A 'perfect storm' of economic factors led to milk being poured away

The European Commission set up its High Level Expert Group on Milk in response to angry demonstrations across much of Europe in 2009.

The report says farmers and dairies need to get better at adjusting the flow of products in response to market signals and need better contractual agreements all along the supply chain – because producers who have no guarantees will just produce more when the price drops.

Co-operative dairies which are obliged to process all milk from all members are a part of this problem.

The message suits the NFU, which says British farmers rode the storm better than most because they do mainly work to contracts – and the future lies in more and better contracts all over Europe. But a lot of farmers wanted a return to government intervention in the form of guaranteed prices and market regulation.

Explaining the background to the crisis, the HLG says: "In 1984, when quotas were introduced, there were 1.6 million dairy farmers in the 'old' EU 10.

"Today the figure is around 220,000, leaving only one out of seven in milk production."

It explains how the community started cutting milk subsidies and lifting restrictions on production in preparation for gentle progress to a free market in 2015. Then the so-called Health Check on the Common Agricultural Policy, in 2008, stepped up the pace of production quota increases.

The report says: "In parallel to the preparation of the Health Check, exceptional developments marked dairy markets. Initially, extreme weather conditions in Oceania (New Zealand and Pacific) brought about a significant decline in dairy supplies, leading to a rapid and significant increase in prices.

"The resulting situation, and the exceptional deactivation of export refunds for all dairy products for the first time in 40 years, led the council to anticipate an increase in the dairy quotas by two per cent from April 2008.

"Yet while world dairy supplies had started their recovery, and dairy prices there return to more normal levels, the subsequent financial and economic crisis negatively affected EU dairy markets, aggravating price volatility.

"Initially feed and other input costs (including energy) increased significantly as a result of higher commodity prices.

"Subsequently, drop in EU demand led to a collapse of EU dairy prices.

"This failed to fully translate into lower dairy prices at consumer levels, generating a widening in the gross margin of the downstream sectors for most dairy products and countries, and preventing demand for dairy products to adjust to low commodity prices, slowing down price recovery and exacerbating the impact of low prices on milk producers.

"This triggered the milk crisis, the unrest among producers, intensive discussions at the level of the Agricultural Council and the European Council and the Commission taking a number of measures to support the market – and finally to the establishment of the High Level Group for Milk."

The failure of shop prices to reflect the fall in farmgate prices – when discounts might have assisted recovery – prompted the HLG to call for more "transparency" about who earns what, and this is also a message welcome to the NFU.

Its dairy board chairman, Mansel Raymond, said: "Data at farm level is widely available so we see no reason this can't be replicated to some degree in the rest of the supply chain."

The report can be found at http://tinyurl.com/3azpqcm/

CW 17/7/10