia Egypt Turkey

000'

Ton

s

2015/14: China 454% | US 90 % | Saudi Arabia 32% | Egypt 167% | Turkey 71%

35 See Exhibit B: Butter Market Balance

46

EU-28 SMP Exports: Key Findings

SMP is the EU-28’s second most exported product (27% of dairy exports) after cheese. In 2013, EU SMP exports fell by 22%, but have shown considerable growth since. In 2015, SMP exports did not outweigh increased production, resulting in an oversupply of SMP in the world dairy market and causing SMP to reach a price floor in 2015.

Import demand for SMP is less consistent than with other products. Algerian imports in particular have greatly fluctuated since 2010, dropping considerably from 2014-2015. In 2015, the EU still supplied more than 90% of Algeria’s SMP imports36. Considering Algeria’s role as a major world oil producer, the drop in Algerian demand could be the result of lowered purchasing power due to persistent low oil prices. Since Algeria has also been the EU’s top SMP export destination since 200437, it is likely that the EU is looking for new export markets to make up for this loss in demand.

2010 2011 2012 2013 2014 20150

20

40

60

80

100

120

140

160

EU SMP: Main Export Destinations2010-15

Algeria Egypt China Indonesia Philippines

000'

Ton

s

2015/14: Algeria 26% | Egypt 21% | China 14% | Indonesia 1% | Philippines 77%

36 EU ST Outlook Winter 2016, p.1137 Source: Milk Market Observatory Historical Trade Series

47

EU-28 WMP Exports: Key Findings

Over the last five years, EU exports of WMP have shown little change compared to exports of other dairy products. Although production of WMP fell by 1.8% (14,000 MT) from 2014-2015, exports of WMP actually increased slightly (+0.3%, or 1,000 MT) over this same period. WMP exports are forecasted to increase more substantially (+2% or 8,000 MT) in 2016, for a total of 398,000 MT38.

EU WMP exports to Algeria (2015’s #2 importer) fell considerably in 2015. Nigeria (2015’s #3 importer, and also a major world oil producer), has decreased WMP imports each year since 2010. The EU compensated for the loss of these markets with higher exports to Oman (2015’s top importer39), China, U.A. Emirates, and Cuba40.

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EU WMP: Main Export Destinations2010-15

Oman Algeria Nigeria UAE Cuba China

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2015/14: Oman 18% | Algeria 48% | Nigeria 23% | UAE 66% | Cuba 47% | China 85%

38 See Exhibit B: Whole Milk Powder Market Balance 39 Source: Milk Market Observatory: EU Dairy Exports to Third Countries 40 Source: EU ST Outlook Winter 2016, p.11

48

EU-28 Whey Exports: Key Findings

EU exports of Whey have greatly increased in recent years, especially to China and Indonesia, which have been the top two importers of EU whey for the last decade41. In 2015, the only main importer that did not show an increase in EU whey imports was South Korea.

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EU Whey: Main Export Destinations2010-15

China Indonesia Malaysia Thailand Korea, South

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2015/14: China 7% | Indonesia 9% | Malaysia 11% | Thailand 14% | S. Korea 21%

41 Source: Milk Market Observatory: EU Historical Trade Series

49

PART 2: TRENDS IN GLOBAL TRADE FLOWS

New Zealand Dairy Exports42: Key FindingsNew Zealand’s WMP exports accounts for 51% of its total dairy exports. Butter has the second largest share of exports, at 19%.

From 2014-2015, Whey exports increased to all top destinations, of which the US is #1 by far. Exports of butter and WMP increased to all main destinations except China. Cheese exports increased to all main destinations except Japan, although Japan remains NZ’s #1 cheese importer.43

China is a major export destination for all NZ dairy products, and is NZ’s top destination for butter, cheese, and WMP. Since 2010, China has increased imports of all NZ dairy products excluding WMP (which dropped by 39% from 2014-2015). Chinese butter imports increased each year until 2015, where they plateaued.

In 201544, New Zealand’s dairy exports totaled 2.58 million tons:

Cheese: 326,915 tons Butter: 497,993 tons SMP: 411,511tons WMP: 1.37 million tons Whey: 31,570 tons

42 Source for all graphs in this section: CLAL.it 43 See Annex 2 Figure 2.2 for historical NZ export and import flows of all major dairy products. Tables include all major export destinations, including Russia, which the graphs here do not.44 See Annex 2 for NZ’s past dairy export totals.

