The structural downfall of Europe’s dairy sector

by Martin Choi and Marina Starodubtseva

EU Milk Shelf

The future of sustainable dairy farming in Europe is hampered by neoliberal forces and the overproduction of cheap milk, the culmination of global market problems.

Johannes Pfaller is a milk producer from Bavaria in the southern part of Germany. He started to work on his family farm when he was 10 years old, and is now a big volume purveyor in Germany with 120 cows.

However, the low milk prices for farmers in recent years is jeopardizing his family farm.

“In Germany the prices went from 40 cents to about 20 cents in 2 years, so the price has halved,” says Pfaller. “The price goes down, so my income is low. I sell more because I hope I can keep the income. That is what every farmer is doing. When you have a low milk price and you produce less, your income decreases even more.”

Pfaller explains this crisis as similar to being stuck in a hamster wheel. With the decrease in milk demand after the Russian embargo on dairy exports, accompanied with a slowdown in the Chinese market among other factors, an increase in the production of milk only worsens the fate of the dairy milk farmers in Europe.

 

Factors contributing to the European Milk Crisis

The European dairy crisis has continued for at least two years now since there was a food embargo towards the EU from Russia, according to Søren Bisgaard, Food Attaché for the Danish Representation to the European Union. This was an answer to the sanctions from the EU due to the situation on the Crimean peninsula. The Russian embargo significantly influenced the price of many products because it was the second largest export market for the EU. After the embargo, Belgium milk became cheaper by 36.3%.

Since then, many European farmers from Finland, the Baltic countries and France have urged for the complete abolition of the sanctions. But European officials insist that lifting the sanctions won’t solve the problem.

“Russia is an important market for the European Union, but the Russian government over the years has been taking lots of protective measures, presenting them as sanitary concerns or some kind of rules that are not right, such as the poor quality of the potatoes in Poland and Hungary overruled by the WTO recently in our favour,” said Daniel Rosario, spokesperson for the European Commission of Agriculture and Rural Development.

“So even if the sanction disappears, all these restrictions are still in place, because they largely don’t comply with some kind of quality requirement.”

The second reason is less demand from China. China had bought a lot of milk powder from the EU but suddenly stopped. New policy changes in China focusing on the safety of milk and dairy products blocked access to China’s market. This has impacted negatively on EU exports of dairy products. In addition, the growth of China’s economy this year hit a record low in 25 years. The slowdown in the Chinese economy had a negative effect on world trade and slowed the development of the economy in the European area.

According to a source from the Commission of Agricultural and Rural Development, there had been a lot of expectations from China’s market, and they couldn’t imagine how such a big market just slowed down.

But these are only a few factors which gave rise to the dairy crisis, and the whole situation is much more complicated. Prices for agricultural products have fallen not only in Europe but also worldwide, while production and labour costs remain high. This causes a loss in revenue for farmers.

“It is too simplistic to say that it was the Russian ban that caused this. It was the end of the dairy quotas as well, and in a way it was kind of the perfect storm with all these factors — the Russian ban, the European quotas in the sense that it changed the rules of the game, and the overall global situation of overproduction, the slowdown in exports to China and other countries” said Rosario.

 

 

The EU Response

The European Union has implemented several packages in the midst of the crisis, including aid and policy instruments from the Common Market Organisation (CMO) regulations. These include public intervention, which allows the buying-in of butter and skimmed-milk powder (SMP) into public storage, and private storage aid, which provides aid for storage of butter, SMP and cheeses under the ownership of a private operator.

On 7th September 2015, the Commission announced a support package worth €500 million to sectors affected by the Russian embargo. Of this, 420 million went directly to member states to address the cash-flow difficulties farmers were facing, the functioning of the supply chain and the stability of the market.

An additional package of exceptional measures was made available by the Commission on 14 March, 2016, including the activation of Article 222 from the Common Market Organisation, enabling organisations and cooperatives in the dairy sector to establish voluntary agreements on their production and supply; a temporary increase in state aid to a maximum of €15,000 per farmer per year in with no national ceiling; and doubling the quantity intervention ceilings for skimmed milk powder and butter from 109,000 tonnes and 60,000 tonnes respectively to 218,000 tonnes and 100,000 tonnes.

On 18 July 2016, the European Commission presented a new package of measures worth €500 million from EU funds, including conditional adjustment aid implemented at a Member State level out of a menu proposed by the Commission worth €350 million, and a EU Milk Reduction Scheme of €150 million to incentivize a reduction in milk production.

And the EU Milk Reduction Scheme had received participation from 52000 farmers from 27 Member States, Commissioner Phil Hogan announced on 29 September 2016. It had received almost full subscription (98.9 %), with applications made offering to reduce production in the final quarter of 2016 by 1.06 million tonnes.

“This incentive for farmers to produce less was a huge take up in the member states,” said Rosario. “It shows that it was a well calibrated measure that is having an effect, and people are supporting it and using it, and that is the best way to check whether a measure is good or not.”

 

The plight of the European farmers

“In the EU it’s not transparent at all where the money goes,” said Sieta van Keimpema, the Vice President of the European Milk Board and Chairman of the Dutch Dairymen Board. “It’s a lot of money coming from Brussels, but in the Netherlands only two cents go directly as subsidies to the farmers. The rest of the billions are separated into different industries and retail. They’re saying agricultural subsidies go to the farmers, but looking into the details there’s not a lot going to the farmers.”

The income of farmers like Keimpema and Pfaller has gone down by at least 40% because of the low milk prices for farmers, and now 40 to 60% of their income is composed of subsidies. If those subsidies go away and the prices don’t go up they will have no way to support their farms and make a living.

“In the Lisbon Treaty, the goal of the agricultural policy is to stabilize markets and ensure that everyone who works as a farmer gets a yearly higher income, and they are not doing a good job these last few years,” Keimpema adds.

And more and more dairy farmers are leaving the market. According to Keimpema, 10% of dairy farmers in the Netherlands are expected to stop next year, as opposed to not more than 3% annually in previous years.

“Many farmers have no power to support their farm anymore and have stopped production, so Germany has 3-4% less milk than half a year ago,” said Pfaller. “But now when the milk price goes up, the farmers are going ahead again to produce milk. Make speed, more and more milk, but I am sure in 12 months, the next crisis will come again.

EU officials hope that the new milk reduction scheme will help European dairy farmers manage the crisis. According to the scheme they will get paid if they have not produced extra milk. The fate of European farmers does not only lie within the hands of the EU, but is intertwined with the future of the global market.

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