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Stress on EU dairy markets reveals shortcomings in functioning of supply chains

18 June 2012

According to the EC’s review of the 2011 agricultural year, ‘dairy commodity prices continued recovering in 2011 driven by strong world demand’. Despite a 2% increase in supply, ‘dairy commodity prices remained at elevated levels throughout 2011.’ This led to an increase in the average EU milk price of around 11%, according to initial EC estimates. EU milk yields continued to increase, facilitating an expansion of EU milk supplies. EU production however remained below the overall production quota limit, with a net undershoot of 6% (some 9.3 million litres). 

In terms of the trends within the dairy sector, the most important from an ACP perspective was the 13% increase in EU skimmed milk powder production in 2011, which drove a further expansion of exports of some 37%. 

The 2012 year however is proving more difficult. In May, the agricultural news and markets website Agrimoney.com reported a further decline in global dairy prices to their lowest level in 2 years. Some analysts have even suggested that underlying prices may have fallen by as much as 37% since March 2011, taking prices down to levels not seen since September 2009. This trend is projected to continue, given the positive outlook for milk supplies, which according to FAO will see global milk production increase 2.7% in 2012 relative to 2011. 

According to the website Thedairysite.com, however, while dairy prices continue to fall they still ‘remain well above historical averages’. 

In May 2012, the UK National Farmers’ Union(NFU) described the behaviour of various UK dairies as ‘atrocious’, following the introduction of sudden price cuts. The NFU dairy spokesperson complained that while milk production required long-term investments, ‘short termism’ was driving the functioning of supply chains, resulting in milk price cuts which would see a typical UK dairy farmer losing ‘around £20,000 per year’. The spokesperson accused milk buyers of ‘transferring losses accrued as a result of their own business strategies to farmers’ and called for contracts where the basic terms such as price are clear, and where price reductions introduced at little or no notice would not be allowed. 

Scottish farmers, for their part, have called for a ‘robust code of practice for the dairy sector’ in the face of ‘savage milk price cuts’ and the imposition of contractual changes. It is argued that ‘the clear and ongoing imbalance of power within the dairy supply chain is clearly working against a sustainable dairy sector.’ Particular concerns were expressed about the power of retailers and processors which leaves milk producers as the weakest link in the chain. While the dairy sector has the potential in the long term to be ‘vibrant and profitable for all parts of the chain’, this is thought to be undermined by current practices. 

Beyond the UK, the European Dairy Board has warned of a situation emerging which closely parallels the milk crisis of 2008–09, with the worrying difference that while milk prices are tumbling, input costs continue to rise. Since March 2012, producers in Italy, France, Netherlands and Belgium have faced price reductions of between 10 and 20%, while some input costs have risen by between 20 and 22%. 

The European Milk Board (EMB) takes the view that ‘the only way to shift the increased volume of milk’ overhanging the EU market is ‘to dispose of it on the world market in the form of butter and milk powder’.

Editorial comment

The higher average milk prices reported by Thedairysite.com need to be seen in the context of substantially higher input costs. As the dairy sector sinks into a downward cycle within the price volatility trend, this is placing financial pressure on EU milk producers. This raises the question: what form of modernised market regulation is required to establish a solid long-term basis for EU milk producers and dairy processors to exploit growing global market opportunities?

If current price developments are likely to replicate the milk crisis of 2009, as the EMB suggests, the question arises of whether the EU will adopt policy responses that run a high risk of ‘adjustment displacement’ (a shifting of the burden of declining prices to non-EU milk producers). This needs to be seen in the context of press reports of complaints about the impact of imported EU milk powder and milk products on dairy markets in ACP countries. However, these remain subjective complaints, with no substantive research yet undertaken on actual trade flows and their impact on the functioning of local supply chains in ACP countries.


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