Milk Markets: when the time for recovery will come…

Posted on 18/09/201518/09/2015 - Posted by Yves Madre

Beyond the measures confirmed and detailed by Commissioner Hogan on 15 September (which will be discussed below), global markets continue to struggle. The defection by Russia, and particularly by China, has intensified the imbalance caused by a production which has grown, in these last months, far higher than the demand.

Some hope for a recovery in the form of the return of Chinese purchases, whereas producers continue to believe in the four principal global exporters. This is a desirable effect and will be, given the current state of affairs, advantageous.

However, two elements should be taken into consideration:

the political will in China for the development of the country’s own milk sector, as seen also in Russia. This approach could cause leaders of these countries to manage their purchases, pace and volumes in a new and differentiated manner.
the fact that available stocks on sale among exporters are very important, notably regarding milk powder. Besides the quantities which will be put under the private storage scheme in the European Union, other stocks remain immediately available and will have an important buffer effect on prices (particularly those paid to producers) during the recovery of global demand.

With a price of less than 20 cents and the amount in stock in New Zealand, for example at Fonterra, European milk producers risk facing a sluggish economy for several months.

Among the measures refined and presented to Member States by Commissioner Hogan on 15 September, the decision to increase private storage aid for milk powder by 100% is undoubtedly the one which will have the most rapid effect in the attempt to prevent the downward spiral of prices in the European Union. If the quantities stocked and frozen for a minimum of 9 months are sufficient, the imbalance in European supply-and-demand could be diminished, ensuring a healthier market in the short-term.

And it is indeed only short-term: European operators are unable to store powdered milk for the global market. They have neither the means nor the will. With regards to prices in the EU, their short-term recovery will be subject to the pressure of a risk of opening the floodgates to the stocks of other big exporters if they witness a substantial recovery without a significant global recovery.

When this global market will begin to stabilise (this is far too early to anticipate positive signals at this stage), the competition between exporters to put stocks and new productions on the market will be strong. In this sense, the supplementary efforts to aid the promotion of dairy markets should be acknowledged as highly valuable and should be fully operational by 2016.

The dairy industry has operated in a new context since 2007, with significantly high price fluctuations (both upwards and downwards) at a higher frequency than previously. The current crisis is not the last.

In this sense, we can only hope that the outline sketched by the Commission during the Council of Ministers of Agriculture of 7 September, in terms of new tools to deal with debt in the milk sector and the involvement of the EIB, materialises quickly. This could represent a viable response to enable the increased resilience of a sector whose development should not be broken or hindered due to economic crises which are now inherent within it.

An initial analysis of the package of emergency measures announced by the Commission on the 7th September.

Posted on 08/09/201518/09/2015 - Posted by Farm Europe

In summary, it is clear that the Commission does not wish to rush out measures. We will have to wait for the outcome of the informal Council of Agriculture Ministers Mid-September before commenting on the ambitiousness of the measures announced yesterday. At this stage it is difficult to predict what impact they may ultimately have on the market.

At this stage the package contains a varied if somewhat motley assortment of measures, some of which offer promising prospects however, and in particular:

– The creation of new financial instruments through the European Investment Bank (EIB): This could prove useful for farmers burdened with significant debts when commodity prices are plummeting. It will take time to put in place and it may be a while before it bears fruit. The idea is nonetheless viable and promising, not least because it addresses a real need facing many farms, especially those that have invested in preparation for the end of quotas.

Other measures being put forward include:

– Enhancing support for private storage: an increase in the level of public aid for private storage could encourage operators to choose to store more. However, the Commission has not yet announced either the new level of aid or details about storage duration requirements. It is therefore difficult at this stage to judge whether the measure will work. If it is well calibrated, it could, to some extent, offer a more politically acceptable alternative to other stronger forms of intervention. If the incentives are sufficient, it could help to rebalance supply and demand over the short term.

– Encouraging a wider use of income stabilisation tools, especially insurance. This is possible under the current CAP’s second pillar, although the provisions are embryonic. In a context of volatile markets, of which the current crisis is just the latest episode, such tools offer a promising approach that the EU should actively pursue.

In addition to which the EU has announced:

– €500 million Euros of ‘targeted’ aid for the dairy sector to be shared among the Member States. Negotiations will undoubtedly be difficult and so there is a risk that the impact of this budget will be diluted. If it is to have an impact, it will need to be carefully targeted. Otherwise the €500 million budget will have to be shared among more than a million farmers, which is unlikely to achieve very much.

Europe must come to grips with the CAP

Posted on 04/09/2015 - Posted by Farm Europe

The European Union has adopted a piecemeal approach to the crises hitting the bloc’s milk and livestock sector, write Yves Madre and Luc Vernet in Euractiv.

