* Farmgate milk prices rising as supply surplus eases
* Volatility ahead given stockpiles, EU policy quarrels
* Farmer ambitions cooled by downturn after 2015 quota end
* EU still well placed to profit from long-term Chinese
By Gus Trompiz
PARIS, Oct 13 When Chinese baby formula-maker
Synutra opened a huge new factory in western France last month
with a ceremony of Breton dancing and fireworks, the boss
praised the "unbeatable quality" of French milk.
The decision to invest 170 million euros in the plant after
a 2008 scandal over tainted milk in China is a sign of renewed
confidence in Europe's dairy farmers, who are struggling and
demoralised after a two-year plunge in prices.
The green fields of Europe's northwestern dairy heartland,
from Ireland to Germany, provide a reliable source of
high-quality milk to meet rising consumption in Asia.
Although the Synutra deal, and several others like it across
Europe, has been in the pipeline for a while, the demand could
help sustain a rebound in the price of raw milk at the farm gate
in the 28-nation European Union from the seven year low it had
sunk to in July.
Prices had been falling due to oversupply after EU quotas
were scrapped last year, Russia banning Western food imports and
weaker Chinese dairy imports but a pickup in demand and tighter
EU supplies have turned them around.
For some dairy processors, the signs of recovery in the EU
dairy market have been bad news. Shares in Britain's Dairy Crest
fell sharply after it warned that rising farmgate prices
could squeeze its margins.
French company Lactalis, the maker of "President" brie
cheese, Dutch company FrieslandCampina, whose products include
yoghurt and Yazoo drinks and Germany's Muller have all recently
raised prices paid to milk farmers.
Europe's farmers still have a way to go before they receive
a price they consider to be "break even" but the appreciation of
companies like Synutra are an encouraging first sign.
"Here we've found a raw material that is among the best
quality in the world, and where we are able to trace the supply
chain," Liang Zhang, chief executive officer of China's third
largest infant milk producer said at the factory opening in
"That allows us to add value in the Chinese market."
The factory will process some 288 million litres of milk
annually from 800 local farmers under a 10-year supply deal.
Europe's farmers are hopeful that the rise in prices from
26.40 euros per 100 kg in August was the start of a turnaround
after reaching 25.63 euros in July, according to data from the
The Commission is expecting a second consecutive rise in
prices in September to 26.99 euros, and analysts expect a
gradual recovery into next year that could bring prices back
above 30 euros per 100 kg - which works out at about 30 cents a
litre -, often considered as a break-even threshold for farmers
in western Europe.
An EU scheme to subsidise farmers to reduce production could
add impetus after it was fully subscribed for 1 million tonnes.
"Dairy continues to be something the world wants and it's
something that is difficult to produce," Matt Johnson, an
analyst with Rabobank, said.
VERY, VERY CAUTIOUS
The EU last year scrapped the milk quotas it had put in
place in 1984 to end the oversupply that led to milk lakes and
butter mountains piling up in storage. Fines were imposed on
producers going over quota.
Many farmers were hopeful that demand would increase once
quotas were removed. Farmers in Ireland, the Netherlands and
Germany expanded in the run-up to the abolition of quotas.
But this coincided with demand from Russia, previously the
biggest importer of EU cheese, dropping off following its
embargo on many Western food products. Chinese dairy demand also
eased after a buildup of stocks.
Favourable weather conditions in the major dairy areas of
Australia, New Zealand, the U.S. and the EU also boosted supply,
sending prices even lower.
Even with a brighter outlook, farmers are still feeling the
pain and are worried about the future.
This concern was evident in August when several thousand
French dairy farmers protested for over a week outside the
headquarters of Lactalis, the world's largest dairy firm to
demand higher prices for their milk.
The EU announced its 500 million euro subsidy package for
farmers in mid-July, part of which was to encourage milk
producers to cut output and reduce overproduction. France
announced further aid after the Lactalis protests.
Ireland was at the forefront of the EU's post-quota
expansion plans. The government set a target of a 50 percent
rise in production by 2020 and farmers ramped up production
despite falling prices.
But Irish output growth is now slowing sharply and could
show a year-on-year fall in the coming months.
"There is a realisation that volatility is going to be part
and parcel of milk production into the future," said Sean
O'Leary, chairman of the Irish Farmers' Association Dairy
Committee, who farms in Cork county in the southwest.
Hefty stocks are lurking in the world market, including more
than 300,000 tonnes of skimmed milk powder sold into the EU's
public storage scheme during the slump.
The granting of EU subsidies to curb production just as
prices are rising could prove a "double whammy" next spring if
farmers use refound liquidity to raise output again, Johnson
"We are being very, very cautious," said Christine Vazeille,
a dairy farmer in a mountainous part of the Auvergne region in
"Experience has shown us you have to avoid projecting
yourself too far ahead if you don't want to fall back just as
EU policy is also uncertain, marked by disagreement over
how to regulate the market and Britain's planned exit from the
Politicians have urged all farmers to use price-hedging to
adapt to market swings, but such financial instruments are
little used in dairy farming.
"We're emerging from 30 years of an administrated market.
Change will come step by step," Adrien Pierre, dairy analyst
with Agritel, said.
(additional reporting by Conor Humphries in Dublin,
Pierre-Henri Allain in Carhaix, France, and Michael Hogan in
Hamburg; Editing by Veronica Brown and Anna Willard)