Anti-crisis dairy package II: What hope for the dairy sector after the Agri Council ?
Six months after a first package of measures – 500 million Euros of funding and no tangible policy response to the crises affecting the dairy and pig meat sectors – the Commission has announced a second package of measures following yesterday’s meeting of the Council of Agriculture Ministers.
Will this package do anything to improve the very difficult situation that European farmers have been enduring for months now?
Unlike his predecessors, Commissioner Hogan cannot count on a miraculous recovery in world markets to make up for Union low response. General economic trends for both world markets and individual sectors are depressed and analysts agree there is little cause for optimism in the near term.
Commissioner Hogan has got it right: the crisis is global, it is deep and it is affecting farmers in all 28 Member States. Given this, it is reasonable for the agricultural sector to expect comprehensive and coordinated action from European policymakers to ensure a much needed recovery.
The evidence shows that, since 2007, theories that assume a linear elasticity between supply and market price are no longer valid at the point when the market switches from equilibrium to disequilibrium. A supply reduction of just 2 to 3 % in the dairy sector would cause prices to jump sharply in the European market, and significantly more than the 5 to 6 % that analysts would have predicted in the past for such a reduction.
Although the Commissioner had, speaking before the COMAGRI, shown his determination to identify solutions, and had begun to outline a number of interesting ideas, it was clear from the contents of the new package put forward at the conclusion of the council meeting that his room for manœuvre was limited. The new package includes:
- a renewed commitment to measures already announced 6 months ago;
- the possibility, for those Member States who wish to do so, to provide funding to farmers of up to 15 000 € per holding;
- voluntary reduction of production: the possibility to make use of article 222 of the Single CMO Regulation, which allows (groups of) producers in the MS who request to do so, to temporarily jointly manage their production volumes, without crossing the red line of discussing prices.
The package amounts to, therefore, national and/or local measures, implemented if desired by the MS and funded by the latter using their own resources.
National financial support will, where it is provided, offer some much needed if only short-term relief to farmers in dire need of support.
However, the impact of the use of article 222 is to say the least hypothetical. We need only recall that it was not designed to be used in the circumstances facing the European dairy sector today. Rather, its purpose is to enable economic actors, which together possess a real capacity to modify trends in their markets, to jointly organise and manage their production, particularly with respect to volumes and promotional activities. However, by its very nature, article 222 can only work where its target markets are relatively modest in scale.
For a dairy sector which is, in the words of the Commission, in the throes of a crisis that is international, whose production is a global commodity, what benefit could a single group of producers gain from independently and unilaterally deciding to reduce their production, at their own cost and without any guarantees – or rather with the virtual certainty that they would not have the firepower to induce a recovery in the market?
At most, such a group may be tempted to use article 222 to implement more aggressive promotional activities with a view to pulling market share away from their neighbours using a promotion-price marketing strategy.
Without strong European incentives (i.e. European political will but also a decision to make credible funding available), a return to a virtuous spiral for the European dairy sector would seem to still be some way off following the latest package of proposed measures, which is, like its predecessor, unlikely to make any meaningful headway.
At the very best, the new package is a gamble with the future of the sector, despite the fact that simpler measures could be put in place by making use of the crisis reserve fund, and avoiding a return to a narrow quantitative demand management approach. A mechanism based on a financial incentive to reduce production using a coordinated European auction mechanism, managed at European level, may today offer the only economically credible solution that will:
- give tangible short-term results, and;
- protect Europe’s production capacity and capabilities.