Monitoring Agency Flexible Management of EU Milk Supply Expertise commissioned by the European Milk Board (EMB) Dr. Andrea Fink-Keßler Romuald Schaber Conference: The EU dairy sector: developing beyond 2015 Brussels, 24 September 2013
Content 1. Our starting point 2. Milk crisis: The future has already started 3. Why we need new market instruments 4. Proposal: Monitoring Agency 2
Our starting point 3
Key stakeholders 4
Forecasts and reality Forecasts are fine but reality changes quickly 500 Forecast export price cheddar in USD/100 kg 450 400 350 300 250 200 OECD outlook 2006 OECD outlook 2007 OECD outlook 2008 Reality 150 100 50 0 2006 2007 2008 2009 2010 2011 2012 Source: OECD-FAO Agricultural Outlook (several years) 5
Milk crisis: The future has already started 6
Dec-07 Mar-08 Jun-08 Sep-09 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Cent/Kg Globalisation and new challenges De-regulation of EU milk market(s) 45 Development of farm gate milk price in the EU (real fat, ct/kg) Surplus and falling farm gate prices Strong impact of volatile global milk prices on EU milk prices 40 35 30 25 20 15 10 5 Milk crisis 2008/09 EU-27 EU-15 EU-10 Crisis 2008/09 after price peak 2007 0 Source: Circa.eu Basic Dairy Statistic 7
Impact of the crisis on dairy farms in EU-27 Output, cost, margins in milk specialised farms EU-27 Source: EU-KOM (2013) Dairy farms report, FADN data 8
...with large differences between EU member states Milk net margin (in euro/t) in milk specialised farms Source: EU COM (2013) Dairy farms report, FADN data 9
Loss of income Farm net income per annual work unit in milk specialised farms (in euro) Source: EU COM (2013) Dairy farms report, FADN-data 10
Increase of liabilities Liabilities in Euro/ha in milk specialised farms in Germany (classified by European size units) 1.810 10-<40 ESU 40->100 ESU > 100 ESU 2.350 2.230 2.250 + 11 % 1.730 1.740 1.760 2.498 1.280 1.160 1.160 1.150 2006/07 2007/08 2008/09 2009/10 Source: FADN data 11
and postponed investments Investments in euro/ha in milk specialised farms in Germany 10-<40 ESU 40->100 ESU > 100 ESU 695 741 729-23% -21 % 562 586 708 591-48 % 460 465 333 448 234 2006/07 2007/08 2008/09 2009/10 Source: FADN data 12
Dramatic increase in farm exits from 2007 to 2009 EU-27: One in three milk producers quit EU-15: One in five milk producers quit EU-10: Particularly strong decrease EU milk supply still secure in the future? + Expensive crisis management 13
Why we need new market instruments 14
First steps Milk package and safety net Reports (EU-COM, EU Court of auditors, German competition authority) More competition for raw milk prices und therefore more negotiation power for dairy farmers necessary Milk package: good direction, but not sufficient Safety net of CAP Intervention: price level too low + not tackling the source Direct payments: necessary, but no answer to volatile prices and not a suitable crisis instrument 15
Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 39845,00 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Feb-09 Cent/Kg but new answers needed Prices rise, but do not cover the cost of milk production 45 40 35 30 Development of farm gate milk price in the EU (real fat, ct/kg) 25 EU-27 20 15 10 Milk crisis 2008/09 Small milk crisis summer 2012 EU-15 EU-10 5 0 Source: Circa.eu Basic Dairy Statistic 16
Global milk market: some opportunities and a lot of risks EU milk surplus increases risks Less opportunities in global markets than promised Global market with few participants and speculative/ psychological influences Environmental and climaterelated risks Risks related to international financial markets Export cheese in third countries 2012 (in Million euro) 2 % 27 % 8 % 63 % < 5 /kg 5-<7,5 /kg 7,5 -<10 /kg > 10 /kg 17 Source: EU external trade data base, own calculations
Uncontrolled milk surplus A challenge for the stability of EU markets and prices?? Following the example of Switzerland? or Striking a new path as the USA are likely to do? 18
Unequal growth of milk production in EU-27 10 Over and under delivery of milk quota 2011/12 in % in EU-27 0-10 -20-30 -40-50 Source: MIV (several years), LEL (2012) -60 19 %
Growth limits reached Limits to growth of production in milk regions almost reached Availability of land (biofuels and milk compete for land) Cows reaching their production limit EFSA 2009: Zero-grazing increases risks to animal welfare Society concerned about ethical questions 20
Who is going to milk the cows? 21
What is needed Reliable and flexible framework Survey on milk supply and demand Instrument for flexible milk market management to stabilise supply and demand in milk markets to stabilise prices at a level covering cost of production to strengthen the resilience of EU milk producers to stabilise production of milk also in less favoured areas, mountain areas and Eastern Europe to mitigate the risks resulting from global milk market influences 22
Scope of action Realisation of Art. 39, Treaty on the functioning of the EU to stabilise markets to ensure a fair standard of living to ensure that supplies reach consumers at reasonable prices Past experiences of scope of action The delivery boycott 2008 had a temporary stabilising impact on the milk price in Germany Reduction of 1 to 2 % of EU milk volume had a stabilising effect on EU milk markets during the milk crisis in 2009 Comparable effect of scarcity of EU milk supply (535.000 tons) in 2012 23
EU policy measures have to balance the interests of all stakeholders + 24
Solution: Monitoring Agency 25
Basic aims and requirements Aims Flexible adjustment of milk volume to demand to restore market equilibrium Stabilisation of milk prices to cover the average cost of milk production Ensure security of milk supply in the EU Requirements The Monitoring Agency is a European agency/ institution Decisions are generally binding 26
Concept Monitoring Agency Producers Milk price necessary to cover production costs Milk market Current milk price Dairies Possible sales of milk at cost-covering price Monitoring Agency Market analysis at least every four months Representation: Producers, Consumers, Dairies, Policy makers Recommendation for the milk volume to be produced
Supply management in detail Decision on the milk volume to be produced Implementation by public administration einzelbetrieblich Adjustment of base quantity Via existing administrative bodies Implementation by producer organisations einzelbetrieblich Adjustment of base quantity Compulsory membership for farmers Independent from dairy industry Control loop/ body Control of implementation at the level of individual farms and producer organisations Penalties in case of non-compliance
Steering instruments Increase/reduction of volume at farm and producer organisation level Prerequisites: Base quantity and external trade protection 1 2 3 Reserve 3-5% of delivery rights for adjustment of the base quantity Additional delivery rights are limited in time Voluntary production cuts against compensation Implementation through public tender Funding: through super levy and private market regulation fund Strategic storage Crisis reserve, Balancing of natural variations in milk production volume Funding through own resources
Milk price per kg in Eurocent Milk price corridor 60 55 50 45 40 35 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Time in months 30
Advantages of flexible milk supply management Security of supply and stable consumer prices Prevention instead of reaction to a crisis Secure income for milk producers Cost-neutral for public finances / no agricultural subsidies 31
Thank you for your attention