Executive Summary Market tools including private storage aid and intervention schemes have been made available to European dairy producers and processors since the announcement of the Russian dairy import ban in Sep ’14. Stocks have remained above seasonal levels as excess production continues to be stored away throughout the first three quarters of the ’16-’17 production season. Highlights through the end of 2016 include:

• EU private storage aid stocks of butter and skim milk powder finished higher on a YOY basis for the 25^th consecutive month during Dec ’16. Combined butter and skim milk powder private storage aid stocks of 95,000 tons finished at an 11 month low on an absolute basis, however. In addition, cheese private storage aid stocks have declined throughout eight consecutive months, reaching a 14 month low of 15,000 tons during Dec ’16.
• Private storage aid schemes for butter and cheese were closed at the end of Sep ’16, contributing to recent declines in stocks, while skim milk powder private storage aid will close at the end of Feb ’17.The European Commission has stated it will continue to monitor the markets and will re-open private storage aid schemes if the markets require it.
• Similarly to private storage aid, the intervention scheme for butter closed at the end of Sep ’16 however a new SMP intervention scheme was opened at the beginning of Jan ’17, set to run through the end of Sep ’17. The European Commission began to offer SMP intervention stocks up for sale during Dec ’16 via a tendering process. Over 21,000 tons of SMP were put up for sale, however just 0.2% of the product sold. Three additional tending processes have taken place since, with no product selling. Bids have been rejected as they were too far from the prevailing market prices.

Private Storage Aid The European Commission reopened private storage aid (PSA) for butter, skim milk powder (SMP) and cheese during Sep ’14 in response to the expectation of price volatility generated from the sudden announcement of the Russian dairy import ban. PSA is a payment made by the European Commission to processors in return for keeping products in storage and withdrawn from the market for an agreed period of time. In PSA schemes, processors retain ownership of the product but receive payments from the European Commission in return for keeping agreed quantities in storage and off the market. In return, processors are paid a rate of aid set by the European Commission that takes into account storage costs, normal depreciation of quality and any foreseeable increase in the price of the product. Temporary storage costs comprise of a fixed rate per ton, plus a set daily amount per ton. The product remains the property of the operators, who are then responsible for selling it when it comes out of storage. PSA has historically been made available for only butter and SMP. PSA made available for certain types of cheese in Sep ’14 was repealed less than a month later due to a disproportionate surge in offers from cheese producing countries not traditionally exporting significant quantities of cheese to Russia. In the 18 days that the scheme was open, over 100,000 tons of cheese were offered, 84% of which was from Italy. Most of the European Union’s additional production of dairy products has been directed into either butter or skim milk powder to utilize the PSA support provided from the European Commission. Combined butter and SMP volumes within PSA remained higher on a YOY basis for the 25^th consecutive month during Dec ’16, finishing up 13.2%. Combined butter and SMP volumes within PSA continued to decline from the 14 year highs experienced over recent months, however, as the PSA scheme for butter closed at the end of Sep ’16. Butter stocks within PSA finished at 27,000 tons during Dec ’16, reaching a 23 month low. Butter PSA stocks peaked at 102,000 tons during Jul ’16. SMP stocks within PSA of 68,000 tons declined for the third consecutive month during Dec ’16, finishing 7,000 tons below the record high volumes experienced during Sep ’16. PSA for SMP is set to close at the end of Feb ’16, however the European Commission has stated it will continue to monitor the markets and will re-open PSA schemes if the markets require it. In addition to butter and SMP, PSA for cheese was reopened during Oct ’15, allowing a maximum of 100,000 tons of cheese to be put into storage at subsidized rates, with additional volume limits for individual member states also in effect. Since opening, EU-28 PSA cheese stocks have not exceeded 33,000 tons. Cheese volumes in storage have declined over eight consecutive months, reaching a 14 month low of approximately 15,000 tons during Dec ’16.PSA for cheese has been closed since the end of Sep ’16. SMP can be stored for between 90 – 210 days or for 365 days within the PSA scheme. Because of the agreed upon storage durations, not all product stored within PSA is available to be withdrawn immediately without penalty. Without incurring a penalty, the largest potential withdrawal in EU-28 SMP PSA is approximately 10,000 MT, or 14.9% of total SMP volumes within PSA as of Dec ’16. Considerably less SMP is available for withdrawal due to the implementation of the 365 day storage program announced during Oct ’15. The 365 day storage program provides a higher rate of aid in exchange for keeping the product off of the market for a longer duration. Over 54,000 MT of SMP has been offered into the 365 day storage program since it was initiated. Intervention Schemes Intervention schemes, involving selling quantities of products into government owned storage to help stabilize prices, have also been made available to EU-28 dairy producers. Intervention schemes are similar to PSA, as both help to stabilize markets by removing excess supply when prices decline. This can be temporary, where the product is later re-released for sale within the EU, or permanent, where the product is eventually exported from the EU. Under intervention schemes, the European Commission purchases up to a designated volume of butter and SMP and, if exceeded, a tendering process takes place for additional volumes. Intervention schemes can be seasonal or in response to exceptional market conditions. The intervention scheme is typically open from the beginning of March until the end of September each year, although the 2016 intervention scheme for SMP was extended until the end of Dec ’16 due to adverse market conditions. Similarly to PSA, the intervention scheme for butter closed at the end of Sep ’16, however a new SMP intervention campaign was opened at the beginning Jan ’17, set to run through the end of Sep ’17. The trigger price for butter intervention is €2,218/ton ($1.12/lb equivalent using a 0.90 USD/EUR exchange rate), while the SMP intervention trigger price is set at €1,698/ton ($0.86/lb equivalent using a 0.90 USD/EUR exchange rate). As of the first week of Feb ’17, average European butter prices were 84.2% above the intervention trigger price while average SMP prices were 22.7% above the intervention trigger price. EU-28 butter prices approached intervention trigger price levels during Apr ’16 but have since rebounded by nearly 70%. SMP prices declined below intervention trigger prices over the first half of 2016 however prices have rebounded to above intervention trigger price levels since the beginning of Aug ’16. EU-28 SMP offered into intervention has risen dramatically since the beginning of 2016 as prices remained below the intervention buy-in trigger price over much of the year. The intervention schemes originally allowed for up to 60,000 tons of butter and 109,000 tons of SMP to be brought at the designated intervention prices. After the SMP intervention limit was reached in Apr ’16, the European Commission raised the volume ceiling for the 2016 campaign to 218,000 tons, citing ongoing market difficulties. The 218,000 capacity was reached by Jun ’16, when the ceiling was again raised, this time to 350,000 tons of SMP. SMP intervention purchases have recently approached the 25 year high of 260,000 tons experienced during 2009. Current volumes of 256,000 tons are in addition to 78,000 tons of SMP bought in via tender during Apr ’16 and Jun ’16 when offers exceeded the previous ceiling levels. The European Commission began to offer SMP intervention stocks up for sale during Dec ’16 via a tendering process. Over 21,000 tons of SMP were put up for sale, however just 0.2% of the product sold. Three additional tendering processes have taken place since, with no product selling. Bids have been rejected as they were too far from the prevailing market prices.