EN Official Journal of the European Union C 242/24

Opinion of the European Economic and Social Committee on the ‘Situation after the expiry of the milk-quota system in 2015’

(own-initiative opinion)

(2015/C 242/04)

Rapporteur: Padraig WALSHE

On 10 July 2014, 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

Situation after the expiry of the milk-quota system in 2015 (own-initiative opinion).

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 8 January 2015.

At its 504th plenary session on 21 and 22 January 2015 (meeting of 21 January), the European Economic and Social Committee adopted the following opinion by 219 votes to 1 with 14 abstentions:

1. Conclusions and recommendations

1.1. The EESC considers the abolition of the milk quota system from 31 March 2015, as decided in 2008, to be a fundamental change. Since the introduction of this comprehensive method of guiding production on 1 April 1984, it has over time become increasingly clear that dairy prices and farmers’ incomes have not been sufficiently effectively supported and stabilised and that dairy production in the EU has decreased, while rising significantly worldwide.

1.2. The EESC argues that EU dairy policy after expiry of the milk quota system, i.e. post-2015, must not only allow for growth and expansion but should also be obligated to avoid abandonment of dairying and to provide support for smaller farmers especially in disadvantaged areas and mountainous regions. It must allow EU farmers and ultimately the EU economy to benefit from growing global dairy markets, while recognising and fostering the equally valuable economic and social contribution made by small-scale disadvantaged dairy farms in many European regions.

1.3. The EESC believes that this must be done by fully utilising Pillar II provisions of the CAP 2014-2020 and the Milk Package, to ensure dairy farm families can be sustained throughout the territory. Participation in producer organisations which can help farmers improve their standing in the supply chain must be encouraged, and knowledge transfer measures targeted to help farmers improve technical and economic efficiencies.

1.4. However, the EESC considers that the Pillar II budgets and measures, or the measures in the Milk Package which now forms part of CAP 2014-2020, will certainly not suffice to protect vulnerable dairy farmers whether within or outside disadvantaged or mountainous areas. Additional measures may be required to ensure those farmers receive viable incomes and a fair share of market returns. They should also benefit from advisory services on production efficiency, diversification and re-orientation to help them make the best decisions for their future and that of their successors, bearing in mind the limitations of disadvantaged enterprises in terms of income generation capacity.

1.5. The EESC considers it equally critical to ensure that commercial and competitive dairy farmers in all areas, including those more suited to sustainable and competitive dairy production for export are allowed to grow their enterprises to respond to fast rising global demand, and in so doing generate increased employment and revenue for the economy in rural areas of the EU. However, the main challenge for these farmers will be the massive income variations related to the volatility of both dairy commodity prices (and hence producer milk prices) and input costs. It is essential that the EU facilitate the development by Member States and industry of taxation solutions and simple hedging instruments, such as fixed-margin contracts, easily accessible by farmers.

1.6. The EESC urges that the inadequate level of the ‘safety net’ provisions built into the new CAP be revised, and kept under ongoing review, to ensure they bear a closer relation to actual production costs.

1.6.1. Promotion of dairy products both on the domestic EU markets and for EU exports must also be further fostered. The EU must support the identification and development of new markets, and ensure that international trade deals are balanced and give EU exporters fair access.

1.6.2. On the domestic market, the EU must support the promotion of the health benefits from dairy consumption, which have been reaffirmed by recent scientific research.

1.6.3. The EU must also strengthen its regulation of the retail market to regulate profiteering by retailers and improve the ability of farmers to recoup their costs.

1.7. Finally, the crucial role played by cooperatives in the dairy sector must be recognised and fostered. Cooperatives play a leading role in the global dairy industry, with four cooperatives in the top 10 world dairy companies according to Rabobank’s July 2014 survey (1). Cooperatives can play a much stronger part in supporting dairy farmers through the vagaries of volatility than private milk purchasers/processors, as their milk suppliers are by and large also their shareholders. Also, they offer much more sustainable long term commitments to purchasing milk from farmer members at viable milk prices.

2. Background — learning from past experience

2.1. The EU average milk price in September 2014 was 37,47 c/kg (Source: LTO milk review) (2), which is down 8,2 % on the February 2014 average price reported by the same source.

