1
The current milk crisis: lessons for the future
BVLE Conference: the recent milk crisis
September 29, 2009
Marc Rosiers, Boerenbond
Pieter Verhelst, Boerenbond
2
Overview
• EU ambition with the dairy sector• Market prediction versus market reality• Lessons from the current milk crisis• Ideas to overcome the current milk crisis now and
in the future
3
EU ambition with dairy sector• Milk production for local and world wide
consumptionProtect a reasonable level of self sufficiencyCompetitive export
• Versatile productionMaintain dairy production in LFADevelop dairy farms in top regions to world players
• Versatile productionDiversification at farm levelDiversification at processors level
• No revolution but evolution
4
Milk production for local consumption…
• Protect a reasonable level of self sufficiency
Keep import tariffs up Improve efficiency
o Investment fundo Extra modulation: restructuring of the dairy sectoro Art. 68: idem
EU-price butter 2,37 2,37
World market price 1,59 1,59
Import tariff 1,90 0,57
Import price 3,49 2,16
Protection 147 % 91 %
5
… and world wide consumption
• Invest in more competitive exportCreate the opportunity for cost reduction through
economies of scaleo Abolition of quota system
and more efficiency from export support to stimulating export
oNo export restitutions: distorts price signaloExport promotionoExport guarantees?
6
EU-share in world dairy market
7
Versatile dairy farmers
• Maintain dairy production throughout Europe In LFA: extra support
o LFA policyo Art. 68
– Dairy production for local consumption
In the most favorable EU regions for dairy production: no extra supporto Only direct payments => discussion on redistribution of direct
payments is crucial– Dairy production for world wide consumption
8
Versatile dairy processors
• Diversification at farm levelFarm sale, tourism,…Gaining a non-agricultural income
• Diversification at dairy processors levelCoping with fluctuating world markets
o Butter and milk powder react instantlyo Cheese reacts with some delayo Fresh dairy products react late
– A diversified processing installation is well equipped to build in the necessary reaction potential to instability and create some stability in farm gate prices
9
From predictions…
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011100
150
200
250
300
350
282 282 282 282
263
244
225220
215 215 215 215
Series1 Series2
Eq. intervention price Predicted milk price evolution
EU
R/t
10
… to reality
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011100
150
200
250
300
350
400
282 282 282 282
263
244
225 220 215 215 215 215
Average EU milk price Average World milk price
Eq. intervention price Predicted milk price evolution
EU
R/t
11
Market correctio
n
Specificity of
agricultural sector
Sector initiatives
Future initiatives to cope with market volatility
12
Some findings
• Food prices in Europe (COM(2008) 821)
Supply shortages in 2007 were followed very rapidly by supply surpluses in 2008/09
EU Commission finds problems in the functioning of the food supply chaino The asymmetry in bargaining power between farmers and the rest of
the chain keeps farmers margins under pressureo EU Commission proposes a roadmap to
– Promote competitiveness of the food supply chain– Ensure a vigorous and coherent enforcement of competition and consumer
protection rules– Improve access of new players– Better inform the market via European monitoring system of food prices– Discourage speculation
12
13
Some findings
• Dairy market situation 2009 (COM(2009)385)
EU Commission questions price transmission and the distribution of value-added
Solutionso Enhance market transparency and helping a fairer market operationo Encourage farmers to work together to improve the efficiency of their
operations by increasing their economies of scale and scopeo Develop a European-wide code of conducto Organize processor cooperatives
– to adapt their members' milk supply to existing and future demand– to increase their countervailing power vis-à-vis processors and retailers.
