In the balance

Stacey Sheppard

As Europe’s dairy sector has been brought to its knees in one of the worst crises to have rocked the industry, farmers from across the EU have taken to the streets in protest. The unprecedented crisis has seen the collapse of milk prices, rising production costs, bad weather conditions and scarce credit coinciding and resulting in crippling income and cash flow problems that could reportedly see EU dairy producers losing up to €14 billion by the end of the year.

“There is the general expectation that there is a good future for dairy, because of the increasing world population and the increasing ability of people to buy products with added value. This will result in an increase in demand for dairy products in the coming years”
-Joop Kleibeuker, Secretary General of the European Dairy Association

Demonstrations have been held in Austria, Belgium, Budapest, the Czech Republic, France, Germany, Italy, Luxembourg, the Netherlands, Spain and Switzerland as the collapse in prices threaten bankruptcy for tens of thousands of producers.

Government offices have been the main scenes of unrest as furious farmers poured hundreds of thousands of litres of milk onto the streets, set light to hay bales and blocked roads with fleets of tractors and herds of disoriented cows.

Milk was also poured into the Rhine by farmers in Strasbourg, whilst protesters in Belgium dumped three million litres of fresh milk back onto their fields and in France producers distributed free milk to the public and erected graveyard style crosses to symbolise the death of French dairy farms.

It would be easy to assume that the crisis facing dairy producers is the product of the same global economic downturn that is affecting the automotive industry, the financial sector and the construction industry to name but a few. But from speaking to those in the dairy sector it has become apparent that there is another, more insidious culprit on the scene.

"The economic crisis certainly has had its effects, but for the dairy sector there was another development that was at least as important and that is the reform of the Common Agricultural Policy," says Joop Kleibeuker, Secretary General of the European Dairy Association.

He believes that the stepping back of the European Commission from the market management approach resulted in a situation at the end of 2007 where there was still a growing demand for dairy products in the EU, but no significant growth in EU production. At the same time, he says, all main stocks were more or less gone, which lead to a strong price increase in the second half of 2007 and the beginning of 2008.

The higher prices for milk meant increased costs for those using dairy products, especially in food processing. Many processors therefore started to look to dairy substitutes, especially products based on vegetable protein, vegetable fats and vegetable carbohydrates, says Kleibeuker. The outcome of this was a strong decrease in price, which has now been amplified by the loss in demand that has been attributed to the economic crisis.

For some in the industry, the aforementioned chain of events has clearly demonstrated that the milk policy implemented by the EU has been a resounding failure. The European Milk Board (EMB), a European organisation that lobbies for milk producers, is pressing for a change in the system so as to create lasting stability for sustainable milk production in Europe.

In October this year, EMB President Romuald Schaber said that a correction of the failed EU milk policy is unavoidable, clearly signalling his belief in the shortcomings of the system. The possibility that EU milk policy be considered a failure however, is something that Mariann Fischer Boel, European Commissioner for Agriculture and Rural Development, strongly denies. "I reject that theory completely. The current situation is a direct result of a drop in global consumer demand for high value dairy products because of the overall economic crisis. Our milk policy is working. The measures we have introduced are having an effect. Prices are now rising," she says defensively.

But there are many who don't necessarily agree with the simplified explanation provided by the Commissioner. Pekka Pesonen, Secretary General of COPA-COGECA, a European organisation representing roughly 15 million farmers across all agricultural sectors, believes that the fact prices have decreased despite the market remaining relatively stable, can be put down to the agricultural reforms that took place in the European Union. But he does not believe that this is the only reason: "Of course, when it comes to market development, the sheer fact that the European Union has enlarged from the EU-15 to the EU-27 over the past 10 years clearly underlines the fact that price levels on average in the European Union have decreased to a certain extent."

On the whole Pesonen is not terribly impressed with the way that the situation has been handled by the EU's executive arm. "I feel strongly that currently - and not only in agriculture - the whole EU ecology seem to be like management by crisis where nothing happens unless we have a major crisis on our hands.

"From an agricultural point of view it means that in the process of this crisis and especially when we have to introduce these emergency measures, in most cases we lose tens of hundreds of farmers all across Europe. It would not be in my interest or COPA-COGECA's interest to encourage crises as a tool to manage the market or manage the policies in place," says Pesonen.

It would appear that fingers are pointing in all directions in the search for somebody to blame. Whilst some cite the economic crisis, others attribute blame solely to the policies of the Commission. But there also appears to be a middle ground emanating from those less hasty to name and shame.

Kleibeuker certainly has a more diplomatic assessment of recent events. "I cannot say that EU milk policy is a failure. We are just in the process of liberalisation. We are confronted with price developments that we had not seen before and because we had not experienced this before the whole sector has not been optimally prepared for the situation," he explains.

As far as he is concerned, nobody could have foreseen the massive price drops that followed the increases. When times were good and producers found themselves benefiting from the increased prices, they invested in more cows and better equipment so they could achieve higher production rates. But when prices took a tumble many found themselves struggling to survive.

