Summary
While EU skimmed milk powder stocks are now empty, after five years of overhanging global markets, this respite could be short lived. A no-deal Brexit could so severely disrupt trade in the dairy sector that the EC would return to skimmed milk powder (SMP) intervention buying and support for private storage of SMP. As with the measures adopted in response to the August 2014 Russian import embargo this could give rise to market consequences and trade flows which undermine efforts to promote milk-to-dairy supply chains in ACP countries, particularly in West Africa. Against this background ACP governments will need to ensure they retain the trade policy space necessary to protect local markets from disruptions where initiatives to develop and sustain local milk-to dairy supply chains are underway.
In June 2019 the European Commission announced the sale by tender of the last of it’s’ publicly held intervention stocks of skimmed milk powder. These stocks were accumulated between 2015 and 2017 as part of the EU’s policy response to dairy market crisis of 2015-15. This market crisis saw EU milk prices fall dramatically (1), from ‘€3,240 per metric ton in early January 2014 before the crisis to €1,720 by the same time in 2016’, with price falling still further, reaching a mere €1,400/tonne in January 2018 (2).
The overall milk market crisis was in part linked to over-investment in response to both the high levels of dairy prices which prevailed in 2013 and company level preparations for the impending abolition of EU diary production quotas. However the expansion of EU skimmed milk powder production was largely a consequence of the August 2014 Russian import embargo (2). In 2013 Russia had been the main market for extra-EU exports of dairy products, taking fully 33% and 29% of extra-EU cheese and butter exports respectively. According to the EU farmers organisation Copa-Cogeca, the August 2014 Russian embargo left EU dairy companies looking for alternative markets for the milk used in the production of approximately 260,000 tonnes of cheese and 40,000 tonnes of butter per annum.
This saw EU dairy companies channelling part of the milk previously used in “Putin” cheese production into the production of skimmed milk powder (SMP) and butter. This move to increased production of SMP and butter was assisted by the announcement at the end of August 2014 of expanded EU financial assistance to private storage of milk powder and the lifting of the ceiling of 110,000 tonnes on intervention buying of milk powder into publicly held stocks. This saw publicly held stocks of SMP increase first to ‘218,000 tons and then later to 350,000’ (2). This eventually saw the accumulation of intervention stocks of skimmed milk powder reaching a peak of 380,000 tonnes (1). A parallel scheme for intervention buying of butter was quickly abandoned when it was found to be open to abuse.
These SMP intervention stock purchases were aimed at stabilising the EU milk market and supporting farmer’s incomes in the face of the market crisis which emerged from the end of 2014.
Speaking on the 21st June Agriculture and Rural Development Commissioner Phil Hogan described this final tender sale as closing a chapter in EU intervention buying with this having been achieved ‘without impacting on the price of skimmed milk powder’. He claimed it was ‘a vindication of the Commission’s patience and prudent management of the whole process since 2015’.
Commissioner Hogan maintained the results of the Commission’s actions were ‘higher prices and a stable market’, with the experience illustrating ‘the necessity and the efficiency of the Common Agricultural Policy’s instruments’. It was argued ‘the right tools acted as a vital safety net during a time of significant market disturbance and their appropriate and timely deployment has helped to secure the viability of hundreds of thousands of European dairy farmers’ (1). It was reported EC policy intervention of which intervention buying was a central part (3) saw EU milk prices increase from an average of ‘26 cent per kilo in summer 2016 to 34 cent per kilo in May 2019’ (4)
The view expressed by Agricultural Commissioner Hogan was not universally held Romuald Schaber, chairman of the German dairy producers association had earlier described the EU’s accumulated milk powder stocks as a ‘sword of Damocles hanging over us all’. At the beginning of 2018 Eucolait representatives had highlighted the pressure on milk powder prices arising from the stock situation. It was argued that ‘although the powder is not on the market per se, the volume sitting in warehouses across Europe was enough to affect the market, even though it is not for sale’ (2).
