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The current milk crisis: lessons for the future

BVLE Conference: the recent milk crisis

 

September 29, 2009

Marc Rosiers, Boerenbond

Pieter Verhelst, Boerenbond

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Overview

• EU ambition with the dairy sector• Market prediction versus market reality• Lessons from the current milk crisis• Ideas to overcome the current milk crisis now and

in the future

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EU ambition with dairy sector• Milk production for local and world wide

consumptionProtect a reasonable level of self sufficiencyCompetitive export

• Versatile productionMaintain dairy production in LFADevelop dairy farms in top regions to world players

• Versatile productionDiversification at farm levelDiversification at processors level

• No revolution but evolution

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Milk production for local consumption…

• Protect a reasonable level of self sufficiency

Keep import tariffs up Improve efficiency

o Investment fundo Extra modulation: restructuring of the dairy sectoro Art. 68: idem

EU-price butter 2,37 2,37

World market price 1,59 1,59

Import tariff 1,90 0,57

Import price 3,49 2,16

Protection 147 % 91 %

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… and world wide consumption

• Invest in more competitive exportCreate the opportunity for cost reduction through

economies of scaleo Abolition of quota system

and more efficiency from export support to stimulating export

oNo export restitutions: distorts price signaloExport promotionoExport guarantees?

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EU-share in world dairy market

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Versatile dairy farmers

• Maintain dairy production throughout Europe In LFA: extra support

o LFA policyo Art. 68

– Dairy production for local consumption

In the most favorable EU regions for dairy production: no extra supporto Only direct payments => discussion on redistribution of direct

payments is crucial– Dairy production for world wide consumption

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Versatile dairy processors

• Diversification at farm levelFarm sale, tourism,…Gaining a non-agricultural income

• Diversification at dairy processors levelCoping with fluctuating world markets

o Butter and milk powder react instantlyo Cheese reacts with some delayo Fresh dairy products react late

– A diversified processing installation is well equipped to build in the necessary reaction potential to instability and create some stability in farm gate prices

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From predictions…

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011100

150

200

250

300

350

282 282 282 282

263

244

225220

215 215 215 215

Series1 Series2

Eq. intervention price Predicted milk price evolution

EU

R/t

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… to reality

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011100

150

200

250

300

350

400

282 282 282 282

263

244

225 220 215 215 215 215

Average EU milk price Average World milk price

Eq. intervention price Predicted milk price evolution

EU

R/t

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Market correctio

n

Specificity of

agricultural sector

Sector initiatives

Future initiatives to cope with market volatility

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Some findings

• Food prices in Europe (COM(2008) 821)

Supply shortages in 2007 were followed very rapidly by supply surpluses in 2008/09

EU Commission finds problems in the functioning of the food supply chaino The asymmetry in bargaining power between farmers and the rest of

the chain keeps farmers margins under pressureo EU Commission proposes a roadmap to

– Promote competitiveness of the food supply chain– Ensure a vigorous and coherent enforcement of competition and consumer

protection rules– Improve access of new players– Better inform the market via European monitoring system of food prices– Discourage speculation

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Some findings

• Dairy market situation 2009 (COM(2009)385)

EU Commission questions price transmission and the distribution of value-added

Solutionso Enhance market transparency and helping a fairer market operationo Encourage farmers to work together to improve the efficiency of their

operations by increasing their economies of scale and scopeo Develop a European-wide code of conducto Organize processor cooperatives

– to adapt their members' milk supply to existing and future demand– to increase their countervailing power vis-à-vis processors and retailers.

o Create inter-branch organisations – involving all the actors in the dairy food chain – that could foster a useful dialogue between all the players active in dairy markets13

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Some findings

• Dairy agreement of 02.07.09 Financial effort by retail sector Cost efficient agricultural production System of fair trade for local products Inter trade agreements within a European framework

• Advise Belgian Competition authority Dairy agreement complies with anti-trust law

o Competition is not reduced, neither between farmers, neither between retailers

o As there is no government intervention, there exits no discrimination between Belgian and foreign farmers and retailers

o All parties are allowed to study – together with the authorities – sustainable solutions for the issue14

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Members of FEDIS

Controled by BIRB

Processors14 ct

2 ct/literFarmer

Belgian milk agreement: July – December

Consumption milk(225 mio liter)

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• The market plays a central role• However, the market is not perfect

Volatility of pricesMarket price does not cover costs (price level)

Some ideas

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• SolutionsPrice volatility

o Explanation = characteristics of farming

–Production cycle–Climate

o Proactively – Systematic, reliable information on demand and supply, today and tomorrow (forecasts) price observatory

o Reactively – market stabilisation instruments (strategic stock management, alternative use of surpluses, insurance systems, …)

Some ideas

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• SolutionsPrice level

o“Sweep before one’s own door”– Strive for cost efficiency (economies of scale and

scope)– Storage, export or alternative use of surpluses

» EU = limited safe net» Specialisation» Separation between the internal and external market,

realistic ?

Some ideas

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• SolutionsPrice level

oAsymmetric bargaining power– Code of conduct– Enhance the position of farmers within the sector

and throughout the supply chain» Producer organisations en cooperatives» Agreements within the supply chain» Systems of certified quality products

Some ideas

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• SolutionsPrice level

oCode of conduct– Buy at a too low price– Coupling with purchase obligations of inputs– Control on quality requirements– Maximum deduction of tare– Duration– Required guarantees– Terms of payment– Silent extension– ....

Some ideas

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• SolutionsPrice level

oAsymmetric bargaining power

–Enhance the position of farmers within the sector and throughout the supply chain

» Producer organisations en cooperatives» Organisational advantages» Market advantages» Financial advantages» Advantages in logistics

» Need for a European framework

Some ideas

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• SolutionsPrice level

o Asymmetric bargaining power– Enhance the position of farmers within the sector and

throughout the supply chain» Agreements within the supply chain

» Inter trade agreements,» specific agreements between buyers and producer

organisations,» Agreements between buyers and producers

» Legal basis (Belgian law on competition of 15.09.06)» Need for a European framework

Some ideas

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• SolutionsPrice level

oAsymmetric bargaining power– Systems of certified quality products

» Condition = price supplement» Mutual recognition» Sneaking increase of (product- and process) standards

without price compensation» Need for a European framework

Some ideas

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Quota cost and efficiencyEstimate 2009

2007 2008 2009Average return 36,99 30,34 25Variable costs 12,35 14,85 EstimateFixed costs 6,88 7,59Total costs 19,23 22,44

Balance 24,34 15,39 9,39Income 17,76 7,90 1,90

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Dairy farm income(source: FAN Boerenbond)

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Changes in investments

Investments 1990-1997

1998-2005 2015(estimate)

Quota 31% 43% 0%

Land 23% 13% 30%

Infrastructure 21% 20% 40%

Machines 21% 18% 20%

Others 4% 6% 10%

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Average quota in Flanders

88/89 98/99 08/09 2016

Number of farms

19.091 10.864 6.461 4.000

Quotum 100.279 173.035 304.829 550.000

-827 farms/year

+7.250 ltr/yearX 1,7

- 383 farms/year+ 13.394 ltr/yearX 1,6

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Know your cost structure!• Cost including income must be below 25 cents!

Production cost FAN = 20 cent Fodder costs 12 cent Cattle/energy/environment 3 cent Fixed costs 5 cent Balance available for income = 5 cent

STANDARD:1 FTE = 30.000 EUR producing 600.000 Ltr milk

with 80 cows!!

This means 200 ltr/worked hour (average FAN = 120)

Remark: where did the quota cost go??

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Questions and discussion