EU Dairy Sector Policies and their impact on Sub-Saharan Africa Countries (1)
The dairy sector offers scope for putting cash into the hands of smallholder farmers on a regular basis and has considerable transformative potential. However this could well be undermined by emerging patterns of EU trade and investment in ACP dairy sectors. These developments cannot be delinked from new patterns of EU support to the dairy sector. There are indications that certain EU dairy companies recognise the need to develop ‘responsible’ trade and investment relations in the dairy sector in Africa in particular. Indeed calls have been made for the establishment of a ‘Code of Conduct for Responsible Trade and Investment in African Dairy Sector Development’. There is also a need for the EU to responsibly interpret and apply the commitments entered into by ACP governments with regard to the use of non-tariff trade policy measures.
The dairy sector potentially offers a powerful tool for reducing poverty in Sub-Saharan Africa (SSA), by putting cash in the hands of smallholder farmers on a weekly basis. However in SSA the realisation of this potential, faces serious internal constraints and growing international challenges. These international challenges are being made more acute by the effects of EU dairy sector reforms (particularly the abolition of milk production quotas) and the EC’s increasingly aggressive agro-food sector trade policy, which is seeking not only a dismantling of import tariffs, but also the abandonment of all traditional non-tariff trade policy tools as well.
The threat to local dairy sector development in SSA comes not primarily from expanded exports of EU consumer ready dairy products, but rather the current and projected expansion of EU exports of milk powders (doubling between 2013 and 2024), which are likely to increase the attractiveness of meeting expanding African demand for dairy products through the local value added processing of imported milk powders and associated bulk dairy commodities. This could potentially disrupt efforts to develop new local milk-to-dairy supply chains and could even undermine some existing milk-to dairy supply chains in certain parts of SSA.
These developments cannot be delinked from new patterns of EU support to the dairy sector. While the EU has moved away from the most directly trade distorting support – export refunds – which were intimately linked to the former high producer price policy, the cumulative effect of new support measures (‘decoupled’ payments, ‘coupled’ payments, the continuation of a protective ‘managed’ dairy sector trade regime and the enhanced ‘safety net’ policy aimed at insulating EU milk producers from the worst effects of global dairy market price volatility and market disruptions),coupled with milk production quota abolition, is supporting a dramatic expansion in EU dairy exports, particularly skimmed milk powder (SMP) and fat-filled milk powders.
While in the face of rising consumer demand, imports of milk powder can help address local deficits in fresh milk production, supporting local dairy processing and keeping consumer prices down, there are dangers. This is particularly the case at times of low dairy commodity prices, when increased imports of milk powder, can lead to a substitution of milk powders for fresh milk in the production of a range of value added dairy products. This can serve to disrupt existing local milk to dairy supply chains and undermine efforts to develop new local milk to dairy supply chains.
This can then pose serious problems when world market dairy prices return to their long term higher price trend. This can leave developing countries not only with a host of missed opportunities for using expanding local dairy market demand to boost cash flows to rural areas, but can also give rise to a greatly increased dairy sector import bill in the long term.
While new forms of EU dairy sector support are largely compatible with current interpretations of WTO rules on domestic and export support, this does not mean EU dairy sector policies do not distort trade outcomes to the detriment of SSA milk producers.
For example, in 2014, in the context of wider EU support programmes, the application of EU ‘safety net’ measures in response to the loss of the Russian market for EU exports of dairy products, saw an almost 59% expansion of EU SMP exports, despite a 50% decline in global skimmed milk powder prices. (2)
This EU trade in SMP does not follow conventional economic logic, where price declines normally lead to a reduction in supply. Broader EU agricultural support policies, give rise to a far from normal market response.
This anomalous expansion of EU SMP exports needs to be seen in the context of two important trends. Firstly the recent EU corporate investment in expanded production of milk powders in preparation for the abolition of EU milk production quotas. Secondly, patterns of EU corporate investment in SSA designed to provide easier outlets for milk powder exports, in ways which allow the EU parent company to maximize returns from the final sale of consumer ready dairy products on SSA markets.
These trends raise important issues for the development of local SSA milk-to-dairy supply chains which need to be taken up and addressed both in the WTO and under newly concluded bilateral trade agreements.
There are indications that at least one major EU dairy company (namely Arla) is alert to these issues. In January 2015 Arla made a commitment to developing responsible patterns of trade and investment, aimed at minimising adverse effects on local milk producers in SSA. (3) However real tensions exist between this long term corporate social responsibility commitment to developing responsible trade and investment links in SSA and short term market pressures, in the context of expanding EU dairy production, reduced export opportunities and declines in global dairy commodity price (to which preparations for EU production quota abolition have contributed). The market pressures arising from a slow-down in Chinese import demand growth, the closure of the Russian market to EU agricultural products and production increases across the globe in response to historically high price prices in 2013, continued throughout 2015 and with only a slight glimmer of uncertain recovery in 2016.
How this tension is resolved at the individual country level in the dairy sector as a whole, will have an important bearing on the future development of local milk-to-dairy supply chains in Africa. Competition for SSA dairy markets has been particularly intense with different EU dairy companies jockeying for market position, on the basis of different corporate philosophies and business approaches.
