Strong dairy markets, coupled with the looming demise of production quotas, are reversing long-running shrinkage in the European Union herd, encouraging higher milk output – which is helping undermine the price rally.
The dairy herd in the EU, the world's top producer of cows' milk, grew by 0.6% last year, US Department of Agriculture staff said, ditching an estimate of stable herd numbers.
And this year, it will expand by 1.3% to 23.5m head, marking the first time in 30 years the herd in the bloc's 28 countries has seen two successive years of growth, countering a trend of contraction which has seen cow numbers halve from a 1968 peak.
"The EU dairy herd's long-term contraction trend appears to have stopped," the USDA staff said in a report, attributing the reversal to "strengthening farmgate prices for milk, and market expectations associated to the EU's discontinuation of its milk quota system.
"Dairy cow numbers are growing as farmers expand operations to generate higher overall milk production."
The EU is in 2013-14 raising milk production quotas by 1%, and will next year ditch them altogether, a factor which is seeing large investment in dairy industries in countries such as Ireland, where the mild and wet climate, encouraging pasture growth, favours cost-effective milk output.
However, stronger dairy prices, until the last three months, have also encouraged production, which the USDA staff forecast rising its forecast for EU milk output this year by 1.5m tonnes to a 20-year high of 141.5m tonnes.
"More favourable weather conditions, improved feed availability, along with continued efforts to enhance genetic stock in national herds are expected to generate higher per-cow milk yield averages in 2014."
The extra production will be snapped up in part by stronger EU consumption of dairy products, encouraged by the bloc's economic recovery.
"Growing supplies and improving economic situations in some member states are expected to stimulate cheese consumption further leading to an increase in overall consumption relative to 2013," the report said.
However, much is of the product is finding its way onto export markets too, adding to the supply response viewed as behind a drop of more than 20% in values at GlobalDairyTrade, the benchmark auction, since February.
The briefing highlighted that EU output of skim milk powder "will increase significantly", underpinned by the extra milk supplies and increased drying capacity in Germany, with exports seen rising 16.4% to 475,000 tonnes.
"In the first two months of 2014, EU exports of [skim milk powder] were 50% higher than in the same period of 2013," driven by a seven-fold rise to 13,162 tonnes in Chinese purchases.
Skim milk powder led the price decline at the latest GlobalDairyTrade event, on Tuesday, after which one broker, Dave Kurzawski at INTL FCStone, highlighted to Agrimoney.com that Europe, as well as Australia and New Zealand, was "flush with milk".
Exports of butter too have proved strong, rising by 16% in the first two months of the year, helped by a drop in regional prices which has made EU product "competitive on the world market".
However, the increase was largely down to imports by Russia, which soared by nearly 50%, but which remain a question market for the future, given deteriorating political relations between the West and Moscow, and the weakened rouble.
"Russia keeps implementing import bans for certain EU member states or individual processing plants," the report said.