50

12%

18%

15%

51%

3%

% Share of Total NZ Dairy Exports 2015

CheeseButterSMPWMPWhey

Major New Zealand Export Destinations

Change in Imports: 2015/2014

China 0.1% Egypt 14% Mexico 133% Philippines16% UAE 68%

Japan 4% Australia 19% China 37% US 144% Philippines27%

51

20102011

20122013

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NZ Butter:Main Export Destinations 2010-15

China Egypt

Mexico Philippines

UAE

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NZ Cheese: Main Export Destinations 2010-15

JapanAustraliaChinaUnited StatesPhilippines

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China 7% Singapore 21% Philippines 7% Malaysia 6% Thailand 26% Vietnam 134%

China 39% UAE 11% Algeria 27% Malaysia 39% Sri Lanka 23% Venezuela 47%

US 12% Singapore 60% Egypt 37% NL 42% Japan 8% China 82%

Australia Dairy Exports45: Key Findings

45 Source for all graphs in this section: CLAL.it

52

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NZ SMP: Main Export Destinations 2010-15

ChinaSingaporePhilippinesMalaysiaThailand

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NZ WMP: Main Export Destinations2010-15

China

United Arab Emirates

Algeria

Malaysia

Sri Lanka

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NZ Whey: Main Export Destinations 2010-15

United StatesSingaporeEgyptNetherlandsJapanChina

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Australia is a major exporter of SMP and cheese, which together account for 76% of its total dairy exports. Australia’s annual dairy exports total considerably less than those of the EU and New Zealand. 46

Australian SMP exports were strong from 2014-2015. Australia’s top destination for SMP in Indonesia, which greatly increased its SMP imports from 2013-2015. Vietnam increased imports of AU SMP by 146% in 2015.

Australian cheese exports also performed well in 2015. The only main destination with a slight decrease in imports was Malaysia (-3%). Japan imports far more cheese from Australia than any other main importer, and in 2015 increased imports by 22%.

Although Singapore is a main destination for AU SMP, WMP, and whey, its imports have decreased significantly in recent years. China’s dairy imports from Australia have also generally been declining, with imports of both WMP and whey plummeting in 2013. In 2015, China’s whey imports did pick back up, as did its imports of SMP.

In 201547, Australia’s dairy exports totaled about just over .5 million tons, of which:

Cheese: 188,789 tons Butter: 36,159 tons SMP: 221,898 tons WMP: 71,873 tons Whey: 33,045 tons

46 See Annex 2 Figure 2.3 for historical AU export and import flows of all major dairy products. Tables include all major export destinations, including Russia, which the graphs here do not.47 See Annex 2 for AU’s past dairy export totals.

53

34%

7%40%

13%

6%

% Share of Total AU Dairy Exports

CheeseButterSMPWMPWhey

Major Australia Export Destinations

Change in Imports: 2015/2014

Singapore 22% Malaysia 19% Thailand 21% S. Korea 104% China 60%

Japan 22% China 4% S. Korea 45% Malaysia 3% US 139%

Indonesia 29% Malaysia 33% China 24% Singapore 11% Vietnam 147%

54

2010 2011 2012 2013 2014 20150

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AU Butter: Main Export Destinations 2010-15

SingaporeMalaysiaThailandKorea, SouthChina

000'

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AU Cheese: Main Export Destinations 2010-15

JapanChinaKorea, SouthMalaysiaUnited States

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tons

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AU SMP: Main Export Destinations 2010-15

IndonesiaChinaMalaysiaSingaporeVietnam

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Sri Lanka 7% Singapore 30% Bangladesh 5% China 56% Oman 13%

China 45% Japan 15% Indonesia 24% Singapore 50% Malaysia 24%

PART 3: RUSSIAN DAIRY INDUSTRY

After the EU put sanctions on Russia in March 2014, Russia responded by putting an embargo on European dairy products entering Russia in August of 2014. Russia’s dairy market since then has changed in terms of production and imports.

55

20102011

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20142015

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AU WMP: Main Export Destinations 2010-15

Sri LankaSingaporeBangladeshChinaOman

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AU Whey: Main Export Destinations 2010-15

ChinaJapanIndonesiaSingaporeMalaysia

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Impact of Embargo on Production & Consumption: Key Findings

This section on Russia will focus on four dairy products: cheese, butter, skim milk powder, and whole milk powder. Each will be analyzed for changes regarding production and consumption levels and how they’ve changed after the Russian embargo on European dairy products. Whey imports and production levels could not be found for Russia. Because of this, whey will not be included in this analysis.

