In the space of a few years, milk has become one of the particularly sensitive issues in agriculture news and a source of major economic and social conflicts in several nations. In the United States, because of falling prices on international markets, dairy farmers were not able to repay the loans contracted to meet the huge costs of modernizing their equipment. In Spain, dairy farmers took to the streets in 2009 to protest against declining incomes. In France, the dispute between farmers, processors and distributors goes on and on, each side standing up for its own interests in the battle for milk price setting. Similar conflicts broke out in Germany and other European countries. At the end of 2009, momagri had addressed the issue and highlighted the urgency to provide durable and structural solutions, considering the key status of milk in the ongoing talks at the WTO or in Brussels. Eight months later, the milk crisis is still raging and the measures currently advocated–the amplification of contract agreements or the creation of a specific futures market––seem to be constructive although inadequate to durably resolve the situation as long as a more global regulation of agricultural markets is not initiated.
Dairy markets are confronted to structural turbulence
While instability in dairy markets is both historical and diverse according to countries, three common symptoms can be emphasized.
- First, the volatility of milk prices. It is considerable and price levels have been steadily declining since September 2008, even if a slight increase was recorded in the summer of 2010. For example, milk prices in France dropped by 36 percent between September 2008 and April 2009, followed by an upsurge of the same amount, then dropped again by eight percent between December 2009 and January 2010, and then rose again…
An aggravating context
- Then, and as a consequence, dairy farmers are meeting increased difficulties to make a living from their work, since they are experiencing the “scissor” effect due to lowered milk consumer prices and production costs that keep increasing: more than 20 percent between October 2007 and October 2008 in France.
- Lastly, such instability and lack of price visibility lead to recurring conflicts between the various players in the industry (producers, processors and distributors), conflicts which always required governmental intervention.
The evolution of the international and national situation has seriously worsened these three symptoms since 2007.
At the European and international level, one notes the programmed elimination of quotas as part of the post-2013 CAP reform, as well as the WTO talks aiming to liberalized the various agricultural markets––and the dairy market in particular. The legitimate uncertainty about the concrete terms and conditions of implementation directly impacts farmers’ visibility as well as market stability by increasing risks and, indirectly, price volatility.
In France, one can mention the ruling of the General Directorate for Fair Trading, Consumer Affairs and Fraud Control (DGCCRF) to terminate collective bargaining for milk prices at the inter-professional level––a mechanism that allowed preliminary price setting, and thus stabilized prices. Since then, a new clash breaks out every quarter between producers, processors and distributors. This year, the agreement reached in March only lasted a few months, since dairy companies decided it was not profitable for them. They offered to buy milk at €310 for 1,000 liters (264 gallons), whereas farmers demanded €330. In the end, both parties amicably settled on a 10 percent increase per ton of milk, with in exchange, the decision to index French prices on German prices starting in 2011.
Responses that are globally ineffective because ill adapted
Until very recently, most responses to the dairy crises were not very effective over time because they were ill adapted, since they are temporary by nature and deal with basically structural issues. This is particularly the case of the European Commission, which, at the end of 2009, agreed on an exceptional €300-million aid for farmers to help offset sharply lowered milk prices. The situation is similar in the United Sstates where the American Senate voted on a $350-million assistance fund that same year. While indeed crucial considering the emergency situation faced by dairy farmers, these measures did not provide a long-lasting solution.
Various national and regional initiatives on the need to combine temporary measures with more structural measures are nevertheless transpiring, therefore showing a progressive awareness of the necessity to regulate markets “from the inside”. Two paths are currently favored: contract agreements and financialization.
Rethinking contract agreements with broader perspectives
The introduction of a contract agreement system is being considered in several countries to restore balance to the industry. This is the case in the United Kingdom, where the Dairy Crest firm implemented a system of milk purchase contracts with guaranteed prices. The goal is to enable farmers to sell milk at a fixed price if market fluctuations remain below €0.023, whether upward or downward. At the European level, Commissioner for Agriculture Dacian Ciolos set up the High Level Group of experts on milk in October 2009 to come up with mid- and long-term solutions for the dairy sector in preparation for the elimination of the quota system by April 1, 2015. The High Level Group therefore advocated seven recommendations, among which the amplification of contract agreements between producers and distributors to enable them to agree on prices and volumes, as well as the implementation of measures to curb farmers’ income volatility. The French Senate took notice and qualified the Group’s proposals as “prudent progress toward regulation”, while noting the High Level Group’s lack of audacity regarding market measures. For its part, the French Senate advocates making contract agreements the rule, and strengthening the role of inter-professional organizations to improve market knowledge and transparency.
Futures markets are helpful, subject to appropriate regulation
In Europe, milk powder has just been introduced on the Euronext market to provide more visibility on the outlook for milk prices. The move follows the example of the United States that already created a futures market for dairy products, although this did not prevent the crisis to continue. So, to avoid that dairy market financialization go hand and in hand with a massive and uncontrolled influx of speculators, it is imperative that dairy future markets––and agricultural futures markets in general––be transversally and globally regulated. French Agriculture Minister Bruno Le Maire recommended this during his meeting in Washington with the U.S. Secretary of Agriculture Tom Vilsack in early September. The French Minister declared his support to limit positions to rein in speculation on European commodity markets, in order to curb food price increases as well as political instability and hunger in developing countries.
The current solutions currently promoted to contain the milk crisis seem to be essential but by no means sufficient to resolve it on a permanent basis. We must strike at the root of the problem, in particular at the structural instability of markets to reduce the negative consequences of uncontrolled price volatility. A transversal and global action is required to improve the equilibrium of the markets and the industry, as well as the incorporation of future markets as factors of stabilization and visibility growth for dairy markets. Concrete responses to the dairy crisis are partly relying on the future of other markets in terms of regulation. Because the dairy market––while it is specific––nevertheless remains both an example and a symbol of the difficulties experienced by other agricultural markets. The up-coming months are therefore going to be decisive ones.