The current milk crisis: lessons for the future

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 consumption • Protect a reasonable level of self sufficiency • Competitive export • Versatile production • Maintain dairy production in LFA • Develop dairy farms in top regions to world players • Versatile production • Diversification at farm level • Diversification 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 • Investment fund • Extra modulation: restructuring of the dairy sector • Art. 68: idem

5. … and world wide consumption • Invest in more competitive export • Create the opportunity for cost reduction through economies of scale • Abolition of quota system • and more efficiency • from export support to stimulating export • No export restitutions: distorts price signal • Export promotion • Export guarantees?

6. EU-share in world dairy market

7. Versatile dairy farmers • Maintain dairy production throughout Europe • In LFA: extra support • LFA policy • Art. 68 • Dairy production for local consumption • In the most favorable EU regions for dairy production: no extra support • Only direct payments => discussion on redistribution of direct payments is crucial • Dairy production for world wide consumption

8. Versatile dairy processors • Diversification at farm level • Farm sale, tourism,… • Gaining a non-agricultural income • Diversification at dairy processors level • Coping with fluctuating world markets • Butter and milk powder react instantly • Cheese reacts with some delay • 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…

10. … to reality

11. 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 chain • The asymmetry in bargaining power between farmers and the rest of the chain keeps farmers margins under pressure • 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 • Solutions • Enhance market transparency and helping a fairer market operation • Encourage farmers to work together to improve the efficiency of their operations by increasing their economies of scale and scope • Develop a European-wide code of conduct • 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. • 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 markets

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 • Competition is not reduced, neither between farmers, neither between retailers • As there is no government intervention, there exits no discrimination between Belgian and foreign farmers and retailers • All parties are allowed to study – together with the authorities – sustainable solutions for the issue

15. Belgian milk agreement: July – December Controled by BIRB Processors 14 ct Farmer Members of FEDIS 2 ct/liter Consumption milk (225 mio liter)

16. Some ideas • The market plays a central role • However, the market is not perfect • Volatility of prices • Market price does not cover costs (price level) 16

17. Some ideas • Solutions • Price volatility • Explanation = characteristics of farming • Production cycle • Climate • Proactively – Systematic, reliable information on demand and supply, today and tomorrow (forecasts)  price observatory • Reactively – market stabilisation instruments (strategic stock management, alternative use of surpluses, insurance systems, …) 17

18. Some ideas • Solutions • Price level • “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 ? 18

19. Some ideas • Solutions • Price level • Asymmetric 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 19

20. Some ideas • Solutions • Price level • Code 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 • .... 20

21. Some ideas • Solutions • Price level • Asymmetric 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 21

22. Some ideas • Solutions • Price level • 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 22

23. Some ideas • Solutions • Price level • Asymmetric 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 23

24. Quota cost and efficiencyEstimate 2009

25. Dairy farm income(source: FAN Boerenbond)

26. Changes in investments

27. Average quota in Flanders -827 farms/year +7.250 ltr/yearX 1,7 - 383 farms/year + 13.394 ltr/year X 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 milkwith 80 cows!! This means 200 ltr/worked hour (average FAN = 120) Remark: where did the quota cost go??

29. Questions and discussion