"Dairy farmers are having a very difficult time at the moment," says Kleibeuker. "But one thing you cannot say is that this proves that the milk policy has not been right. All it proves is that we have not prepared ourselves well." 

But, as Kleibeuker points out, the discussions that have resulted from this crisis are raising questions that the dairy sector should have perhaps asked itself long ago such as 'How can we prepare ourselves better?' and 'How can we develop tools for farmers, tools for the processing industry, tools for traders, so that we can operate in a market where prices are more volatile?'.

So if one good thing is to come out of this crisis it is indeed the fact that all industry sectors are now rallying together to deliberate ways to secure their future. At the beginning of October Commissioner Fischer Boel announced the formation of a High Level Group (HLG) that was to be set up to discuss measures which could potentially ensure the long-term sustainability of the dairy sector.

The HLG on milk is chaired by the Commission's Director-General for Agriculture and Rural Development, Jean-Luc Demarty, and composed of Member State representatives. Experts and stakeholders will be invited, when appropriate, to assist the HLG in its work. The group will meet once a month and must deliver its final report by June 30, 2010."

Some of the main topics of discussion for the HLG will inevitably address the suggestions - or in some cases demands ­- that are being issued by the various industry players.

The EMB is advocating the establishment of a monitoring agency that will represent all those involved in the milk market. Sieta van Keimpema, Vice President of the European Milk Board, says: "A monitoring organisation in which EMB, the dairy industry, retailers, a consumer organisation and EU politicians are represented, has to be installed to investigate - on a structural basis - market demand and the cost of producing milk."

She believes that in doing this the responsibility for prices that are paid to producers will be spread across all players in the chain and that it should prevent over-production and the dumping of milk on Third World markets, which is detrimental to the livelihood of farmers in those countries.

COPA-COGECA has also asked the Commision to take action. "We have asked that strong measures be put in place as soon as possible, meaning that they should have been there yesterday. We would like to see interventions, private storage, especially for cheese, and we would like export refunds to be activated," says Pesonen.

"And regarding medium to long-term measures we certainly would like to see active promotional schemes, labelling requirements and then of course we need to talk about structures within the dairy industry and dairy farms in general."

However, there are also those that believe that some of the decisions that the commission has taken are on the right track and will help diminish risks in the future. Kleibeuker, for example, agrees with the Commission's decision only to interfere in the market in emergency cases. "When the EU intereferes in the market earlier we create uncertainty in the market and this results in speculation and that could do more damage rather than recover the market."

He is happy to see that the Commission and national authorities are now developing schemes, such as direct payments and second pillar payments, that help farmers without interfering in the market.

The Commission, however, has been proactive and a number of the dairy industry's concerns will be addressed by the HLG. Commissioner Fischer Boel explains that the HLG will be discussing the following priorities: whether the current market instruments are appropriate,; transparency and information available for consumers; quality; health; labelling issues; the possibility of a futures market for dairy; and innovation and research with a view to making the sector more competitive.

Another topic that the HLG has agreed to discuss is the measures that need to be taken to strengthen the bargaining power of milk producers. Many farmers feel exploited as the prices they are paid for their milk have now slumped below the cost of production - a situation that is clearly unsustainable.

COPA COGECA is particularly keen to address this situation and Pesonen fingers retailers as the main obstacle. " About two years ago, prices went up and retailers pointed out that they had to increase their prices as farmers were getting more. Surprise, surprise, after two years when prices plummeted, nothing happened to consumer prices.

"We don't say that prices should go through the floor as we have experienced, but the problem is what was the justification for retailers two years ago? It was that farm gate prices went up. All of a sudden, this same argument doesn't work the other way around and we find it extremely artificial," says Pesonen.

However, on the topic of whether or not retailers and large supermarkets can be accused of profiteering, Kleibeuker does not believe this to be the case. Whilst the price of milk has dropped, so too have the prices for commodities and ingredients and consumer prices will reflect this eventually. But what we must remember, he says, is that the prices that are agreed with retailers are often set in contracts that last for maybe six months or a year. Because of this prices have reacted, just quite slowly.

"We have not seen extreme profit margins in the processing industry. There is not a single dairy company that is really rich. I also think we should be very careful in saying that this is the case in the retail sector," says Kleibeuker. "A main part of dairy products are sold by retailers under private labels, which are used to attract people into their shops. There is quite a lot of competition between retailers - especially in the liquid milk market - resulting in low prices."

But Kleibeuker does concede that in some cases, for example in Germany, the UK and France, the power that retailers possess has caused problems and many are now realising that they may have gone a little too far in lowering milk prices and are working with farmers to rectify the situation.

Pesonen believes that more cooperation of this sort is required and strongly supports the need for more contractual agreements to protect the position of producers in the supply chain. And he would like to see this at a European level with agreements that concentrate on the three main parameters of price, time and volume.

