# C_2010347EN.01003401.xml

| 18.12.2010 | EN | Official Journal of the European Union | C 347/34 |
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18.12.2010

EN

Official Journal of the European Union

C 347/34

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Opinion of the European Economic and Social Committee on ‘Future strategy for the EU dairy industry for the period 2010-2015 and beyond’

(own-initiative opinion)

(2010/C 347/05)

Rapporteur: Frank ALLEN

Frank ALLEN

On 16 July 2009 the European Economic and Social Committee, acting under Rule 29(2) of its Rules of Procedure, decided to draw up an own-initiative opinion on the

Future strategy for the EU dairy industry for the period 2010-2015 and beyond.

Future strategy for the EU dairy industry for the period 2010-2015 and beyond.

The Section for Agriculture, Rural Development and the Environment, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 28 January 2010.

At its 460th plenary session, held on 17 and 18 February 2010 (meeting of 17 February), the European Economic and Social Committee adopted the following opinion by 152 votes to six with six abstentions.

1.   Conclusions and recommendations

1.1   The EU dairy industry is of long term strategic importance in its role of supplying high quality safe dairy products to EU citizens. The EU must never become dependant on non-EU sources of milk supply. The EU must continue to maintain the highest standards of animal welfare, hygiene, traceability, animal medicine, environmental protection, and sustainable production.

1.2   Farmers will continue to produce good quality milk provided it is profitable to do so (but not on a long term basis if it is unprofitable). EU milk production will decline and vanish altogether from some areas unless we stabilise prices and such prices return a profit. The LFAs need special attention. Milk farmers must also receive a financial return for delivering multifunctional agriculture, that being ‘public service non-commodity goods’ such as maintaining and developing the rural landscape, biodiversity, natural habitats and rural art and culture. In the new Member States, the possibility of coupled direct payments for milk producers should be considered.

1.3   Major resources need to be devoted to innovation, research and development and livestock breeding to ensure the Dairy industry becomes more efficient at farm level and at processing level. This must include better utilisation of grass and feed inputs at farm level and new products at processing level. There is also a need for new and better technology at farm and processing level. Major investment to develop the sector is vital. We must become world leaders in this area.

1.4   It is essential to prevent a recurrence of the price volatility that occurred in 2007/08. This must be achieved by the use of adequate support measures plus proper monitoring of the market to ensure a reasonable balance between supply and demand.

1.5   The EU has the option to react to the market situation by using the quota system and other market organisation instruments (at least until 2015).

1.6   In line with the Commission Communication of July 2009 a road map must be developed and implemented to deal with the issue of why consumer prices have remained 14 % higher than before the dairy price surge occurred. We must have transparency throughout the food chain.

1.7   To ensure the viability of the EU dairy industry after 2015, various agricultural policy measures will still be necessary, combined with a safety-net system in order to support and stabilise prices and prevent them from falling below a certain level, limit excessive price fluctuations, and also provide sufficient reserve stocks to cover unforeseen shortages or natural disasters. A system with supply and demand-related market measures is essential to ensure a sustainable and environmentally-friendly dairy industry in the period after 2015. Food in general, and milk in particular, are too important for the well-being of citizens to be subject to the vagaries of a free, unregulated market system.

2.   Introduction

2.1   Dairy farming is one of the main agricultural activities in the EU. In 2008, one million farmers produced 150 million tons of milk with a value of over EUR 40 billion, which is 14 % of the value of EU agricultural production. Over 60 % of beef produced in the EU comes from dairy herds. According to figures from the International Dairy Federation (IDF), the EU is the world’s biggest milk producer at 27 % of world production, followed by India at 20 % and the USA at 16 %.

2.2   The dairy sector, from collection to processing, employs around 400 000 people in the EU.

2.3   Dairying plays a very important part in maintaining the economic and social structure in the Less Favoured Areas (LFA). Indeed 60 % of EU25 dairy farms are in LFAs. Dairying is one of the most suitable enterprises to keep farming families in the LFAs and along with cattle and sheep farming plays a major role in maintaining and developing the landscape and the environment.