2.2. Until late spring, the strong global demand had supported firm prices. However, a correction in prices has started as production growth across the major exporters (+4,3 % p.a. for the January to September period 2014) is outpacing healthy demand growth (+ 2-2,5 % p.a.), mostly from emerging markets. Most recently, the temporary exit of China from the market, having overbought in previous months, and the Russian ban on EU dairy exports — Russia representing 33 % of EU dairy exports — have further impacted on commodity, and therefore producer prices, in the second half of 2014.

2.2.1. With fast falling milk prices in late 2014, EU dairy farmers are understandably worried about the likely impact on their livelihood of the next number of months, as the EU comes out of the quota regime, and production from other global regions continues to rise — for the short term at least. They also legitimately question the readiness and ability of the EU to help them manage inevitable times of low milk prices/incomes caused by future crises.

2.3. The medium and long term prospects for milk and dairy commodities remain strongly favourable on both the world and domestic markets. World demand remains dynamic, especially in the emerging economies, and is well founded in solid demographic trends. Traditional, high quality artisan products, many of which are manufactured in disadvantaged areas from milk produced on vulnerable farms and are highly valued by consumers, are seeing demand increasing even in mature European domestic markets. Innovative dairy products like sports, medical and infant nutrition based on whey and other dairy components are fast rising high value product categories both on domestic and international markets.

2.4. Production increases after the lifting of quotas can be expected especially in those Member States currently restricted by the quotas, such as Ireland, Germany, the Netherlands, Denmark, Austria and Poland, as well as France.

2.5. However, there are still doubts about the capacity of the EU regulatory framework to deal with episodes of extreme market volatility or with a crisis situation, especially with a view to helping farmers manage their way through volatile margins and incomes, and ensuring the balanced development of milk production across the European Union.

2.6. The Russian ban and its knock-on effects on all EU dairy commodity markets was the first test of the EU’s new crisis management regime, and with limited effects on markets from the reopening of the aid for private storage of cheese (before its abrupt closure), as well as the aid for private storage of butter and skimmed milk powder (SMP), plus the extended intervention buying in period and increased spending on promotion, it is clear that the doubts are well founded. Additional measures must be developed to deal with market crises, but most of all the EU must be prepared to put them into action rapidly and decisively.

2.6.1. The EU’s experience of responding to a major collapse in dairy demand and prices linked to the financial crash in 2008/09 provided an opportunity to learn. At the time, slow action by the EU Commission meant that, in 2009, it took 6 months’ worth of butter intervention purchases, and 8 months’ worth of SMP purchases, before market prices started rising above full intervention buy-in equivalent. Intake of butter for private storage went on most of the year (March to December) and continued into 2010, closing only in August 2010. In 2009, a total of EUR 37 0 0 00 000 was spent on all intervention measures to support markets, of which EUR 18 1 0 00 000 on export refunds. In 2010, a total of EUR 52 9 0 00 000 was spent on all intervention measures to support markets, of which EUR 18 6 0 00 000 in export refunds. In 2010, the EU Commission made EUR 3 1 0 00 000 from selling out SMP and butter intervention stock, and a further EUR 7 3 0 00 000 from SMP sales in 2011. Significant quantities of the product in stock was also used in the framework of the Deprived Persons’ Scheme, which would otherwise have required financial contribution from the EU budget (3).

2.6.2. Also in 2009/10, the European Parliament voted for EUR 30 0 0 00 000 to be paid direct to EU dairy farmers. This was worth just under EUR 600/farmer (based on how it was distributed in Ireland), and was paid in early 2010 with much delay, at a time when prices were already starting to recover. It is unclear how much this measure cost to administer. We need to learn from this experience that such direct payments do little to turn markets around, and a small allocation per farmer ends up costing a huge amount.

2.6.3. At the time of the 2009 dairy crisis, production costs were significantly lower than they are today. Irish production costs were 19 c/l in that year, and had risen to 25,6 c/l by 2014. The intervention ‘safety net’ represented by current levels of intervention buy-in price for SMP and butter is worth a producer price equivalent of around 20 c/l, and has therefore completely lost any relevance to farmers’ costs of production.

2.7. Ideas have been presented on how to equip the EU with the means to preserve viable dairy production in crisis situations, and to better manage harmful consequences for milk production in disadvantaged regions. It is important that the measures put forward are fit for purpose, and consistent with a European dairy market in which dairy prices, even in countries which do not export, are now substantially influenced by global trends. Any form of unilateral EU milk production management, even voluntary, will not change this fact.