The EU’s response to the milk crisis – and to the crisis hitting its livestock production more generally (including pork and beef) – has been at sixes and sevens.

Several hundred million euros in emergency aid was announced during the summer by the governments of the EU’s member states, in particular Belgium, Spain, Italy, France, and Estonia. Were it not for the Council convening an emergency meeting of Agriculture Ministers on the 7 September, we would have been forgiven for forgetting that Europe’s 28 member states have a common agricultural policy at all.

Yet, while the situation in each country, in each sector and in each farm varies, the whole industry is struggling to cope with a perfect storm of negative developments: the Russian ban on EU food products, the Chinese economic slowdown, and the persisting sluggishness in the European market. The questions being asked are ‘what is Europe doing?’ or ‘what can Europe do?’, that is, over and above simply observing that, as in the words of the European Commissioner for Agriculture Phil Hogan in July, “there is too much milk on the market”?

If there’s one thing this summer has shown it is that, in addition to short-term measures, the time has come for a fundamental redesign of the European Common Agricultural Policy itself. We need a fresh forward-looking vision and common strategy for agriculture that encompasses the whole of Europe. It is a tall order, but it is the only way to support agricultural businesses, wherever they are in Europe, to become more resilient in times of crisis and it is the only way to avoid the looming renationalisation of crisis management in the industry.

The world’s food needs are growing fast. European agricultural markets are mature. Europe is technologically advanced and it has a climate that is particularly conducive to agriculture. Europe, therefore, is very well placed to be a major supplier. However, if this is to be, it needs to devise a Europe-wide strategy that is equipped to surmount the challenges that would accompany such growth, a growth that must be sustainable in three dimensions: the environmental, the economic and the social. Such a strategy must, in particular, be better able to cope with market volatility as today’s crisis, will not be the last, far from it. Whether in terms of the economy, the geopolitical situation or the weather, instability is increasingly common, and increasingly violent.

It is abundantly clear that Europe is not, as we speak, able to act. Its lack of effective policy instruments for stabilising farm revenues is simply adding to existing volatility. Why? Because producers operate in a market and most of them are obliged to react to market signals: when demand rises they produce more in order to take advantage of rising prices, when demand falls they also produce more in order to earn through volume what they lose in unit value, but they do so hoping that their neighbour produces less, or goes out of business.

Without a fresh European approach, and renewed European investment in the Common Agricultural Policy, this vicious circle can only create unhealthy competition between producers. It has become urgent, therefore, for Europe to ‘tool up’ for the major economic challenge of coming years: market volatility management.

The most recent CAP reform was focused on an important subject; that of the sustainability of farming practices. To this end, greening was introduced and Europe is set to invest nearly 100 billion euros over 7 years, in order to improve the environmental footprint associated with food production in Europe. The priority today is to get serious about the industry’s economic sustainability, by securing revenues and organising the industry to improve its performance. The economy and the environment are two essential dimensions of the sustainability of European agriculture and also two key ingredients for attracting young people – and investors – into the industry.

In the short term, due to its lack of foresight, Europe can only make do with the tools at its disposal: stop the haemorrhage, limit the damage, and reassure producers, whose dynamism and abilities are key to the rural economy of tomorrow, but who are today demonstrating in the streets.

The palette of useful policy instruments is limited. It is possible to increase the trigger price for public storage (intervention) from 21.7 cents to 25 cents, bringing it in line with the economic reality in the industry, without causing artificial overproduction, such as has happened in the past.

Some voices are encouraging the Commission to put in place a ‘financial package’ for the dairy industry. This would be useful. However, any such package should avoid spreading resources too thinly and should not become a political stunt devoid of any real economic impact.

Measures must focus on the areas and the challenges being faced by the sectors that are in difficulty: the challenge of financial costs related to loans recently contracted by farmers investing in the future; the challenge of small farms located in disadvantaged areas and affected by the crisis even if their markets are much more local; the challenge of extension of the closure of the Russian market; the challenge of conquering new markets and of securing investment resources for marketing campaigns, given that any returns take at least 12 to 18 months to arrive in farmers’ bank accounts.

Europe needs to navigate the next few months with due care, it needs to kick-start discussions on the CAP of tomorrow. By doing this, it will be showing its ambition for Europe’s agriculture and food industry, not only though its budget – which is significant – but also through its ability to come up with a vision and a strategy for its farmers, wherever they are in Europe. It isn’t just about the economics of the moment. It is vital to give a political signal that offers hope for the future for those on whom 500 million Europeans depend for their daily food needs.