For the European Commission the key to averting any serious undermining of the EU milk market as a result of the accumulated stock was the development of exports of skimmed milk powder and other value added milk powder products. In this context particular concerns have been expressed over the impact of high levels of EU milk powder exports to West Africa (see companion epamonitoring.net article ‘Ageing EU SMP Intervention Stocks See EU SMP Prices Discounted’, 6 July 2018).
According to Bocar Diaw, president of the Senegalese dairy association FENAFILS ‘when large quantities of milk powder from the EU — from intervention or directly from processors — are sent to West Africa, our local milk producers have to shoulder the burden’. As Thierry Kesteloot, agricultural policy adviser at Oxfam has pointed out ‘the solution has not been to manage supply but to find new export markets’ (2).
| Comment and Analysis The success of EU milk market stabilisation measures implemented in response to the closure of the Russian market in August 2014 hinged around taking fresh milk off the EU market by providing an outlet for skimmed milk powder, through the buying of SMP into public intervention stocks and the provision of financial support to private storage of SMP. While this eased pressure on the EU milk market, it built up stocks of milk powder which served to put substantial and sustained downward pressure on global SMP prices. This effect was quite independent of the expansion of EU milk powder exports which arose from the increased exports of EU SMPs and other value added milk powders to ACP markets.More recently further prices pressures were exerted on SMP markets as accumulated EU stocks began to reach the limit of their shelf life for human use. This saw additional discounts being offered on export sales of SMP sold from EU intervention stocks. Altogether this served to put considerable pressure on fresh milk markets in African countries where efforts were underway to develop local milk-to-dairy supply chainsWhile EU intervention stocks are now empty this could prove to be a short lived situation. A no deal Brexit could profoundly disrupt a UK-EU27 trade in dairy products which is in excess of 1.1 million tonnes per annum. While EU dairy markets would adjust over time to a no-deal Brexit, the immediate market disruptions are likely to lead to calls for a resumption of EU purchases of skimmed milk powder into intervention stocks and the reintroduction of EU programmes of financial assistance to private storage of SMPs (for details see companion epamonitoring.net article ‘Commissioner Hogan Highlights Agri-food Sector No Deal Brexit Preparations’, 12 August 2019).This could once again see efforts by African governments to promote local milk-to dairy supply chains undermined, as global milk powder prices once again came under pressures and EU exports of skimmed milk powder and value added milk powder products to African markets expanded at progressively lower prices.Ideally the European Commission should seek to factor potential adverse effects on ACP dairy sector development programmes into the design and implementation of EU policy interventions aimed at dealing with Brexit related disruptions of the European dairy sector. At a minimum the EC should ensure a flexible interpretation and application of policy commitments related to the use of trade policy tools entered into by ACP governments under their economic partnership agreements with the EU. It seems essential that African governments are allowed to retain the trade policy space necessary to protect local markets from import surges arising from Brexit related trade disruptions. This would appear to be particularly important in countries where initiatives are under way to develop and sustain local milk-to-dairy supply chains. |
Source:
(1) EC, ‘Dairy market public stocks of skimmed milk powder now empty’, 21 June 2019
https://ec.europa.eu/commission/presscorner/detail/en/IP_19_3335
(2) politico.eu, ‘Europe’s hidden milk lake threatens fragile market’, 29 January 2018
https://www.politico.eu/article/europes-hidden-milk-price-lake-threatens-fragile-market-eu-commission/
(3) EC, ‘Managing the EU Dairy Market 2014-2019’, 24 January 2019
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/animals_and_animal_products/documents/dairy-market-smp-story_en.pdf
(4) Irish Independent , ‘EU Commission public stocks of skimmed milk powder fully sold off’, June 21 2019
https://www.independent.ie/business/farming/dairy/eu-commission-public-stocks-of-skimmed-milk-powder-fully-sold-off-38240853.html