3.   Background

3.1   Global dairy markets have seen major price swings over the last two years. In 2007 and early 2008 we saw a record increase in global prices of dairy commodities, which gave rise to substantial price increases for milk and milk products. This was followed in the 2nd half of 2008 by an even more dramatic collapse in such prices.

3.2   Most milk products are consumed in the region where they are produced. Around 8 % of global dairy production is traded on the world market and consequently a small change in global production can have a significant influence on the world market. For example, a 2 % gap between global production and global consumption is the equivalent of about 25 % of the world dairy market trade.

3.3   While the EU is the largest exporter of cheese, nevertheless commodity products i.e. powders and butter constitute the majority of dairy export sales out of the EU. Indeed the world dairy market can be described as mainly a dairy commodity market.

3.4   Since the EU is 109 % self sufficient in dairy products, the 9 % surplus is available for export onto the world market. The main EU exports are Butter/butteroil, Skimmed milk powder, Cheeses, Whole milk powder and Condensed milk.

3.5   Since 2000, global dairy consumption had been growing at 2,5 % per annum on average. This has now dropped to 1 % per annum.

3.6   From 2004 to 2006, global dairy consumption exceeded production and consequently all reserves were used up. This was the principal reason for the sudden rise in world dairy commodity prices. Since 2008 the relationship has changed with the result that production now exceeds demand.

3.7   The sudden rise in milk prices ultimately caused a drop in market share as consumers switched to cheaper substitutes and, especially, as dairy ingredients were replaced with cheaper alternatives. The global recession and the drop in oil prices added to a further reduction in sales of dairy products. Oil producing countries are major importers of Dairy products and a drop in oil prices means that they reduce their imports of dairy products and this may lead to a fall in world dairy commodity prices.

3.8   While price movements of higher value dairy products are more difficult to track than in the case of commodities, it is obvious that sales of value-added dairy products have declined as customers have switched to cheaper products.

3.9   The Commission, in its July 2009 Communication to the Council, said that the price surge in the 2nd half of 2007 generated a rapid increase in milk prices and a strong increase in consumer prices. In contrast, the falling prices in the 2nd half of 2008/2009 which saw the price of butter fall by 39 %, SMP (skimmed milk powder) by 49 %, cheese by 18 % and milk by 31 % only caused (an EU average) consumer price drop of some 2 %. Indeed consumer prices have remained on average 14 % higher than before the price surge occurred. However, those countries that have high sales of dairy products to low-price retailers have seen a ‘price war’ in 2009 as dairy products are used to undercut other retailers (1).

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3.10   Rationalisation and increasing concentration within the EU retail sector has given the retail sector a bargaining power that is unmatched by the remainder of the food supply chain. Farmers have become ‘price-takers’ rather than ‘price-makers’ especially when milk supply exceeds demand. On balance, it would appear that the competition authorities and competition rules have been of greater benefit to the multiple-retail sector rather than to the one million dairy farmers. Farmers need a stronger negotiating position as regards farmgate milk price so that balance and equilibrium are restored to the food chain.

3.11   In Agenda 2000, followed on by the mid-term review and the Health Check designed to prepare EU Agriculture for a possible future WTO agreement, the intervention price was lowered and, together with quantitative restrictions on intervention, this weakened the price support mechanism, and so farmgate milk prices fell to a lower level than was previously the case before support mechanisms such as intervention become operational.

4.   Market outlook

4.1   European Union

4.1.1   The EU dairy market is one where production exceeds consumption by 9 %.

4.1.2   Dairy products are also imported into the EU from third countries at reduced tariffs. These imports are small relative to total EU consumption. In 2007 and 2008 the EU imported in the region of 330 000 and 300 000 tonnes of dairy products respectively. Dairy products imported into the EU include cheese (1,1 % of EU production), butter (4,3 % of EU production) and skimmed milk powder (2,4 % of EU production). Dairy product imports amount to about 2 % to 3 % milk equivalent of EU milk production.