o Create inter-branch organisations – involving all the actors in the dairy food chain – that could foster a useful dialogue between all the players active in dairy markets13
14
Some findings
• Dairy agreement of 02.07.09 Financial effort by retail sector Cost efficient agricultural production System of fair trade for local products Inter trade agreements within a European framework
• Advise Belgian Competition authority Dairy agreement complies with anti-trust law
o Competition is not reduced, neither between farmers, neither between retailers
o As there is no government intervention, there exits no discrimination between Belgian and foreign farmers and retailers
o All parties are allowed to study – together with the authorities – sustainable solutions for the issue14
15
Members of FEDIS
Controled by BIRB
Processors14 ct
2 ct/literFarmer
Belgian milk agreement: July – December
Consumption milk(225 mio liter)
16
• The market plays a central role• However, the market is not perfect
Volatility of pricesMarket price does not cover costs (price level)
Some ideas
16
17
• SolutionsPrice volatility
o Explanation = characteristics of farming
–Production cycle–Climate
o Proactively – Systematic, reliable information on demand and supply, today and tomorrow (forecasts) price observatory
o Reactively – market stabilisation instruments (strategic stock management, alternative use of surpluses, insurance systems, …)
Some ideas
17
18
• SolutionsPrice level
o“Sweep before one’s own door”– Strive for cost efficiency (economies of scale and
scope)– Storage, export or alternative use of surpluses
» EU = limited safe net» Specialisation» Separation between the internal and external market,
realistic ?
Some ideas
18
19
• SolutionsPrice level
oAsymmetric bargaining power– Code of conduct– Enhance the position of farmers within the sector
and throughout the supply chain» Producer organisations en cooperatives» Agreements within the supply chain» Systems of certified quality products
Some ideas
19
20
• SolutionsPrice level
oCode of conduct– Buy at a too low price– Coupling with purchase obligations of inputs– Control on quality requirements– Maximum deduction of tare– Duration– Required guarantees– Terms of payment– Silent extension– ....
Some ideas
20
21
• SolutionsPrice level
oAsymmetric bargaining power
–Enhance the position of farmers within the sector and throughout the supply chain
» Producer organisations en cooperatives» Organisational advantages» Market advantages» Financial advantages» Advantages in logistics
» Need for a European framework
Some ideas
21
22
• SolutionsPrice level
o Asymmetric bargaining power– Enhance the position of farmers within the sector and
throughout the supply chain» Agreements within the supply chain
» Inter trade agreements,» specific agreements between buyers and producer
organisations,» Agreements between buyers and producers
» Legal basis (Belgian law on competition of 15.09.06)» Need for a European framework
Some ideas
22
23
• SolutionsPrice level
oAsymmetric bargaining power– Systems of certified quality products
» Condition = price supplement» Mutual recognition» Sneaking increase of (product- and process) standards
without price compensation» Need for a European framework
Some ideas
23
24
Quota cost and efficiencyEstimate 2009
2007 2008 2009Average return 36,99 30,34 25Variable costs 12,35 14,85 EstimateFixed costs 6,88 7,59Total costs 19,23 22,44
Balance 24,34 15,39 9,39Income 17,76 7,90 1,90
25
Dairy farm income(source: FAN Boerenbond)
26
Changes in investments
Investments 1990-1997
1998-2005 2015(estimate)
Quota 31% 43% 0%
Land 23% 13% 30%
Infrastructure 21% 20% 40%
Machines 21% 18% 20%
Others 4% 6% 10%
27
Average quota in Flanders
88/89 98/99 08/09 2016
Number of farms
19.091 10.864 6.461 4.000
Quotum 100.279 173.035 304.829 550.000
-827 farms/year
+7.250 ltr/yearX 1,7
- 383 farms/year+ 13.394 ltr/yearX 1,6
28
Know your cost structure!• Cost including income must be below 25 cents!
Production cost FAN = 20 cent Fodder costs 12 cent Cattle/energy/environment 3 cent Fixed costs 5 cent Balance available for income = 5 cent
STANDARD:1 FTE = 30.000 EUR producing 600.000 Ltr milk
with 80 cows!!
This means 200 ltr/worked hour (average FAN = 120)
Remark: where did the quota cost go??
29
Questions and discussion