The figure above demonstrates the changes in levels of production for each dairy product from 2010-2015. The orange bar symbolizes the year the embargo began- 2014. The changes in production could be due to the increasing inflation rate of the Russian ruble, the exit of foreign competitors from the Russian market, or the lax government regulations regarding the use of palm oil in dairy products.

The rest of the report will focus on each of the dairy products in detail and how they’ve been impacted.

56

Production Level ChangesCheese and butter, expressed by the blue and orange respectively, are the most important products Russia produces, comparing their volume to SMP and WMP. Both cheese and butter are influenced by the palm oil substitute.

The production of cheese is the greatest influence in the total production of dairy products in Russia.

Since the embargo in 2014, the total production has increased to a new maximum, possibly with considerable help from palm oil.

57

Note: The scale of the figure

Russian Milk: Key FindingsFrom 2013 and onwards both the production and consumption of milk fell. The actual production of cheese, butter, and even SMP rises, even with the falling milk levels.

Production of milk is loosely tied with the number of cows in milk48. Currently, over half of the milk-producing farms in Russia are small household farms49 with little access to modern technology. As the technology becomes more prevalent, the decreasing cow numbers should not forecast decreasing milk numbers.

The amount of milk that is imported into Russia from other countries is insignificant at about 1 percent.

48 See Annex 3 Figure 3.1 for percent change in cows compared to milk production49 FAO The Russian Federation Review of the Dairy Sector 2010, pg. 8

58

Palm Oil and Russian Dairy ProductsRussia had no regulations in place on the use of palm oil to substitute milk fats in products such as cheese and butter. This unregulated market, partnered with the lack of imported cheeses and butter, likely allowed an increase in the production of butter and cheese by Russian processors.

The lack of competitors who could provide better quality cheese were not in the market anymore, allowing Russian producers to pour higher amounts of palm oil into their products. Consumers have no choice in the quality of their product, other than choosing to buy it or not.

The Russian Ministry of Agriculture made a few announcements regarding the regulation of palm oil in food products. According to an announcement from them on February 6 201650 the Ministry of Agriculture and the Ministry of Health are partnering to implement an excise tax on palm oil. This tax will bring up the price of palm oil, with the intention of discouraging its use in dairy products. Other than this tax, there have been no further announcements on the regulation of palm oil use in dairy products.

Using palm oil as a substitute for milk fats after the trade embargo could be important to consider when looking at the product mix in Russia. This cheaper source of fat may lead to a higher production of butter and cheese per milk input. Potentially, more cheese and butter can be produced from the same amount of milk if palm oil is mixed in. In a market where this is legal and where higher quality competitors are non-existent, producers at the factory level will take advantage of the cost-savings and high profit margins.

50 Press Service for the Ministry of Agriculture of the Russian Federation

59

Russian Cheese: Key FindingsRussia produces more cheese than any other dairy product.

In 2015, Russian cheese production is higher than the five years prior51. The production levels have not grown nearly as much as consumption levels have fallen.

The decreasing domestic consumption levels of cheese could have been brought about by the rising inflation rate in Russia, the depreciating ruble, and the lower quality of cheese mixed with palm oil.

The gap between the rising production levels and the falling consumption levels is smaller in 2015, meaning that Russia may be responding to the embargo. Since the consumption rates fell more than the production rates grew, it may be the economic situation in Russian that is narrowing the gap.

Russian producers of cheese were not able to offset the balance between the decrease in imports and the increase in production. Cheese still is imported into Russia, although in a smaller quantity than before the embargo.

51 Refer to Annex 3 Figure3.2 for percent change in production of cheese

60

Russian Butter: Key FindingsThere was an increase in the production of butter from 2013-201552.

Three years before the embargo, production of cheese was stagnant. After the embargo began, there was a 50,000 MT increase in the production of butter from 2013-2015.

Consumption-wise there was a slight increase up until around 2014. In 2015 the domestic consumption leveled off. This may be due to the inflation rate or the decline in the quality of butter (because of the added palm oil).

With the stagnant consumption levels and the rising production levels, Russia is becoming less dependent on the world market for butter. This being said, they still produce less than they consume, putting them in a position of possibly needing butter imports.

