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Europe is not the answer to the woes of dairymen

Gather together any assorted business types -- travel agent, house builder, car dealer, advertising executive -- and ask them why times are hard. They will surely finger the same culprit: the global economic crisis. Then visit the protests being staged by dairy farmers across Europe -- tread carefully, as these usually involve burning hayricks, spilled milk and a clutch of confused cows. Ask why they think raw-milk prices have collapsed and it will take a time before anybody says “economic crisis” or “consumer demand”. Instead, the protesters are swift to blame the European Union and what they see as its failure to prop up prices. This is both telling and depressing. Farmers elsewhere may be unhealthily dependent on state aid. But Europe’s dairy farmers are so obsessed by the need for regulation that the worst economic slump in 70 years barely enters their consciousness.

Look at what the protesters want above all else: the preservation of strict production ceilings on milk. Since 2008 these quotas have been on a slow path towards abolition as part of a modest series of reforms to the Common Agricultural Policy (CAP). Many protesters blame today’s plunging prices on a slight easing of quota ceilings last year and this. Some want new production curbs imposed immediately to make milk scarcer and thus more expensive. Others attack the supermarkets, accusing them of profiteering: retail prices for milk have hardly fallen, though prices at the farm gate have collapsed. But market forces explain the low milk price far better than the EU’s decision to reduce its meddling. Look at the facts. Though Europe’s dairy sector was permitted to increase production by 2-2.5% in the year 2008-09, farmers did not take up this slack. Indeed, EU milk production fell by 0.9%, leaving overall European production some 4% below quota. Most farming is already responsive to market forces. Yet the dairymen want to head backwards towards state planning.

Politicians and the press have rushed to pander to the demonstrators. “Europe deaf to farmers’ cries,” shouted the front page of one Belgian newspaper after hundreds of tractors gummed up central Brussels in July. Better market regulation is the “only solution”, thundered a Belgian minister. In a joint statement the French and German farm ministers called on the European Commission to step up such market-meddling horrors as export subsidies and buying up surplus butter, saying measures taken so far fall short of what is needed. And though the plan is to raise the Europe-wide milk-production ceiling by 1% each year until quotas vanish altogether in 2015, the ministers suggested that Eurocrats should reconsider this plan and ponder suspending the 1% easing scheduled for 2010. The European Milk Board, a farmers’ lobby, wants EU dairy production curbed by 5% immediately, either through quotas or by paying farmers to limit production voluntarily. It is a seductively simple solution. Farmers are suffering: prices for raw milk have fallen by half in some countries since 2007, tumbling below the cost of production on many farms. Imposing tight quotas would raise prices.

But the plight of Europe’s dairy industry is not so simple. The record high prices for milk and other farm commodities in 2007 were a bubble caused by many factors, including new demand in emerging markets (China’s middle-classes developed a taste for yogurt, for example), and by unforeseen events (Australia suffered a terrible drought). In contrast, the recession has hurt global sales of cheese, a relatively pricey food that is a marker for rising affluence. This is especially painful to EU farmers since cheese-making consumes nearly half of all European milk. Moreover, the EU’s farmers are split. In places such as Italy, Denmark and the Netherlands, they yearn to produce more than the quotas allow. But French milk production is well below the ceiling set by the quotas, thanks to national rules that hobble production in dairy-friendly spots like Normandy, while helping pretty but unproductive regions such as the Alps. None of this stops French farmers from rioting for the preservation of the milk quotas -- just as they did when the European Union introduced them in 1984. Back then French farmers fought for an earlier system of buying dairy produce at guaranteed prices -- a ruinous policy that created the European Union’s famous “butter mountains”.

As it happens, quotas are finished. Whatever farm ministers imply in public statements, most EU governments are committed to abolishing them, France included. But under pressure from national governments, there has been a sliding away from a market-based approach. The European Commission will spend €600m this year on export subsidies and buying unwanted dairy goods which will then moulder in cold storage -- the EU is not recreating mountains, insists one Eurocrat, “more a butter hillock”. There is an economic crisis, national officials say, when challenged on this backsliding. Yes, but it will end. If the authorities restrict production harshly, European dairies will be caught on the hop when global demand resumes -- cows need to reach milking age, so you cannot just increase production by turning a tap. Dairy markets are global, and rivals like New Zealand dauntingly efficient. Europe should be a premium producer -- creating butter mountains is disastrous for that brand image. Farm policies tend to have perverse effects. Tax rules and regulatory incentives intended to preserve small farms make it hard to create larger, more competitive ones. Laws to protect small shops block the opening of new supermarkets and promote local and regional cartels -- and the easy bullying of farmers. Governments need to be braver, and tell their protesting farmers: “Milk is good for you. It helps you to grow strong. So do markets.”

Deze column van Charlemagne verscheen ook in "The Economist".

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6 Reacties:

At 15:23 Anoniem said...

Dat ze gewoon ander werk gaan zoeken als ze van hun melkproductie niet meer kunnen leven! Wij gaan toch hun archaïsche technieken niet blijven betalen zeker? Jobs en opportunities genoeg.

At 17:03 Wim said...

I miss the notion that farming means different things for different people. In some regions - like the Alps - it is also what keeps the region alive. Milk is not only a market - it is also a social system.

The last paragraph left me puzzled. Talking about shops seems rather unrelated to milk. And the claim that bigger shops would mean more competition sounds completely hollow here in Holland where farmers are complaining that they are at the mercy of the few remaining big supermarket chains - who often press for price cuts.

At 17:04 Joe Mitchell said...

The guidelines of the market are not always optimal and infallible. The market leads to price close to the minimum cost of production with zero profit (in the nineteenth century Marx called this law "the downward trend in the rate of profit).

If we want to maintain a beautiful countryside, clean mountains, rural villages in the mountains or in Northern Europe and milk production which minimizes damage to the environment then do not trust the market. Urban society needs its nice rural landscapes.

On the contrary, if we want to minimize our food budget in search of low production costs and neglect our environment we have to promote milk factory farms in our countryside and exacerbate competition between countries.

At 17:04 Anoniem said...

Milk is a market that really needs to be handed over to the free market. Australian milk and Dutch milk (the fresh variety) are exceptional in quality. They taste the way milk should. The milk in all other European markets are of exceptional poor quality or are put through a Ultra High Temperature (UHT) process, making it taste awful in any but flavoured form. Having never tasted NZ milk, but assuming it's of the same quality as Australian milk (with no credible backing, however) I would say it's not just a matter of efficiency but quality. Other markets can produce good milk for cheap. Agricultural subsidies should not be handed out willy nilly like this to farmer that cannot compete on either quality and/or efficiency.

At 17:04 Anoniem said...

Go Ron Paul!

At 17:05 DV said...

If the main recipients of the subsidies are global companies rather than the rural family, then the rural family will have nothing to fear from their abolition. Right?


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