4.1.3   Up to 40 % of EU milk is made into cheese and about 30 % is used for fresh dairy products. These two product types have been the main drivers of growth in consumption within the EU over the last decade. The remaining 30 % is made into butter, powders and casein.

4.1.4   Intervention stocks of butter and SMP were growing as a result of weaker consumption within the EU, the downturn in world market prices and the global recession. The EU quota was increased by 2 % in 2008 and 1 % in 2009, which, together with future quota increases already agreed could ultimately lead to increased milk production in the EU.

4.1.5   The use of export refunds has prevented even larger stocks going into intervention while intervention was open.

4.1.6   The actions undertaken by the Commission have prevented EU milk prices falling to world market prices of 14-15 eurocent per litre. EU prices have been held above world prices. Prices vary in the different member states from a low of 16 cents in Latvia to 25/27 eurocent per litre in many other member states, which is still below the cost of production. What other section of society works for zero income or even under the legal minimum wage?

4.1.7   Milk production is currently 4,2 % below quota and it is expected that production will be under quota for 2009/2010.

4.1.8   The recovery in EU prices (which has already started) is likely to be very gradual. The existence of substantial intervention stocks overhanging the market could delay recovery, depending on when the Commission decides to release intervention stocks into the market.

4.1.9   Cow slaughtering has increased according to EU data. It is likely that increased numbers of dairy cows are being slaughtered, which will depress dairy production in the immediate future. However, the gradual increase in milk prices will lead to increased production in a small number of countries in the short term.

4.1.10   As milk prices recover in the medium term, milk production will increase over the period to 2015 and is likely to keep pace with quota increases agreed in the Health Check.

4.1.11   The trend of declining milk production in Southern Europe and some northern member states is likely to continue.

4.1.12   EU cheese and fresh dairy product consumption is likely to remain weak due to lower income growth prospects.

4.1.13   The Commission predicts a decline in the butter surplus over the period to 2015 due to reduced butter production and greater cheese production. This would facilitate the requested reduction in export refunds, which are the subject of ongoing WTO negotiations.

4.1.14   Some market experts believe that a butter surplus could remain due to greater production of low fat dairy products and lack of growth in cheese consumption.

4.1.15   The market outlook within the EU up to 2015 remains uncertain but is unlikely to demonstrate the growth as seen over the last decade.

4.1.16   A particular problem for the EU milk market in the last few years has been high price volatility. This leads to major problems for farms and to uncertainty for consumers as a result of frequent price changes. There should therefore be an attempt to reduce such high volatility in the markets through suitable measures.

4.2   USA

4.2.1   In the USA, in the five years up to 2008, dairy production has been growing at 2,5 % per annum and consumption has been growing at about 1 % per annum. The USA has had an annual exportable surplus of up to 5 million tons. The weakness of the US dollar has helped exports.

4.2.2   The short-term outlook for the US dairy industry is not good. There was a reduction of 1 % in production in 2009 and there is the expectation of a further reduction of 1 % in 2010. In the medium term, with a recovery in milk prices and affordable feed costs, some growth in production is likely. Any such production increase is likely to go into cheese and be consumed internally.

4.2.3   The USDA Economic Research service is predicting improved US milk prices for 2010 as a result of increased dairy cow slaughtering and increased dairy exports.

4.3   New Zealand

4.3.1   New Zealand is the largest dairy exporter in the world. Production was depressed by about 3 % in 2007/2008 thus reducing exports, but production increased by 8 % in 2008/2009. Commentators expect an average growth of 3 % per annum but it should fall again by 2015. Since New Zealand production is grass-based, weather conditions can have a major impact on production levels.

4.3.2   Low prices have not caused a drop in production in New Zealand to date. In the future, because of increased use of concentrate feed and fertilizer, it is likely that a recurrence of low prices could lead to reduced growth in milk production.

