The Dairy Industry Crisis: A Case Study
The milk industry is currently the only market where the crisis has led to an open conflict between its various players. For the past several months, the dispute opposed French dairy executives, who favor lower prices, and milk producers, who disagree by drawing attention to increased operating costs. Following the September ruling by the Direction de la Concurrence, de la Consommation et de la Répression des Fraudes (DGCCRF)––the French Directorate for Fair Trading, consumer Affairs and Fraud Control––that ended cooperative negotiations for milk prices at the inter-professional level by claiming that these were anti-competitive––the situation prompted farmers to mobilize to air their demands. Since then, milk strikes, dairy plants blockades and product un-referencing actions in retail centers are going on and, far from reaching a solution, the conflict grows even more bitter.
In more ways than one, the milk situation is representative of the crisis experienced by agricultural activities. First, because milk producers, as it is the case in other agricultural activities, suffer from a market structural instability that thrusts them into insecurity. Second, because deregulation policies conducted by public authorities have been or will be mostly devastating: in fact, reactions from public authorities brought results in contradiction with what was to be done, whether on European or national levels.
This explains why the dairy industry is now a case study that foreshadows what could happen to agriculture as a whole if the general deregulation trend is confirmed.
From Circumstantial Difficulties to a Structural Crisis
If the dairy industry has always been defined by its relative stability, its current crisis points to a genuine break from previous situations. The split results from a combination of factors, which, at various levels, generate a predominantly destructive climate of insecurity. We must single out two instability causes to explain the current dairy crisis.
Just as it is the case for other agricultural markets, milk markets are defined by significant structural price volatility. While prices rose by 30% between May 2007 and May 2008, they recently sustained a decline. This unexpected result was mostly due to production surpluses encouraged by soaring prices. Indeed, today’s inventories of milk powder and butter––the only means to preserve milk––are at their highest level: so much so that the European Commission, whose wish to reach “zero inventory” is a well known fact, recently authorized public intervention on the butter market.
In addition to declining prices, rising operating expenses (close to 20% for the past 12 months), which have considerably increased milk production costs, are not taken into account by the dairy industry. According to the FRSEA1, the drop in prices actually recorded by producers range from nine percent to 17 percent for the month of October (or less 30€ to 60€ per 1,000 liters), which translates into a situation where milk producers are operating at a loss. Despite the fact that production costs average 0.334€/liter, the price given to producers by the dairy industry is 0.308€/liter. One must also note that dairy executives are themselves subject to retailers’ demands, and therefore being put between a rock and a hard place.
Irrelevant Public Reactions
The situation deteriorated with the public authorities’ recent decision to repeal the mechanism favored by all players without replacing it with a satisfactory procedure, thus rejecting the existing price fixing formula through internal industry negotiations. As a result, each party now calls attention to its specific demands, without any likelihood of reaching a middle ground. Consequently, milk producers see their profits and the very existence of their activities called into question, as they confront the results of cutbacks and the absence of negotiation procedures that were effective until now. Trapped in a context of drastic earnings decline, many farmers might cease activities. In addition to impacting the economic growth of rural areas, this would threaten production capacities of nations, and therefore their food security.
In addition to this first national deregulation, one must also combine another European deregulation that is bound to make matters worse. We are talking about the European Council’s recent decisions subsequent to the PAC Health Report, decisions that guide the dairy industry toward total short-term liberalization: dismantling quotas by 2015 in addition to public intervention measures that guarantee some production level and some market stability.
Analysis of the Combined Results of an Irrelevant Deregulation Policy
Let’s examine, in a few lines, how one is inclined to destabilize markets that are now quite chaotic by insisting on the application of general principles.
To begin with, by doing away with the inter-professional mechanism of price negotiation at the national level. Until now, prices were set by a collective negotiation that allowed for the softening the excessive volatility of global prices. Yet, alleging that this mechanism represented an arrangement at the expense of the end consumer, the DGCCRF ordered the organization responsible for prices configuration, the Centre National Interprofessionnel de l’Economie Laitière (CNIEL)––the French Dairy Industry Inter-professional Organization––to terminate national recommendations for the evolution of milk prices, whether the trend was upward or downward. By terminating a procedure that was nothing but a regulation method tailored to the industry, public authorities thus weakened the industry itself. In addition, it is erroneous to think that the mechanism of price negotiations undermined fair trade: the CNIEL was only a negotiating venue, whose goal was to achieve a common ground between supply (the producers) and demand (the industry). The resulting suggested prices thus allowed producers to benefit from a clear and set indicator, which served as a reference for the coming year. This reference price, which developed from meeting supply and demand as it is done in other markets, did not in fact raise prices nor punish end consumers. A basic comparison with neighboring countries is proof enough: in Europe’s other large milk producers––Germany and Spain––that do not operate with the same negotiated price system, prices recorded in 2007 were in average far higher than those monitored in France (353€/1,000 liters in Spain, 326€/1,000 liters in Germany and 289€/1,000 liters in France).
Next, as far as Europe is concerned, the ministerial agreement on the PAC Health Report brings about a progressive deregulation of the dairy industry. This agreement, which answers the European Commission’s aspiration to reconcile the industry and the market, includes successive increases of the quotas, which have curbed production since 1984 (only a one percent increase in five years) while waiting for their scheduled removal in 2015. Yet, quotas now represent the markets’ sole regulation tools since all other mechanisms were gradually abolished by the PAC successive reforms. In so doing, the ministerial agreement thus denotes a decisive step toward a totally deregulated market and an omen for the worst: barring public intervention mechanisms, we can fear that the structural volatility of prices breeds an unbearable situation for milk producers and threatens the very existence of the industry.
In conclusion, the dairy industry appears to be symptomatic of the current disorders affecting agricultural markets and represents a case study that must bring about solutions. In fact, deregulation policies observed today––the PAC Health Report being the best illustration––constitute a major strategic mistake. In this environment, one must fear that the makeup of the crisis affecting the dairy industry is reproduced in other industries with specific forms according to activities. And reporting on the situation does not make for empty words, since indications of hostility have already occurred elsewhere during the past few weeks, such as in the beef or the sheep transformation industries.
This is why it is imperative to maintain regulation mechanisms tailored to agriculture’s specifications as well as to political requirements. One could, for instance, plan for the creation of an independent organization to set up prices that would provide the dairy market with reference prices for transactions between producers and dairy executives. It is also one of compelling initiatives proposed by momagri, a think-tank that supports the establishment of an International Ratings Agency, whose competence would include, among other tasks, setting up balanced prices.
Momagri’s Editorial board
1 Fédération Régionale des Syndicats d’Exploitants Agricoles (Regional Federation of Farmers’ Unions)