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The European Union abolished its milk quota system earlier this year, which had been in place for about three decades.

MATHIEU BELANGER/REUTERS

The Trans-Pacific Partnership (TPP) trade deal signals a disruption for Canadian dairy farmers, but the experience of their Dutch counterparts over the past several years offers hope, and some lessons.

Earlier this year the European Union abolished its milk quota system, which had been in place for about 30 years. By that time the Dutch dairy industry was already well established in the international market. The Netherlands only ranks 14th globally in milk production, but nearly two-thirds is exported, with 2013 revenue of roughly €6.3-billion, or $9.2-billion at the time. By contrast, Canadian dairy exports now only account for $281-million.

Dutch dairy farmers positioned themselves in foreign markets through farmer-owned co-operatives. FrieslandCampina NV, with its 19,054 farmer members and annual revenue of €11.3-billion ($16-billion), is by far the largest Dutch dairy company. (In Canada, Agropur, the dominant dairy co-op, has about 3,500 members.)

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Producing milk in the Netherlands is expensive due to high land and labour prices. But the Dutch dairy industry, and FrieslandCampina in particular, "invested early in R&D, which provides them with more value per litre of milk produced," says Kevin Bellamy, a senior research analyst at Rabobank.

Dairy farmers and milk processors work closely with research institutions and agricultural universities. The integration of the supply chain from raw milk to distribution, the so-called "from grass to glass" concept, ensures Dutch dairy's high quality and safety, says Jan-Willem ter Avest, a spokesman for FrieslandCampina.

Only 8 per cent of global dairy production is exported, which means regional markets in less dairy-favourable climates are underserved and have great growth potential, especially as a growing middle class develops a taste for cheese, condensed milk and infant formula. In China, demand for Dutch milk infant formula has grown 50-fold in a decade.

FrieslandCampina has focused on emerging markets such as Nigeria, Vietnam and the Philippines. To avoid protectionist measures, it collaborates with agricultural universities and trains local dairy farmers. "We aren't just trying to get something [revenue/sales], but we are also there to bring something," Mr. ter Avest says.

But even though many farmers welcomed the end of quotas as "liberation day," the reality was more sobering. Several months of a quota-free market pushed prices down. This was partly due to increased production, and in part due to sanctions imposed on Russia, which hit the Dutch hard – Russia had been the fifth largest recipient of its dairy.

Most Dutch dairy farmers now face hefty losses. The guaranteed milk price FrieslandCampina pays its farmers has fallen with the drop in the market – roughly €40 per 100 kilograms of milk in 2013 and 2014, to a new low of €28,50 in August.

But while farmers struggle to adjust, FrieslandCampina made gains in its Asia and ingredients segments. Similarly, farmers more successful in weathering the storm also process raw milk into products such as yogurt and cheese – adding value to each litre of milk.

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Jan Hoogenboom, with his 10 employees and 300 cows, is doing just this. Before the drop in milk prices, Mr. Hoogenboom was unsure whether he should continue with his business model; selling raw milk was more profitable than the costly processing production process. But now processing is keeping him afloat.

Dutch farmers are realizing that they have to make cost savings to improve margins."If you compare the best farmers with the worst farmers, then there is a huge difference in terms of costs-per-litre of production," Mr. Bellamy says. In addition, "the trick is to invest in new products and market it to population [groups] that are rapidly growing, with increasing disposable income, and who are looking to increase protein intakes."

Poorly performing Dutch farmers will lose out initially, but those nimble enough to move with the market are expected to thrive as production is forecast to increase 17 per cent over the next decade. With quotas gone, "the challenge for the Dutch dairy farmers is to revise their production strategy to optimally and sustainably produce within environmental [regulatory] conditions," states a Dutch government-commissioned report.

Canada should take heed and open up. "Canada is the North Korea of the dairy industry," Mr. Bellamy says. Canadian experts remain skeptical that Canada's protective system will soon be abolished, but, says Al Mussell of Guelph-based Agri-Food Economic Systems, there are "some lessons to be learned from the Dutch dairy farmers; for example how they adjust to lower [dairy] prices."

"There are huge opportunities [for Canadian dairy]," Mr Bellamy says. "I accept that it takes a lot of adaptation … and that it is not going to be an easy time, but farmers around the world have gone through those changes and have emerged with very successful industries."

Linda van der Horst is a journalism fellow at the Munk School of Global Affairs at the University of Toronto.

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