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The example of the dairy industry:
Between the drawbacks of liberalization and the benefits of regulation
by Paul-Florent Montfort, Analyst, momagri
Dairy industry
For the past twelve months, the dairy industry has constantly been in the public eye in France and in Europe, even dominating the agenda of several meetings of the EU Council of Agriculture Ministers to find a solution to the drastic decline in dairy farmers’ income. In spite of a fact largely ignored by public opinion and that shows the seriousness of the situation, the crisis affecting the dairy industry is far from being confined to Europe: In the US for instance, milk prices paid to producers declined by 44 percent between March 2008 and March 2009, while they fell by 20 to 35 percent in Australia.
Just like the food crisis of 2008, the serious crisis affecting milk producers throughout the world is partly generated by the price hyper-volatility in agricultural markets. As indicated by the International Farm Comparison Network (IFCN), milk is in fact one of the world’s most volatile commodities, which leads to unpredictable situations. Thus in 2009, only two percent of the global milk production covers its costs against the “global prices” for the same period (US$20 for 100 liters of milk)1. For most opinion leaders––like Pascal Lamy, the Director-General of the World Trade Organization, or various high-profile economic think tanks such as The Fraser Institute––the answer lies in more liberalization of agricultural trade.
Yet, this does not take into account three significant facts that deserve to be mentioned at a time when the CAP reform, and especially milk quotas reform, is entering its most dynamic stage of definition and negotiation.
First of all, the unfettered liberalization implemented through structural realignment policies by international organizations in developing countries is precisely the cause of the destruction of sustenance farming in countries that were the most severely affected by the 2008 food crisis. This is currently recognized in several reports, among which a document published in September 2008 by The United Nations Conference on Trade and Development (UNCTAD)2 as well as The World Bank’s 2007 World Development Report 3.
Secondly, deregulation entails costs, which are largely overlooked today. As an example and according to a report issued by the European Court of Auditors that assesses the reform of dairy industry in Europe4, expenditures to support the dairy industry soared by 64 percent between 2005 and 2007 to outweigh disparities generated by the hyper-volatility of milk prices in agricultural markets. Consequently, subsidies accounted for 41 percent of the gross income of an average European dairy farm in 2006. And this was prior to the current crisis, the resumption of export subsidies, the surplus buyback by the European Union and the release of a €300 million emergency assistance to producers…. Not to be outdone, the US announced $1 billion in financial aid5. in July 2009. The cost to taxpayers is therefore sizeable: Is this the gain brought about by liberalization?
All the more so since, thirdly, liberalization policies in agriculture do not necessarily benefit consumers due to increased competition, although this represents one of the chief objectives. The above-mentioned report by the European Court of Auditors maintains that between 2000––when the European Union initiated its progressive deregulation of milk quotas––and 2007, prices paid to producers declined by 6 percent while consumer prices rose by 17 percent. In the US, The Farm Foundation reported that while prices were plummeting at the farm, foodstuff prices were barely dropping6. This disparity is even more blatant in Australia. Starting with the July 2000 deregulation, the Government provided producers with a monetary compensation financed by a tax on milk sales. When the tax was terminated in February 2009, milk prices were maintained to the benefit of middlemen….
Hence, unfettered trade liberalization is not the antidote to the structural crisis currently experienced by the dairy industry. Additionally, the first results of deregulation policies implemented in several countries are showing the deregulation of dairy markets is not successful.
Canada : An alternative policy
Conversely, the supply management system implemented in Canada7 clearly demonstrates that alternative policies do exist and work. While dairy farmers’ conditions greatly deteriorated in most industrialized nations, Canadian producers and consumers did dodge the recent price whirlwind and benefited from a stable and just trade environment. Yet, not only this management system does not cost anything to the taxpayer, but it also prevents the release of emergency funds to aid a strategic economic sector. For that reason, “in the context of solving agribusiness economic problems, the management of supply is part of the solution, not the problem!” states a recent declaration by Canada’s dairy producers8 in reaction to the liberalization recommendations made by The Conference Board of Canada––a Canadian think tank that conducts research and economic analysis, as well as performance analysis of public policies.
It is still unclear whether such a system can be exported and generalized on a global scale, which means taking into account the differences between developing and developed countries. The very question we must now answer is: How do we regulate without disrupting market operations and implement a homogeneous system at the global level? This represents momagri’s main work regarding the governance principles that aim to establish a new global agricultural and food policy 9.
1 As stated by the 10th IFCN Dairy Conference 2009 http://www.ifcnnetwork.org
2 UNCTAD’s Annual Report, “Africa, the symbol of failure of liberal policies” of September 2008. Please see momagri’s October 20,2008 article under the same title www.momagri.org/UK/Focus-on-issues/Africa-the-symbol-of-the-failure-of-liberal-policies_371.html
3 “Agriculture is {…} very promising in terms of economic growth, poverty reduction and environmental services, but for these promises to be realized, governments must also impart their invisible hand by providing essential public goods, by improving the investment climate, by regulating the management of natural resources and by getting favorable social results.” World Development Report 2007, The World Bank.
4 Special Report #14/2009 dated October 15, 2009 of the European Court of Auditors, “Have the management instruments applied to the market in milk and dairy products achieved their main objectives?”
5 Please see momagri’s October 12, 2009 article “Dairy’s financial problems outstrip usual ups and downs”. www.momagri.org/UK/Editorials/-Dairy-s-financial-problems-outstrip-usual-ups-and-downs-_561.html
6The University of California Giannini Foundation of Agricultural Economics, 2009, “How Do the Recent Farm Price Fluctuations Affect Consumer Prices?”
7 Please see momagri’s May 18, 2009 interview with Marcel Groleau, President of the Quebec Federation of Dairy Producers, “Free agricultural trade will never guarantee the quantity, quality and security of what we eat.” www.momagri.org/momagri12_web/UK/PAGE_Temoignage.awp
8 “The lessons learned from the management of supply or the benefits from stable markets” November 23, 2009. http://www.newswire.ca/en/releases/archive/November2009/23/c4100.html
9 Please visit momagri’s July 2, 2008 article “Ten propositions by momagri for a new vision for agriculture.” www.momagri.org/UK/Points-of-view/Ten-propositions-by-Momagri-for-a-new-Vision-for-Agriculture_337.html
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