4.3.3   Environmental issues are becoming more important in New Zealand and this could also hinder long term growth.

4.3.4   It is likely that New Zealand will continue its dairy export growth.

4.4   South America

4.4.1   South America is growing in importance as a dairy exporter and is likely to compete with the EU in African markets rather than with New Zealand for Asian markets. In particular Brazil’s exportable surplus is likely to continue up to 2015.

4.5   China

4.5.1   The expansion of Chinese dairy production over the last decade has been extremely rapid but the level of growth will probably slow down over the next decade. Chinese production has not matched consumption but dairy imports into China are not as large as originally anticipated.

4.5.2   In the medium term it is expected that Chinese imports of cheese and SMP will increase while Chinese exports of WMP (whole milk powder) will also increase.

4.5.3   Two new cases of melamine tainted milk were found in December 2009 and this could do serious damage to Chinese dairy exports.

4.6   Russia

4.6.1   Milk production in Russia is likely to recover over the next five years as low yielding cows are being replaced by higher yielding imported cows. For food security reasons Russia would like to go from 70 % to 95 % in self sufficiency in dairy products. A milk production target of 37 million tons has been set for 2012. Consequently it is possible that Russian butter imports will decline in the long term while cheese imports are likely to grow.

4.7   The overall world market outlook is one of slow growth and depending on the extent of the global economic recovery this will determine the growth in consumption, especially in Third World countries.

4.8   Most population growth in the next 30 years will take place in Third World countries and this should lead to growing demand for dairy products. However, unless there is adequate economic growth, such countries will be unable to purchase increased amounts of dairy products. Dairy products are not a traditional staple diet in Asia and in some Third World countries.

4.9   Issues such as the nutrition and health claims of dairy products will be key ways of maintaining and developing the market share for dairy products. Research and innovation in these areas is essential.

4.10   It is important that the label indicates that the product is an authentic dairy product and adequately explains the nutritional and health qualities of the product. In future, observance of environmental standards will be of greater importance for dairy production.

5.   High Level Group

5.1   Commissioner Fischer Boel has established a High-Level Group (HLG) on milk and this group will issue its final report by the end of June 2010.

5.2   The Group will discuss the following issues:

| — | Contractual relations between milk producers and dairies with the aim to balance supply and demand on the dairy market more effectively. |
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Contractual relations between milk producers and dairies with the aim to balance supply and demand on the dairy market more effectively.

| — | What can be done to strengthen the bargaining power of milk producers? |
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What can be done to strengthen the bargaining power of milk producers?

| — | Transparency and information to consumers, quality, health and labelling issues. |
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Transparency and information to consumers, quality, health and labelling issues.

| — | Innovation and research, with a view to making the sector more competitive. |
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Innovation and research, with a view to making the sector more competitive.

| — | A possible futures’ market in dairy products. |
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A possible futures’ market in dairy products.

6.   Franco-German initiative

6.1   The French Agriculture Minister Mr Le Maire outlined three key objectives for European agriculture:

| — | to guarantee stable and decent revenues for farmers with strong regulatory instruments; |
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to guarantee stable and decent revenues for farmers with strong regulatory instruments;

| — | to make prices throughout the whole food supply chain more transparent, with the possible appointment of a European watchdog; and |
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to make prices throughout the whole food supply chain more transparent, with the possible appointment of a European watchdog; and

| — | to put innovation and investment in the agri-food sector at the heart of the Lisbon Agenda. |
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to put innovation and investment in the agri-food sector at the heart of the Lisbon Agenda.

6.2   The Franco-German initiative calls for more EU action to protect dairy farmers. It suggests temporarily increasing the minimum EU intervention price at which the EU would commit to buying surpluses from farmers.

7.   Policy up to 2015

7.1   The Commission is firmly opposed to any changes to the increase in quotas as decided in the Health Check. At present these increases are having little impact because the EU is 4,5 % under quota and is also likely to be under its quota next year. However, as the milk price improves in the medium term, production will rise and increase the gap between milk production and consumption, thus tending to drive down farmgate prices, depending on the world market situation.

