Sep 11th, 2009

ICMSA says others 'in denial' about dairy price collapse

The Deputy President of ICMSA and Chairman of the Dairy Committee, John O’Leary, has fired a broadside into those who he accuses of continuing to foster myths about the collapse in milk price and the likelihood of a steady recovery. He maintains that an unwillingness to face the facts is still holding back any chance of a solution to what ICMSA calls ‘a catastrophic collapse’ in the prices being paid to dairy farmers right throughout Europe.

Mr O’Leary didn’t hold back in his criticism and said that last week’s failure by the Farm Council to agree on measures to address the crisis in the dairy sector was being facilitated by a persistent refusal to accept that the collapse in price was all about the complete mis-match that existed between supply and demand ‘as is always the case in these matters’.

‘The idea that the kind of stirrings we see price-wise in New Zealand now represent a new dawn and that the crisis is passed are absolutely wrong and simply add insult to injury. Any kind of upward price movement is welcome but it’s nonsense to suggest that the underlying reasons for the price collapse have been addressed. Unfortunately, in our opinion, some of the people in question seem to not even understand the reasons, much less be prepared to address them. Instead, they content themselves with describing our position as “illogical” while their own policies drive our dairy sector off the cliff. Their policies – if you could even describe them as such – rest chiefly on two myths and these need to be exposed before there’s any chance of real and sustained recovery in the milk price paid to farmers.’

‘Dairy farmers will have been disappointed to read last week that “we had to face the reality of no quotas. Milk quotas only made sense when tariffs and supports were in place. Even if Europe cut quotas by 10% now, there is no guarantee it would have any impact, as Europe is 5% under quota and price is still on the floor. There is no point in Europe cutting back production to leave the world market open to the US and New Zealand.”

‘What’s being said here? Are we being told that quotas and tariffs are gone forever and there is to be a permanent reduction towards world prices which are around the €0.17 per litre mark? Is that being put forward as the new reality and one within which Europe’s dairy farmers will have to exist or exit? ICMSA rejects that picture of the future.

The myth here can be boiled down to this statement: EU production is under quota so issuing more quota is not the problem and freezing quota would not give a solution.

But EU production was higher in 2008 than it was in 2007. And production in 2009 will be half a per cent higher than it was in 2008. These production increases at European level are being recorded despite the fact that quota is actually being exceeded in some Member States and superlevy fines are being incurred. The expected reduction in output due to lower prices has not materialised and, in fact, there’s evidence that lower prices have led to increased production as farmers try to recoup the drop in price by that means. In Germany production is up by eight per cent and there’ll be a similar rate for Holland and Poland. The fall in French production is attributable to the enormous quota expansion that took place there last year and other factors specific to the operation of the French quota system. Look at Britain: production there continues to decline due to the complete lack of profitability and that lack of profitability arises from a surplus of available milk. The link between increased production and decline of price is as obvious in the case of milk as it would be for any other commodity. Pretending that’s not the case is just wilful self-delusion.

We will very soon come to the tipping-point where production falls drastically as dairy farmers simply go bankrupt or exit the sector without being replaced and that’s exactly what the Commission is waiting for.

The other great myth pretends that structural surplus of milk within the EU has no effect on price so production expansion facilitated by quota expansion can continue.

There’s a broad consensus that the EU’s own figures now show 109 per cent self sufficiency in dairy products up from 107 per cent two years ago, so we have a nine per cent surplus at a time when the opposition to export refunds is growing within the EU. If we take these two elements of increased production and actual reduced consumption than it no longer becomes a mystery why prices in the milk sector have fallen towards world prices. That’s what the Commission want and they want it even more as WTO talks resume.

Anybody – or any publication – who thinks that it’s possible to achieve an EU price of 10 to 20 cents per litre above world price while we have a nine per cent EU milk surplus of production over demand which is growing year-on-year is either very, very naïve or very misinformed. But it might at least explain why no serious action is being taken to save the dairy sector.

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