Against this background it would appear important that the EU takes its’ commitment to policy coherence for development seriously in the dairy sector, through:
- Promoting a dialogue on responsible patterns of EU trade and investment in African dairy sectors, so as to accommodate African aspirations for the development of local milk-to-dairy supply chains;
- Extending the work of the EU Milk Market Observatory (5) to include detailed monitoring of evolving patterns of EU dairy exports to Africa, so as to provide an early warning of any adverse effects on local milk-to-dairy supply chains arising from the on-going expansion of EU dairy product exports;
- Ensuring the provisions of recently concluded EU trade agreements with Sub-Saharan African countries are not applied in ways which prevent the use of trade policy tools to manage dairy sector imports as part of broader policies to strengthen local milk-to-dairy supply chains, in the face of heightened global dairy market price volatility.
While these issues of policy coherence for development can be seen as particularly acute in countries where the EU is deploying development assistance in support of smallholder livestock development programmes, should not be made a prerequisite for setting in place mechanisms to ensure greater policy coherence for development in the dairy sector. Indeed promoting greater policy coherence for development in the dairy sector should be made a priority in relations with ACP countries where government and the private sector efforts are underway to develop local milk-to-dairy supply chains.
In addition there would also appear to be a need to revisit proposals first advanced in 2013 by Joseph Stiglitz and Andrew Charlton to enshrine a ‘right to development’ in WTO rules. (5) This proposal would seek to limit ‘the applicability of WTO obligations when the enforcement of such obligations would have a significant adverse effect on development’. This would create a right for developing countries ‘not to be harmed by the imposition of trade rules’. This would appear to be particularly important in developing countries seeking to promote the development of local milk-to-dairy supply chains as part of their broader agriculture and rural development policies.
Indeed, allowing developing countries to continue to have the right to protect their emerging dairy sectors from the worst effects of global price volatility, would appear to mirror EU ‘safety net’ policy measures which are explicitly aimed at insulating EU milk producers from the worst effects of global dairy market price volatility. This would appear to be particularly important since EU policies serve to sustain EU milk production at higher levels than would otherwise be the case, thereby serving to fuel EU exports of dairy products. (5)
However it needs to be recognised that in SSA countries, government budgets are constrained, with traditional agro-food sector trade policy tools being far more extensively used to manage dairy sector markets in the interests of local producers. This right to use traditional agro-food sector trade policy tools needs to be preserved, if growing African demand for dairy products is to be met through increased local milk production, rather than the manufacturing of dairy products based increasingly on imports of bulk dairy commodities.
- The EU needs to take its’ commitment to policy coherence for development more seriously in the dairy sector. This needs to occur not only in countries where EU aid is being extended to smallholder livestock development programmes, but also in all countries where government and private sector initiatives are underway to develop local milk-to-dairy supply chains.
- The EC should promote a dialogue on responsible patterns of EU trade and investment in African dairy sectors, so as to accommodate African aspirations for the development of local milk-to-dairy supply chains. This could include the development of a locally relevant ‘Code of Conduct for Responsible Trade and Investment in African Dairy Sector Development’, which would take account of:
- government and private sector aspirations for the development of local milk-to-dairy supply chains;
- the underlying environmental and ecological constraints on sustainable milk production; and the short, medium and long term role which milk powder imports could play in dairy sector development.
- The EC should extend the work of the EU Milk Market Observatory to include detailed monitoring of evolving patterns of EU dairy exports to sub-Saharan Africa. The aim of such detailed monitoring should be to provide an early warning of any adverse effects on local milk-to-dairy supply chains arising from the on-going expansion of EU dairy product exports, in those countries where initiatives to develop local milk-to dairy supply chains are under preparation or underway.
- In the face of heightened global dairy market price volatility the EC should commit to ensuring the provisions of recently concluded EU trade agreements with sub-Saharan African countries are not applied in ways which prevent the use of trade policy tools to manage dairy sector imports, as part of broader policies to strengthen local milk-to-dairy supply chains.
- Initiatives in the dairy sector provide an opportunity for the practical application of the concept of a ‘right to development’ as an operational mechanism for ensuring full respect for the EU’s legal obligation to ensure policy coherence for development.
- In an era of heightened global market price volatility, where necessary global supply side adjustments are impeded by the evolution of EU dairy sector policies, practically applying the concept of a ‘right to development’ would appear to be particularly important for sub-Saharan African countries seeking to promote the development of local milk-to-dairy supply chains, as part of their broader agriculture and rural development policies.
- The right to use traditional agro-food sector trade policy tools needs to be preserved, if growing African demand for dairy products is to be met through increased local milk production, rather than the manufacturing of dairy products based increasingly on imports of bulk dairy commodities.
(1) Initiativet for Handel og Udvikling, ‘EU Dairy Sector Policies and their impact on Countries in Sub-Saharan Africa’, November 2015
Research for these analytical papers posted by Initiativet for Handel og Udvikling in November 2015 was financed by ActionAid Denmark in the summer of 2015.
(2) EC, ‘Short term outlook for EU arable crops, dairy and meat markets – Winter 2015’,
(3) Arla, ‘Arla Foods to ensure responsible approach to African markets’, 12 January 2015
(4) Joseph Stiglitz and Andrew Charlton, ‘The right to trade: Rethinking the aid for trade agenda’,
(5) EU Milk Market Observatory
Additional Background Materials on the Evolution of EU Dairy Policy
Agritrade, ‘Executive Brief Update 2013: Dairy sector’, 17 December 2013
Agritrade, ‘Executive Brief Update 2012: Dairy sector’, 15 October 2012
Agritrade, ‘Executive Brief 2011: Dairy sector’, 2 November 2011