7.2   World dairy commodity prices are usually under the EU price. This is a consequence of different standards (and hence different costs of production) within and outside the EU. The EU model of dairy farming will never be able to compete with New Zealand and some other countries because of a totally different structure of input costs and size of dairy units.

7.3   Cheese exports out of the EU are generally competitive but an increase in consumption outside the EU is dependent on sustained global economic growth over a period of time.

7.4   Without flanking measures, the idea of increasing quotas irrespective of the level of demand to achieve a so-called ‘soft landing’ is contradictory if we wish to develop the European model of farming and ensure the continuation of milk production in LFAs. We need a vibrant rural environment and, in some areas, milk production is a key driver for the social, economic and cultural future of such areas. The other possibility is the abandonment of land with harmful social and environment consequences.

7.5   Increasing milk quotas irrespective of market conditions and ultimately fully deregulating the milk sector would be logical if the EU wishes to develop the New Zealand and US model of farming. The emergence of very large feedlot systems in the US with over 2 000 cows is seen as the way forward there. At the current rate of change, just 500 farms will soon produce 1/3 of US milk. Such a policy would pose significant dangers to the cultural heritage, landscape and development of the EU's rural areas, harming the environment and biodiversity of the EU, and, moreover, would cause the abandonment of uplands and wetlands. We would therefore see the rejection of the EU model of multifunctional agriculture.

7.6   The concept of Multifunctional Agriculture means that, in addition to producing food, agriculture has other functions such as development of rural landscapes, growth of natural and cultural heritage, support of the rural economy and enhancement of food security. The OECD perspective of Multifunctionality is of an agriculture that jointly produces a range of commodity outputs (food and fibre) and also a range of non-commodity outputs, including environmental and social products and services.

7.7   Large scale feedlot dairy farming which does not respect certain legislation such as that concerning management of nitrogen in the soil, for example, has major implications for the environment.

7.8   At present 50 % of EU milk production is concentrated in 11 % of EU territory. Irrespective of the policy decisions made, in the future the average EU herd size will continue to increase. However, it can hardly be desirable to adopt policy options that will encourage very large and intensive dairy farming in areas that have a particular input cost advantage. Such a policy could present significant environmental hazards.

7.9   Dairy farmers are participants in the EU model of multifunctional agriculture. Even if a multifunctional farm can overcome temporary difficulties, such a model is not sustainable when the volatility of farmgate prices becomes a recurring event for dairy farmers. Farmgate price stability, where dairy farmers get a reasonable income, is good for farmers and for consumers.

8.   After 2015

8.1   If dairy faming is to be maintained and developed as a viable industry throughout the EU, dairy farmers must get a fair income allowing them to live a normal lifestyle and also invest in their future as dairy farmers. A fair income means an income comparable to the average non-farm income.

8.2   Art. 33 of the EC treaty sets out the objectives of the CAP which include the provision (a) to ensure a fair standard of living for the agricultural community, (b) to stabilise markets, (c) to assure the availability of supplies and (d) to ensure that supplies reach consumers at reasonable prices.

8.3   It is essential that much greater resources are devoted to livestock breeding and preventing livestock diseases, as well as research and innovation at farm level to enable the development of a more efficient industry. A more competitive dairy industry can be achieved by a better utilisation of grass and other feed inputs. More research and innovation is needed at processing level to develop new products to increase market share. Education and health establishments as well as civil society organisations should promote consumption of dairy products because milk is both a foodstuff and a remedy and at the same time a refreshing drink. We must see radical change in these areas. The EU must maintain the security and self-sufficiency of the milk supply within EU. It would be a major blunder to become dependent on dairy imports as has happened in EU beef production as a result of low farmgate prices.