The EMB concurs with this demand for contractual arrangements and Sieta van Keima says: "We need regulations that make it obligatory for the dairy industry to negotiate with producers before the milk is delivered. This would make the whole supply chain more transparent." The negotiations should be the responsibility of the monitoring organisation that EMB proposes to establish rather than of individual dairy producers as this approach is not working, as we see in Switzerland, says van Keimpema.

However, contractual agreements are nothing new. They are already used to great effect in other agricultural sectors, such as the production of malt and barley, protein crops and the specialized production of crops such as hops. Pesonen suggests that the same kind of agreements used in these sectors could merely be transposed into dairy.

The reason these agreements have not been used in dairy before is because the EU had its own system in place for dairy in terms of the quota system, which is due to be abolished in 2015. This is one of the single most important issues facing the industry as far as Pesonen is concerned and once the quota system is revoked he believes it will be necessary to replace it with an alternative mechanism to rebalance the market.

For the EMB, the phasing out of the quota system represents a significant threat to the market. "We will have enormous changes in prices and supply. Speculators will have the time of their lives and consumers and taxpayers will have to pay the bill. Deregulation brought about the economic crisis and liberalisation of the dairy sector will bring food crisis," says van Keimpema.

This view of the situation, however, is something that very rapidly angers the Commisioner. "Sometimes it is very frustrating to read in the press that the milk market is being totally deregulated, as if it's the law of the jungle out there. We have regulations and we will have regulations in the future. There must be a safety net, that's obvious."

This debate regarding the abolition of the quota system does appear to suggest that farmers will not be able to continue without some kind of guidelines telling them exactly how much milk they are allowed to produce. But Kleibeuker thinks that farmers will be more than capable of making this judgement by looking at the market and determining if the demand is there.

Once the quota system is no longer in operation and whether or not contractual agreements are used to protect producers, there still remains the issue of price transparency in the supply chain. In order to tackle this issue the Commission is establishing the European Food Prices Monitoring Tool, which will aim to bring together the available data on price developments in the different steps of the supply chain, comparing price developments for the relevant agricultural commodities, for the relevant food industries as well as for the chosen consumer goods.

COPA-COGECA believes that increased price transparency will also promote greater understanding of pricing structures. "It is of paramount importance to communicate to the public the actual share of the farmer's income from the final product," says Pesonen. "I don't see any reason why operators in the food chain should not support wider public information being provided." He believes that once armed with this information, consumers will be able to make informed decisions based on how much farmers are being paid for their produce. He likens it to the inclusion of environmental criteria, which is now being included on packaging

However, Kleibeuker sees one glaringly obvious problem with Pesonen's suggestion. "Full price transparency is in conflict with the competition laws that we have in Europe. It is not allowed for me to collect prices that dairy producers are asking of retailers. It is not possible for me to get a full insight into all the prices along the food chain as this type of information can be misused in a free and liberal market."

Whilst full transparency may not be possible, other suggestions that the dairy sector is making are being taken on board and discussed by the Commission. Some may believe that the Commission is not doing enough but Mariann Fischer Boel is convinced otherwise.

"We have done absolutely everything we can to support the dairy sector and our actions are bringing concrete results. Prices are rising. If you look at the list of demands from 21 of our Member States they have all been met already with the exception of the idea of a subsidy for milk powder in animal feed, which would be extremely expensive and not actually help the market. And my purse is now empty. There is no money left."

So time will tell if the Commission will be successful in providing the lifeline that the dairy sector so desperately needs. If however its efforts prove futile, then the future of dairy farmers will look very bleak indeed.

Pesonen fears for the future of the sector as it hemorrhages workers. "Farmers are being forced out of the market because of the lower farm gate prices. But what I would like to highlight here is that it is not necessarily the small-scale farmers that are being forced out, but rather those who have invested heavily," says Pesonen.

"It is the young farmers who have gone along with the demands of the past tens years or so where farmers were encouraged to invest in more modern, efficient, higher quality production. And these farms are actually the first ones to feel the heat of the market. Therefore we are very concerned about future developments in the market place and how future farmers, young farmers, are going to cope with the market pressures."

Mariann Fischer Boel has some advice as to how farms of all sizes can survive the crisis and what needs to be done to stem the flow of farmers who are leaving the sector, but she also emphasizes the fact that restructuring and consolidating have been occurring anyway.

"In 1984, when we introduced the milk quotas, there were 1.6 million dairy farmers in the then 10 Member States. Today, there are 300,000 milk producers in these 10 countries. One of the main goals of the Common Agricultural Policy is to support the European model of farming, in which there is a place for small, medium and large-scale farms.

"But through our direct payments and the numerous measures available through our Rural Development policy, there are good opportunities for even very small producers to make a living," says the Commissioner. "Increasingly, our farmers will have to focus on producing high-quality products and I hope that our quality labeling system can help them communicate the qualities of their product to consumers."

According to Kleibeuker, who is forever the optimist, the outlook for the sector is surprisingly bright. "There is the general expectation that there is a good future for dairy, because of the increasing world population and the increasing ability of people to buy products with added value. This will result in an increase in demand for dairy products in the coming years," he says with an impressive conviction. Let's just hope that he is right.