52 Refer to Annex 3 Figure 3.3 for percent change in production of butter

61

Russian Skim Milk Powder: Key Findings

The major difference in production and consumption is much more dramatic (proportionally) in SMP than in any other dairy product. Russia depends more on the world market for SMP than their own production. In 2015, imports of SMP accounted for 63% of Russia’s total supply.

The embargo seems like it may have impacted SMP production for 2014, but production fell in 201553. The long lasting results of the embargo seem to have a smaller impact on the total production of SMP because Russia imported most of their SMP from Belarus and not the EU.

53 Refer to Annex 3 Figure 3.4 for percent change in production of SMP

62

Russian Whole Milk Powder: Key FindingsWMP accounts for the smallest portion of the dairy industry in Russia. As seen from the figure above, about half of WMP is produced within Russia, the other half is imported. The amount of WMP that was imported from the EU into Russia is insignificant, since it is so small. The production54 of WMP doesn’t seem to have been impacted by the embargo in a significant way.

54 Refer to Annex 3 Figure 3.5 for percent change in production of WMP

63

Product Mix of Russian Imports: Key FindingsSMP is the only product that is more imported in a larger quantity per year than it is produced. It is becoming a larger percentage of the product mix, as other products are imported less.

Before the embargo, cheese imports accounted for more than half of the product mix into Russia. Afterwards, cheese imports have fallen to a little less than half of the imports.

Proportionally, the mix of butter and WMP remained at about the same levels as the years prior. In real terms, they were both imported less in 2015 as compared with 2013, a year before the embargo.

64

Ruble DepreciationThe Russian ruble has been depreciating55. As the currency depreciates, this makes purchasing the same amount of a product more and more expensive.

Percent Imported 2013 2014 2015

All Dairy Products 43% 35% 26%

● Russia’s imports of dairy products fell 17% over the course of three years.● With the ruble depreciating, it will be harder and harder for Russia to import more

products, since the ruble will essentially be buying less.

2016 Russian Dairy Intervention PlanThe Russian Ministry of Agriculture (MOA) announced in February 2016 that they are considering implementing their first ever dairy intervention plan.

The dairy intervention consists of the following criteria if enacted: MOA can buy up to 5% of the produced butter and milk powder This plan is intended to keep the price of butter and milk powder up during the spring

flush, thus helping the farmers’ profitability.

55 Refer to Annex 3 Figure 3.6 for exchange rate between the ruble, dollar, and euro.

65

Russia’s Dairy Production vs. Imports : Pre and Post Embargo

Butter: Key Findings Domestic butter production increased in both 2014 and 2014. Belarus has been and continues to be Russia’s largest butter supplier. Russia doesn’t seem to have found an alternative source to match butter import levels prior to the embargo.

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RUSSIAN BUTTER IMPORTS: MAIN SUPPLIERS2010-15 (Jan-Dec)

ArgentinaAustraliaNZUSEU-28BelarusOthers

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Source: CLAL.it

EU’S SHARE OF TOTAL RUSSIAN BUTTER IMPORTS

2011 22%2012 17%2013 22%2014 15%2015 0%

Main Russian Butter Suppliers (Excluding EU)2010 2011 2012 2013 2014 2015 2014-2015

BELARUS 53 56 75 44 59 73 +23%URUGUAY 2 5 12 17 18 10 -46%NZ 27 30 22 25 18 6 -66%ARGENTINA 3 5 6 11 10 3 -68%KAZAKHSTAN - - 0.02 0.18 0.24 1.35 456%

67

Cheese: Key Findings The EU-28 accounted for over half of Russia’s cheese imports prior to 2014. By the end of 2015, the EU-28 accounted for only 2%. Belarus has increased exports to Russia, but not by enough to cover this loss from the EU.

2010 2011 2012 2013 2014 20150

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RUSSIAN CHEESE IMPORTS: MAIN SUPPLIERS2010-15 (Jan-Dec)

ArgentinaAustraliaNZUSEU-28BelarusOthers

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Source: CLAL.it

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EU’S SHARE OF TOTAL RUSSIAN CHEESE IMPORTS

2011 45%2012 49%2013 53%2014 38%2015 2%

Main Russian Cheese Suppliers (Excluding EU)2010 2011 2012 2013 2014 2015 2014-2015

BELARUS 117 120 133 111 131 162 +24%ARGENTINA 7 7 8 7 19 10 -45%SERBIA N/A 0.4 4 5 8 8 +8%ARMENIA 0.3 0.3 0.9 1.6 1.5 6.1 298%UKRAINE 66 69 56 50 11 3 -76%

69

Skimmed Milk Powder: Key Findings Although the EU exports relatively large quantities of SMP to Russia, Belarus is Russia’s main SMP supplier, providing 75-80% of Russia’s SMP imports. The loss of the EU as an SMP supplier does not seem to have had as great an effect as with other dairy products. In 2015, Belarus increased exports to Russia, and total Russian SMP imports in 2015 were higher than those in 2014, although still lower than 2013.