8.4   The Court of Auditors’ special report 14/2009 states in Recommendation 1 that ‘the Commission must continue to supervise the development of the market in milk and milk products by implementing the measures required to make sure deregulation of the sector does not lead to a recurrence of overproduction. Failing this, the Commission's objective of keeping to a minimum level of regulation, of the safety net type, might rapidly prove impossible to fulfil’. The EESC is convinced that ‘safety net’ intervention and storage also require various supply and demand-related measures for market stabilisation.

8.5   The EESC believes it is crucial to establish conditions that will guarantee the future of a viable EU wide dairy industry.

8.6   A system with supply and demand-related market measures as well as appropriate direct support systems is essential to ensure an EU dairy industry which will fulfil the social, economic and environmental needs of society and becomes a truly multifunctional agricultural system which should bring a new dynamism to rural EU. Such a development would bring social, cultural and economic benefits to the overall development of the EU.

9.   Specific comments

9.1   The use of a ‘futures market’ in the milk sector needs to be looked at very carefully. However, we need to take careful note of the global financial turmoil stemming from the inappropriate use of financial products. The Committee has previously said that: ‘Foodstuffs therefore must be viewed in a completely different light from, say, industrial goods, where cost factors largely determine where those goods are produced’.

9.2   The majority of dairy farmers are organised in cooperatives. This means that to some extent they can influence the marketing of their products. Where dairy farmers are members of a cooperative, and sell their milk to that co-operative, then they have better safeguards than where a dairy farmer sells to a privately-owned dairy. Although voluntary contracts between the individual farmer and the buyer exist already, in the case of a private dairy, the farmer has little scope for negotiating such a contract. These contracts clarify the delivery conditions but cannot influence general EU-wide market trends. Experience shows that the market position of farmers and the cooperatives representing them in the food chain must be improved. The possibilities for cooperation from the point of view of competition law should therefore be examined.

9.3   In the new Member States, however, many farmers sell their milk directly to private dairies. Since the dairy industry is increasingly concentrated, there is little or no choice and farmgate prices go down. In order to maintain competition for raw milk, farmers must have the possibility of organising themselves in cooperatives that can then sell the milk on to the industry.

9.4   Most milk producers in the newest Member States (Bulgaria and Romania) receive very little support from direct payments, which are totally decoupled on a per hectare basis. Faced with this low level of support, together with low productivity, a lack of income from the market and the difficult access to credit, farmers cannot invest in order to comply with EU hygiene standards.

9.5   All dairy imports into the EU must conform to EU standards especially in the areas of traceability, animal welfare, hygiene, use of animal medicine, environmental protection, food safety and sustainable production methods. Carbon content is an emerging issue.

9.6   We must ensure that existing bodies such as advisory and management committees have sufficient resources to analyse the supply demand situation of the milk market. The necessary instruments must be available to ensure that farmers receive an adequate milk price which covers their costs and returns a profit. The EU must maintain its capability to produce adequate milk supplies. We cannot allow ourselves to become dependent on supplies of milk from outside of EU. If we pursue the wrong policies this could happen in the distant future.

9.7   The maintenance and further development of full-time and part-time employment in the dairy sector must be a priority, especially in rural areas.

9.8   We cannot ignore issues of hunger and lack of adequate food resources in the Third World. Issues of global climate change, global food price and global food supply are closely related. We have a responsibility to help the underdeveloped world.

Brussels, 17 February 2010.

The President of the European Economic and Social Committee

Mario SEPI

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(1)  OJ C 128, 18.5.2010, p. 111 and OJ C 255, 14.10.2005, p. 44.

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APPENDIX

The following amendment was rejected but obtained at least one-quarter of the votes cast:

Point 7.7

Delete point:

‘Large scale feedlot dairy farming which does not respect certain legislation such as that concerning management of nitrogen in the soil, for example, has major implications for the environment.’

| Result of the voting: | For: 56 | Against: 76 | Abstentions: 25 |
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Result of the voting:

Result of the voting:

For: 56

Against: 76

Abstentions: 25

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