3. Outlook for dairy markets post-2015

3.1. UN projections for global demographic and socioeconomic trends suggest that the world population will increase from 7 billion today to 8,4 billion by 2030 and to 9,6 billion by 2050 (4). Most if not all of this growth is projected to take place in emerging countries, and will be accompanied by an equivalent growth of the ‘middle classes’. In a 2012 paper, HSBC Global analysts (5) conclude that by 2050, the share of the population earning at least middle-income levels will be 2,6 billion — more than one third of today’s world population. This group will be not only more numerous, but more affluent and aspirational in their consumption habits. They are increasingly seeking to secure their protein intake from animal, rather than vegetable form.

3.2. Within this, dairy features particularly strongly as it is generally seen by governments and people alike as a healthy contribution to a population’s diet, desirable and often supported by official policy (e.g. school milk scheme in China).

3.3. The OECD and FAO, in their most recent Agricultural Outlook report (6), predict that global dairy demand will grow by around 2 % per annum to 2023, especially for SMP, whey and cheese, with butter performing slightly less well around 1 %. In its 7th Dairy Index, published in October 2014, international dairy packaging company Tetra Pak suggested the annual demand growth for the period would be as much as 3,6 %. They and other experts such as GIRA, the IFCN, CNIEL (7), etc. have stated that production growth will be chasing demand growth in the main for the long term, because the regions most suitable for environmentally sustainable and economically competitive production are relatively few — and they include some of the EU’s regions, especially the Northern/Western edge.

4. Volatility of margins — the main challenge for dairy farmers

4.1. While the outlook is extremely positive in the main, occasional imbalances between demand and supply, such as that we are currently living through, will cause temporary price and therefore farm income pressure. Similar volatile global trends for grain and other feed ingredients will add further to this. These events will more than likely be short lived in light of the underlying demographic trends, but they will be potentially very disruptive in the absence of new coping strategies.

4.2. Volatility of milk prices, and therefore incomes, is a relatively new experience for all European dairy farmers, and has followed the substantial removal of market supports and the reduction in import tariffs since 2005 to 2007, at the beginning of the previous CAP Reform.

4.3. While the replacement of market support with direct payments to farmers will play some part in helping farmers deal with income volatility, the level of payment redistribution and the extremes of variations in market-based incomes will require additional strategies.

5. Production management — an inefficient strategy

5.1. The Uruguay Round deal of GATT (now WTO), which operated from 1986 to 1994, was the first time agriculture was brought into international trade deals. It resulted in fundamental changes in the direction of EU policy. Import opportunities were increased through general lowering of tariffs and the provision of tariff free import quotas. The new GATT deal also saw the beginning of a shift in supports away from markets towards direct payments to farmers which later became increasingly decoupled from productive activity. The European milk quota regime, introduced only 2 years previously, was unaffected, and was rolled forward several times.

5.2. In 2003, with the Mid Term Review of the then CAP, the Member States of the EU agreed to put an end to the quota regime from 31 March 2015. This decision having been made, further ‘soft landing’ measures followed in 2008 to ease the transition out of quotas. This change in policy direction, which clearly moves away from production restrictions or management, comes at a time when global markets are growing rapidly. It therefore makes sense to allow European dairy farmers and the European dairy industry — and ultimately the EU economy — the opportunity to supply those markets, recouping some of the massive market share losses suffered in the 30 years of quota stagnation.

5.3. However, with the new price volatility which has followed the implementation of the previous CAP causing a major dairy income crisis in 2009, the merits of restricting production have been debated again, with a variety of production management based proposals discussed in various circles in Brussels in the last couple of years.

5.4. One such example is the ‘Dantin proposal’ adopted by the EP during the CAP 2014-2020 negotiations during the summer of 2013. This suggested that, in cases of market disturbances, farmers could be incentivised to reduce production voluntarily (a ‘buy out’), while those who increased production could be penalised. This proposal was subjected to an analysis by Dr Michael Keane and Dr Declan O’Connor, commissioned by the European Dairy Association (EDA) (8).

5.5. Future dairy policy options under the headings of ‘Market balance and competitiveness’ and ‘Sustainable milk production including its territorial dimension’ were also examined for the EU Commission by a panel of experts from Ernst and Young (9).

