Dairy Crisis Luke Ming Flanagan
Dairy production in the EU accounts around 20% of the world production. Close to 40% of the production takes place in Germany and France. The other significant producers are the United Kingdom, Poland, the Netherlands and Italy.
Most of EU's production of dairy products is consumed domestically: around 11%-13% of the milk is exported (in milk equivalent). The main exported commodities are the powders: around 50% of powder production is exported outside the EU. 8% of the EU cheese is exported, 6% of the butter and more and more fresh dairy products are exported but it remains small at above 1% of the EU production.
The main EU exporters of dairy products are the Netherlands, France, Germany, Belgium, Poland and Denmark with more than a million tonne of milk equivalent exported each and gathering more than 70% of the EU exports.
EU exports to Russia only account for 1.4% of the EU cow’s milk production (in milk equivalent, average 2011-13). However this share is much higher in Finland (22%), Lithuania (14%), Estonia (8%) and Latvia (5%). It is to be noted that some of these exports can originate from other EU Member States. Similarly part of the milk processed into exported products might be imported.
Russia is the destination of 13% of the EU exports (in milk equivalent). This share is much higher for cheese and butter at 32% and 24% respectively. The main EU exporters to Russia are Finland, Germany, the Netherlands, Lithuania, Poland and France. The EU is the main supplier of Russia followed by Belarus, both supplying 80% of the Russian dairy imports (in value).
When the market for dairy products and their final destination is analyzed it is clear that the current crisis is generated by the market power of the processers and the retailers and their failure to deliver a fair share of the retail price back to the primary producer.
The vast majority of dairy produce is consumed in high value European markets, fixing the food chain within Europe would be the biggest step to ensure a viable return for the farmer.
Also in the debate on the current crisis, the continuing mantra from some quarters that “financial instruments” and the futures markets can offer stability.
Offering low cost loans to a business that is already losing money would not be seen as a seen a sound business model in other sectors, why do we encourage farmers to go down this road locking them in endless debt with no option but to continue to produce to service this millstone around their neck. Farmers should be encourage to react in a commercial manner to the current market situation reduce their output and their costs.
While hedging is put forward as the solution to combat volatility, and theoretically this may be true, in practice it is unlikely to happen. As trades take place between a very small numbers of huge dairy companies, they can influence the commodity price and thus the price paid to farmers for their milk—by holding or selling products at strategic moments.
In 2008, Dairy Farmers of America paid a $12 million penalty to the federal government to settle charges that the company manipulated the price of fluid milk by buying bulk cheese on the Chicago Mercantile Exchange (CME)