Quota increase not to blame as milk prices fall

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It doesn't take a lot to get French and German farmers out on to the streets - for some it is almost a national pastime.

But the scale of demonstrations in the European dairy sector, and the fact they have been going on for so many months, suggests the level of disgruntlement is running deeper than normal.

brussels demo.JPGIn France, for example, some 81 dairies have been blockaded and dairy farmers have threatened a national "milk strike" if an ongoing "mediation process" fails to deliver a meaningful lift in prices.

In Germany, meanwhile, six women have gone on hunger strike, while around 6000 dairy farmers took to the streets of Berlin to demand a national milk summit.

And this week the protest headed to Brussels, with a claimed 2000 farmers from 10 member states clashing with riot police outside the EU Council building, while farm ministers discussed the market situation.

It's easy to understand the source of their complaint. Milk prices in Europe have slumped to a 12-year low. The average EU price in February was 26 cents/litre (23.4p/litre) - down 25% in just 12 months...

In response, the European Milk Board, which organised the Brussels protest, has demanded an immediate 5% cut in milk quotas for the current milk year. It believes that expanding quota has exacerbated the supply:demand imbalance, pushing prices lower.

There is also a growing call for the EU to abandon the policy agreed in last year's CAP "health check" to scrap milk quotas altogether in 2015.

But these arguments are misplaced. Many factors have contributed to the recent demise in dairy commodity prices - but the small increase in milk quotas in the EU is not one of them.

Quotas were raised by 2% last milk year and another 1% this milk year. Yet actual milk production in the EU has fallen over that time span by about 0.5%. Few member states managed to even meet their quota last year and the forecasts suggest this will be the case again in 2009/10.

No, the reason milk prices have slumped so dramatically relates to the significant drop in global demand in response to the exceptionally high prices in 2007, compounded by the effects of the credit crunch and global economic recession in late-2008/early-2009.

Over-production in some parts of the world last year exacerbated these problems, though there are signs that this is now being corrected and international prices have recently found some stability.

It is inevitable that milk quotas will continue to spark heated debate - not least due to the vested interests that are tied up in them. But the fact is, milk supply in the EU is determined by market signals, not quota.

There are some steps the EU Commission can and should take to soften the blow in the current downturn. But ultimately the onus is on the whole industry to get better at adjusting to market signals if the price volatility we have seen in the past 18 months is to be avoided in future.

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2 Comments

james walker

where have you been since 1984 milk supply in europe certianly has been determined by quota supply of milk was getting out of control in europe\rember butter mountains\ quotas brought stability at an affordable price to the ec budget a reduction in quotas to match consumation with a decent return to dairy farmers is the only sensible way forward to ensure the milk supply eurpean consumers need

MT Philip Clarke

Thanks for the comment James, and yes, I do remember the 80s and the introduction of quotas. At the time I was revising for my ag econ finals and the arrival of quotas in April gave me yet another subject to try to get my head around.
I also remember working at the NFU in the years immediately after quotas came in and all the problems they caused.
There were issues of landlard/tenant apportionment, allocations for those who'd been involved in outgoers' schemes, collection of superlevy, the evolution of quota trading and the invention of "quota brokers". I even remember when quotas cost over 50p/litre to buy and 20p/litre to rent - saddling many farmers with unhealthy levels of debt and blocking the entry into the industry of any new blood.
I also remember the constant calls for the UK to be given a bigger quota by Brussels. The feeling was that we had had a very raw deal and were stuck with a structural deficit in a country that should be one of Europe's leading milk producers.
Most of all, I remember the legal battles that occured when it came to sorting out the rights to quota upon death or divorce. The lawyers made a lot of money out of that one and I was aware of more than one family breakdown.
And through all of that, I don't remeber milk prices being that great. Suffice it to say, I've never been a huge fan of quotas.
As to whether a 5% cut in quotas now would correct the current downturn in prices - I have to admit I doubt it. Milk production across Europe is falling anyway in response to lower prices. But that is down to global market conditions, not because the EU Commission decided to add an extra 1% to quotas as of April 1st.

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This page contains a single entry by Philip Clarke published on May 26, 2009 4:24 PM.

Top dairy farmers show off their credentials was the previous entry in this blog.

Don't count on early SFP being delivered in UK is the next entry in this blog.

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