5.6. Both studies pointed out that production management/quotas were no longer effective in sustaining and stabilising milk prices and incomes. Both studies also pointed out that the proposed ‘buy out’, or other similar production management measures, would be difficult to implement across the entire EU, as the level of price which can cause an income crisis varies vastly from country to country; it would also be ineffectual because very slow to take effect; and expensive because of the level of compensation producers would need to encourage them to reduce production voluntarily. Dr Keane and Dr O’Connor further emphasise that, were it to be implemented, it would have a plethora of negative predictable and unintended consequences on the normal functioning of dairy markets, and it would make investment and planning at farm and processing levels nigh on impossible.

5.7. Most of all, however, the study from Dr Keane and Dr O’Connor strongly stresses the point that the proposed measure can only be in any way effective if operated in a closed economy, or if the policy is introduced by all major international suppliers together in an open economy. Introduced unilaterally as suggested, the main winners from this policy would be our international competitors, while EU milk producers would lose competitiveness, yet continue to take the consequences on their milk price of production decisions taken by our competitors in the US or in New Zealand.

5.8. While the EU was constrained by quotas, the world production of milk has increased exponentially — by 22 % in the last 10 years alone. Over the same period, our competitors, especially New Zealand and the US, who both have a strong export vocation, have increased their production very substantially while the EU’s was shrinking — and quota constraints did not protect EU dairy farmers from the major price shocks of 2007-2009.

5.9. It is also fair to assume that these countries’ export growth strategies, underpinned by some very well publicised investment plans in NZ and the US in particular, will continue post-2015. If the EU does not get into the game, we will find ourselves squeezed out of major global exporting opportunities, at a sizeable cost to EU dairy farmers, but also more generally in jobs and revenue for the EU rural economy.

6. Risk management tools and a better ‘safety net’

6.1. The Ernst and Young study also strongly recommended the strengthening of the safety net in cases of market crises. It stressed the importance of helping dairy farmers cope with the new income volatility caused by highly variable milk prices and input costs, and references risk management tools, from hedging, using futures markets, etc.

6.2. The EU must allow Member States to provide tax based solutions which help farmers put away funds in good years which are only brought back into the business and taxed in worse years, and can also be leveraged to allow for investment in between for those who are set to expand.

6.3. The EU must also encourage, promote and possibly also regulate the provision by industry of price and margin hedging options which allow farmers to avail themselves in the simplest possible way of options to fix their milk price/margin for a percentage of their milk and for a set period of time — without having to engage with all the complexities of futures markets dealings. Farmers in the US can already access this type of instruments through dairy co-ops, and a few milk purchasers (Glanbia in Ireland and Fonterra in New Zealand) have brought forward fixed price/margin schemes of value to farmers. Greater availability of such options throughout Europe will be vital.

6.3.1. The Glanbia Index Linked Fixed Milk Price scheme allows farmers to voluntarily lock in a percentage of their milk at a fixed price for 3 years. The price is corrected for a degree of input cost inflation each year, so that the farmers also lock in a good portion of their margin. There have been four such 3-year schemes since 2010, and all have been oversubscribed, because they offer farmers a strong degree of certainty as to the income they will receive for a portion of their milk. It is estimated that 22 % of all the milk purchased by Glanbia is purchased under this scheme, and most of the farmers who have participated in the first scheme have come back for more.

6.4. From an economic point of view, it is also crucial that the EU review the basis for its ‘safety net’ provisions. Unchanged since mid-2008, the dairy intervention prices offer a ‘support’ level equivalent to around 19 c/l net of processing costs — which no longer bears any relation to either the now much higher band within which global and EU dairy prices operate, nor the significantly increased primary production costs. The EU must revise upwards its safety net levels by increasing the intervention price for SMP and butter at least in line with production cost increases, and must monitor the relevance of its safety net relative to production costs on an ongoing basis.

6.5. The sector will need to look into whether an additional crisis instrument can be developed, particularly in the event of pronounced price volatility that threatens farmers’ livelihoods.

6.6. Cooperatives, from a farmers’ viewpoint, are the most successful legal structure to run a dairy business. Cooperatives prioritise returns to their shareholders (farmers), whether by way of dividend or milk prices. The welfare and best business interest of their members is at the root of their activity.