2010 2011 2012 2013 2014 20150

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RUSSIAN SMP IMPORTS: MAIN SUPPLIERS2010-15 (Jan-Dec)

ArgentinaAustraliaNZUSEU-28BelarusOthers

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EU’S SHARE OF TOTAL RUSSIAN SMP IMPORTS

2011 25%2012 13%2013 19%2014 7%2015 0%

Main Russian SMP Suppliers (Excluding EU)2010 2011 2012 2013 2014 2015 2014-2015

BELARUS 54 44 69 73 79 104 +31%ARGENTINA 2.7 0.5 1.3 8.3 2.7 1.7 -38%NEW ZEALAND 0.02 0.12 N/A N/A 0 1.71 N/ASWITZERLAND 2.6 0.7 0.4 0.7 1.7 1.5 -15%URUGUAY N/A N/A 2 4.1 2.3 0.9 -59%

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Whole Milk Powder: Key Findings Belarus continues to be Russia’s primary WMP supplier. Although WMP imports from the EU dropped to zero, this loss seems to have had minimal impact on Russia’s WMP supplies, although domestic WMP production did decrease slightly.

Jan-Dec 2010

Jan-Dec 2011

Jan-Dec 2012

Jan-Dec 2013

Jan-Dec 2014

Jan-Dec 2015

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RUSSIAN WMP IMPORTS: MAIN SUPPLIERS 2010-15(Jan-Dec)

ArgentinaAustraliaNZUSEU-28BelarusOthers

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EU’S SHARE OF TOTAL RUSSIAN WMP IMPORTS

2011 10%2012 3%2013 50%2014 4%2015 0%

Main Russian WMP Suppliers (Excluding EU)2010 2011 2012 2013 2014 2015 2014-2015

BELARUS 25 15 25 N/A 31 31 +2%URUGUAY 1.95 N/A N/A 0.65 0.60 0.55 -8%ARGENTINA 2.61 0.73 0.50 0.39 3.49 0.55 -84%KAZAKHSTAN N/A N/A 0.05 N/A 0.09 0.22 139%NEW ZEALAND 0.05 0.34 0.37 0.08 N/A 0.18 N/A

73

CONCLUSION

Summary of Main Findings:

Overall, world dairy markets seem to have adjusted to the impact of the Russia trade embargo and EU quota expiry. For the EU, lower import demand from Russia was compensated by higher exports to other countries. The total amount of trade, although it has shifted, has not changed greatly.

For the most competitive players in the EU dairy industry, forecasted growth in production and exports suggest that despite the initial shock, the embargo has not significantly dampened the optimism for future growth.

Some EU dairy farmers still face significant challenges adjusting to the post-embargo, post-quota market environment. Consider Poland, where the embargo meant the unexpected loss of Polish dairy producers’ number one export market. As the main producer that had the most significant ties to Russia, Poland could be a country to keep an eye on in the future in terms of product mix and new export markets.

For the major world dairy producers, oversupply remains an issue; small increases in domestic consumption in major dairy producers have not been able to counteract excess supply. Excess supply of EU SMP, in particular, could soon pose a problem for world markets. If SMP production increases as much as forecasted and pushes intervention stocks to capacity, this could translate into sharp increases in EU SMP exports.

EU cheese exports were most affected by the embargo, which in turn had the most impact on world export markets. The EU’s net loss of the Russian market for cheese was nearly 1 billion euros from 2013-15; a more substantial loss than that of any other dairy export product.

Following the embargo, Russia tried to adjust to the lack of dairy imports by increasing domestic production of butter and cheese. Despite the lack of foreign competitors and increased government incentives, this increase was still not enough for Russia to offset the lack of European dairy imports.

Regardless of the quota expiry and embargo, there will always be external limiting factors on dairy production that can cause challenges for even the most competitive countries. For example, milk collection in the Netherlands is forecasted to increase, but can only do so to the extent that it does not violate the newly implemented limits on EU phosphate production.

74