"The present volatility of the butter market is expected to persist over the short-term, resulting in reduced exports and increasing intervention stocks, but the resulting price decline should provide enough incentive to further reduce production and thus improve the market balance over the medium term," said the Commission in its report on agricultural market prospects fro 2006-2013.
The report re-iterates the Commission's prediction that added value products will increase their share of the EU dairy market over the next few years.
Dairy commodity producers have seen cost pressures increase since the Commission began cutting prices and export subsidies for a range of products, including butter and skimmed milk powder. The cuts form part of the Common Agricultural Policy (CAP) reform, agreed in 2003.
The situation has become more serious for EU butter producers recently, with a supply glut leaving prices at rock bottom and EU intervention stores full.
The European Commission, however, said butter production would simply have to fall going forward. It predicted there would be 200,000 tonnes less butter around by 2011.
Other dairy products with higher added value potential, such as cheese, desserts and yoghurt, are likely to do well out of CAP reform.
A number of big firms, including Arla Foods and Campina, have said these products will be necessary to offset CAP reform and remain competitive in the wider world.
The Commission said cheese production, for example, was expected to rise 10 per cent over the medium term.
Cheese consumption per person is also expected to jump from 17.4kg in 2005 to 19kg in 2013, driven by a predicted 39 per cent rise across the member states which have joined the bloc since 2004.
A Babcock Institute report said earlier this year that Arla Foods was looking to expand production of hard cheese in Poland in a move to corner more of Europe's economy cheese market.
The Commission predicted EU milk production would be around 145m tonnes in seven years' time, compared to 142m in 2005.