A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
Focus on issues

World dairy crisis: The ball is in the Commission’s court

Momagri Editorial Board

The dairy crisis is not occurring only in France, it now affects directly or indirectly all producers worldwide. That is the reason why the studies blaming the lack of competitiveness of French agriculture as the root of the current turmoil amounts to misunderstanding its contents and its solutions. Prices continue to plummet below production costs even for the most competitive producers, who only keep going by underpaying their own labor and the capital they raise. This is all the more valid and likely to last even longer since dairy production is based on substantial and specific investments: A crisis of overproduction in the dairy sector cannot be resolved by a spontaneous adjustment of supply.

This crisis fits in the framework of an economic reversal marked by the end of a commodity syper-cycle. Spurred by seven or eight years of high prices, major investments were made, leading to a situation of excess production capacity and significant overproduction for most commodities. The dairy sector is especially impacted by these circumstances, since the progressive removal of milk quotas and their eliminiation on March 31, 2015 has unlocked the production potential of the world’s largest producer––the European Union. This surplus production capacity is an explanatory factor that is at least as significant as the shocks affecting demand, as it is the case for agricultural commodities with the Russian embargo and China’s drop in imports of dairy products.

Over a span of two years, the prices of processed milk products (butter and milk powder) have been halved. Milk prices paid to producers have lost a third of their value over the same period. We are getting closer to the lowest price levels of 2009, even if it is clearly impossible to foresee the changes in prices. Since spring is traditionally a season of increased production, the specter of 2009 prices cannot be ruled out if no policy response is provided.

EU Raw Milk Prices Evolution

Following the euphoria of recent years, this return to the reality of excessive agricultural market volatility is problematic for producers. Less than a year following the end of quotas, the analysis is grim: The strategy of phasing out of milk quotas that was launched in 2008 by Danish Commissioner Marianne Fischer Boel and qualified as “soft landing”, has failed. The strategy called for a gradual one percent increase of quota volumes to be produced between 2009 and 2014, so that there would be no price decline when quotas were to be eliminated. This approach was grounded on and endorsed by studies conducted by economists, proving once again that the use of inadequate simulation models was indeed risky. In this particular case, the model does not incorporate any factor of instability, assumes there are no fixed costs, and considers a seamless price transmission between producers and consumers. The graph below depicts one of the exits from the model which presents prices for different scenarios (the Q1 scenario involves a one percent increase in quotas before their elimination in 2015, while the Q-15 scenario considers a quota phase-out without prior increases)

Change in EU27 milk price

Having a regulatory scheme as alternative to milk quotas seems all the more required, since the European Union is the world’s largest milk producer with an ouput of about 150 billion liters, far ahead of the United States (94 billion) and New Zealand (21 billion). It is estimated that these respective countries increased their production by 15 billion liters (+10%), 10 billion liters (+12 percent) and 5.5 billion liters (+36 percent) since 2007. With the elimination of quotas, the European Union acts as if it was not responsible for the balance of international trade, which is all the more regrettable since, contrary to other nations, it no longer has the necessary safeguards to disconnect its domestic prices from international prices.

In spite of the blind eye of the European Commission that did not provide any alternative to dairy quotas, some members of the European Parliament, including Michel Dantin, made significant proposals as early as 2011. Among these, one seeks to introduce an energetic scheme to control supply by providing support to producers in times of crisis if they would consent to cut production. Unfortunately, this proposal did not gather enough support during the latest CAP negotiations to generate an already operational mechanism. Seconded by then Agriculture Commisssioner Dacian Ciolos, the proposal nevertheless resulted in an Article in the European regulation that lays down the rules of market functioning (Single CMO Regulation). The Article 222 allows the Commission to act in times of severe market imbalance by implementing various measures, including market withdrawals or “temporary planning of production.”

The ball is now in the new Commissioner’s and his staff to design and quickly implement a new regulatory system for the dairy sector. The more delayed the reaction, the costlier will be the solution. Unfortunately, the recent statements made by Tassos Haniotis, Head of the Unit Agricultural Policy Analysis and Perspectives at the Commissison and a co-sponsor of the soft-landing strategy, seem to imply that political pressure on the Commission must still be stepped up. Although he does recognize some forecasting errors by these officials––“We do not have a crystal ball and no one knows what the situation will be ten years from now!”––Tassos Haniotis perseveres by declaring that “producers must self-regulate and take full responsibility

In addition to the crisis management mechanism that must be designed, this suggests that a counter-cyclical scheme must be implemented to ensure adequate incomes to farmers, while respecting multiannual budgetary balance and preventing production slippage caused by ”blindly” eliminating quotas, as it was done by the European Union in 2015. This is the essence of momagri’s proposal “A new strategic course for the CAP”.

1 http://ec.europa.eu/agriculture/analysis/external/milk/full_text_en.pdf
2 http://www.lafranceagricole.fr/actualites/marches-agricoles-a10-ans-les-prix-resteront-inferieurs-(...)html

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Paris, 18 June 2019