The breakdown, without agreement, of the World Trade Organisation talks in Geneva last week is likely to have far-reaching implications for the European dairy farmer.

After the talks, it has been interesting to track the mixed messages emerging from the various interested bodies, which range from the almost euphoric to the extremely cautionary.It is important for the UK dairy farmer planning a long-term investment to have an understanding of where we now stand.

Many commentators agree that these talks are not dead and buried and those taking part have emphasised that the progress already made is “in the bag”. But it is unlikely that discussions will resume for at least two years after the US and India elections and the change in EU trade commissioner.

Much emphasis has been put on the proposed 60% reduction in EU import tariffs. But with the smaller gap between European and world prices that we have seen in the past 12 months, the tariff reduction on the table, if implemented, would unlikely be large enough to see significant increases in imports of dairy products into the EU.

Dairy cows

The breakdown of WTO talks could have important consequences for UK and European dairy farmers

After the breakdown in talks, we are also far more likely to be exposed to numerous bilateral trade agreements that will go no way to reducing trade-distorting handouts given to farmers in countries that have not decoupled their support as we have in the EU. For example, the support given to US farmers through their new Farm Bill may become more influential as the USA begins to take a dominant role in a number of the world’s big dairy commodity markets.

A bilateral deal between the South American trading bloc, Mercosur (Argentina, Brazil, Paraguay and Uruguay) and the EU is also on the horizon. If these countries are offered greater access to our dairy markets, with their rapidly expanding “New Zealand-type” milk production systems, there could be pressure on EU prices.

But it is likely that existing EU market protection measures will help keep dairy commodity prices above world levels, at least for the short to medium term. Much will depend on the supply/demand balance within Europe. With milk quotas likely to end in 2015 and export subsidies likely to be phased out, it remains to be seen how long the EU will see prices at a premium over the global markets, even without a WTO agreement.

Price gap narrows

If we look in detail at European and world butter markets, the European price has been consistently above the world price for a number of years. But recently, the surge in world prices has meant that prices have converged. The world market is about £300/t (about 14%) lower than the EU market. But there have been a number of occasions over the past eight years where the price difference has been greater than £1000/t (65%).

It has been reported that rising world market prices are making some exporters less willing to pay import tariffs to access EU markets, as they can now obtain a better price in other less protected markets. This is becoming an issue for New Zealand butter importers, with 20,000 to 30,000t less likely to be imported into Europe in 2008.

The stable butter market, alongside positive world markets for most other main dairy commodities, is holding EU markets firm, at least for the short to medium term. Actual Milk Price Equivalent (AMPE) and Milk for Cheese Value Equivalent (MCVE) stand at 26.9p/litre and 28.5p/litre, respectively, and with British dairy processors and retailers indicating their intention to secure a sustainable milk supply, farmgate prices are likely to rise in the coming months.

Food security and the sustainability of agriculture are increasingly on the EU political agenda, so it will be interesting to see how political opinion within the EU changes in the coming years. If large fluctuations in food prices and guaranteed supplies become more of an issue, will reductions in agricultural tariffs continue to be offered up as bargaining tools when the EU is looking for greater market access for our other industrial products and services?

Daily commodity prices

 

July-08

June-08

July-07

AMPE (p/litre)

26.9

26.7

29.6

MCVE (p/litre)

28.50

29.15

27.79

SMP £/t

2,120

2,120

2,300

Butter £/t

2,350

2,300

2,500

Mild cheddar £/t

2,850

2,850

2,500

Cream £/t

1010

1007

1300

 

June-08

May-08

June-07

Dairy farmer numbers (England and Wales)

12,252

12,309

12,867

 

June-08

May-08

June-07

Deliveries to dairies (million litres)

1,127

1,226

1,147

 

May-08

April-08

May-07

DEFRA farmgate milk price (p/litre)

24.45

24.91

17.53

Source: DairyCo