Can the recommended measures stabilise the dairy sector?
The „Improving Market Outcomes“ report published by the Agricultural Markets Task Force in November 2016 puts forth recommendations to improve the position of farmers in the supply chain.
Against the background of severe crises in the dairy sector and as an organisation representing European milk producers, the European Milk Board (EMB) essentially welcomes the recommendations to improve the situation. This document evaluates how much the recommended measures can actually contribute to positive developments in the sector, while focusing on the most important aspects. The evaluation has shown that the recommendations by the Task Force are not enough to achieve the required degree of stability in the EU dairy sector.
Market transparency
It is positive that the report talks about increasing market transparency. However, it does not address a key element - when production costs are considered, they must include a fair income for producers. It erroneously assumes that transparency alone will motivate producers to undertake actions that are in tune with market needs. However, this requires additional measures, like voluntary production cuts, in order to elicit appropriate market reactions.
Risk management instruments
In the context of risk management instruments with regards to agricultural prices, the EMB recommends that the Task Force pay closer attention to their effect on, firstly, producers and, secondly, the market. Instruments should ensure that producers face less risks and thus suffer lower income losses. However, it is also important that these instruments stabilise the market and do not act as an additional burden on it. The Task Force report does not give these two points sufficient consideration.
Futures markets
The use of futures markets as a risk management instrument does not include the need to restore a degree of balance in the real market (spot market) to allow for cost-covering producer prices.
The EMB analysis, and to an extent the Task Force report as well, shows that futures markets can, in fact, somewhat flatten out price peaks and troughs under certain conditions, but they cannot change the actual price level. Furthermore, an effective tempering of price fluctuations is only possible when projections on the spot market are positive - something that is very rare in the dairy sector. In addition, cost-covering prices can hardly be expected on the spot market and as a result, no such assurances can follow on the futures market either.
Even if you want to exploit the very limited advantages of futures trading: Producers require high liquidity and the trading of futures contracts only makes sense upwards of a production volume of 1 million kg milk. This means that a large number of EU producers are excluded from exploring this possibility. Farmers are also no trading experts and they cannot take the risk of net-loss trading lightly. Therefore, futures contracts cannot be considered a solution for the dairy market crisis.
EU-level framework against unfair trading practices
An EU-wide legislative framework to avoid unfair trading practices in the supply chain is welcome. However, this must definitely include a law against unfair competition that prohibits the sale of raw materials below cost price.
Contractualisation
As France has shown, contracts in themselves are not enough to strengthen the position of producers. The Task Force report does state that contracts can only have a limited effect on the same. However, it fails to mention the following possibility: Contracts could play a key role if EU-wide mandatory contracts included the contractual linking of prices to production costs.
Producer organisations
The Task Force has correctly observed that there is insufficient collective action by producers. In addition to resolving regulatory confusion, as mentioned in the report, the following points - not mentioned by the Task Force - must necessarily be considered as well to encourage association: raising grouping thresholds, including milk from cooperatives in collective negotiations as well as creating incentives to join producer organisations.
Easier access to finance
Financial bottlenecks are problematic in times of crisis. Nonetheless, the Task Force should clearly state that easier access to finance alone cannot be the solution. Furthermore, it is important to ensure that this money does not end up acting as an additional burden on the market, delaying the adjustment of supply to demand. Bridging loans also only make sense if producers are in a position to pay them back in the foreseeable future.
Direction of the CAP
If the CAP were to maintain its correct direction, as recommended by the Task Force, the marginalisation of many stakeholders will only become stronger. Therefore, the CAP should pay greater attention to balanced growth. The EU needs factors that bring people and nations stronger together. Agriculture can help to implement such drivers.
For the dairy sector, for example, this would be instruments that do not act as a burden on the sector but allow producers to actually generate their income from the market. The implementation of voluntary production cuts this year has been a first step in this direction. However, a standard instrument set up in an EU-wide legal framework is still necessary.
This legal framework must:
1. Include a market index implemented through the MMO;
This index would be determined by factors like developments in product quotations, milk prices and producer costs (margins).
2. Permit sanctions;
During voluntary production cuts in times of crisis, the remaining production must be capped. In this regard, the possibility of sanctions is vital. Without a cap, there is a great risk that the achieved reductions will be neutralised by increased production by other producers.
3. Allow for the collection of a levy from producers to finance the crisis instrument.
With such a levy, producers also take on a financial responsibility for the programme.
Observe the market - predict and prevent crises!
Silvia Däberitz, EMB
Evaluation of the "Improving Market Outcomes" report of the Agricultural Markets Task Force (12/2016)
"Improving Market Outcomes" Report of the Agricultural Markets Task Force (November 2016)