6.7. Cooperatives are in a unique position to act as conduits for the provision to farmers of volatility management options, such as fixed price contracts or opportunities to ‘lock in’ a milk price and/or margin for a set period of time.

6.8. Any future dairy policy must duly factor in the crucial importance of cooperatives, and must not cause any difficulties for what is the ideal structure from a farmer point of view.

6.9. The inability of farmers to recoup costs from the retail chain must also be tackled. Consumers see little benefit from extreme dairy commodity price reductions, but retailers always seek to secure the fullest benefit by putting the squeeze on suppliers when global dairy prices are falling — as they are at the moment. Lower wholesale prices obtained by retailer pressure — some of it at least morally questionable, if not legally — equate to increased retailer margins and profiteering at the cost of the rest of the chain and consumers. Farmers are at the very end of that chain, and have no way of protecting their margin to sustain their family income. Prompter market intervention by the EU Commission would help turn around market crises faster, and would minimise the retailer pressure highlighted in this point.

7. Sustainable milk production in disadvantaged areas

7.1. Dairy farming makes a vital socioeconomic and environmental contribution in all regions of the EU. Recognising and supporting this contribution, which in many regions relies on small, vulnerable farms, has long been part of the vocation of the CAP. Pillar II of the CAP includes many measures that are relevant in this context, as do the new provisions, now included in CAP/CMO, which were first introduced as the ‘Milk Package’.

7.1.1. However, the end of quotas could conceivably accelerate the shift in milk production within the EU towards the North/West areas where production can be carried out most efficiently. This would potentially see production reduced or abandoned in the higher cost (and also poorer) areas of Europe, deepening the economic gap between those regions.

7.1.2. The vast majority of farms in EU Member States have very small numbers of cows, with 75 % of farms with less than nine cows (10). While many are undoubtedly producing milk to supply the farm families’ own consumption, the economic vulnerability of those farms is obvious, all the more so as many are located in mountainous or otherwise disadvantaged areas.

7.1.3. The EU Commission must initiate a coherent rural and milk development project for mountainous areas, disadvantaged milk production areas and for Member States where milk production relies on very small herds.

7.1.4. In addition to the knowledge transfer package, or perhaps as part of it, it would be crucial that these farms are given access to advisory and education services to help them make sound business decisions for their own future and that of their successor(s). They could be advised of how to go about diversifying, becoming more efficient, growing their size if it is economically feasible, and also — where relevant — given advice on what alternative occupations for the existing farmer or the successor to consider (career re-orientation).

7.2. In regions at risk of land abandonment, under-grazing or other negative environmental impact, Pillar II environmental payments could be slanted specifically towards dairy farmers based on certain conditions.

7.3. Vulnerable dairy farmers in all regions must be encouraged to engage with producer organisations and inter-branch organisations to promote quality productions and increase their weight and influence in the supply chain.

7.4. Young farmer payments could also be used to encourage generational renewal where the flight from the land is a concern due its limited income generation capacity. For such farmers, investment could be encouraged through favourable loans or other such schemes.

Brussels, 21 January 2015. The President of the European Economic and Social Committee Henri MALOSSE

(1) https://www.rabobank.com/en/press/search/2014/dairy_top20.html

(2) http://www.milkprices.nl/

(3) EU Commission Reports on Intervention Measures in the Dairy Sector 2008, 2009, 2010, 2011 (EU MMO).

(4) World Population Prospects: the 2012 Revision, UN, June 2013.

(5) Consumer in 2050 — The Rise of the Emerging Market Middle Class — HSBC Global, October 2012.

(6) http://www.oecd.org/fr/sites/perspectivesagricolesdelocdeetdelafao/produits-laitiers.htm

(7) GIRA Food Consultancy, the International Farm Comparison Network and the French Centre national interprofessionnel de l’industrie laitière.

(8) Analysis of the Crisis Dairy Supply Management Proposal in the Report of the Committee on Agriculture and Rural Development (COMAGRI) on CAP Reform 2012/2013 (final version) — September 2013 by Michael Keane PhD, Cork, Ireland and Declan O’Connor PhD, Cork Institute of Technology, Ireland.

(9) AGRI-2012-C4-04 — Analysis on future developments in the milk sector Prepared for the European Commission — DG Agriculture and Rural Development Final report 19 September 2013, Ernst and Young.

(10) Source: Eurostat, 1 January 2011.