Fears over impact EU SMP stocks on global dairy prices being realized


There is growing international concern over the impact of accumulated EU skimmed milk powder (SMP) intervention stocks on global milk powder prices. Fears over future EU stock disposal plans, are weighing down global SMP prices. Given the extent to which SMP import prices act as a benchmark for local fresh milk prices, this is an issue of particular concern in ACP countries seeking to develop local milk-to-dairy supply chains. To avert the disruption of efforts in ACP countries to develop local milk-to-dairy supply chains the EU needs to tolerate the continued use of controls on all forms of milk powder imports in those countries where local milk supply development programmes are underway.

The impact of accumulated EU stocks of skimmed milk powder (SMP) on international SMP prices is becoming a matter of growing concern, as the European Commission begins exploring ways of disposing of 380,000 tonnes of SMP held in storage under EU public intervention purchase schemes. In mid-October 2017 prices at the GlobalDairyTrade auction ‘fell 5.6% to a 17 month low’ of $1,797 per tonne. This took SMP prices to 40% below the price of whole milk powder (WMP) (1).

The US based Milk Producers Council has expressed concern that falls in the price of Chicago non-fat milk powder futures in mid-October were attributable to market concerns that the EU is ‘considering changes to its skim milk intervention purchase programme which has served as a floor supporting  the global milk powder market for the past three years’ (1).

The EC is rumoured to be considering selling off up to 109,000 tonnes of SMP in the coming year at an indicative price of €1,690/tonne, but with no floor price being applied within the tender sales system.  This implies prices could fall below this level if there was insufficient interest in purchases of SMP from intervention. The EC is looking to find a way of returning to a more limited system of intervention buying and storage. However as Agriculture Commissioner Hogan has acknowledged when it comes to the rapid disposal of accumulated EU intervention stocks of SMP ‘there are not any easy options’ (1).

Previously, as part of the reforms of the dairy sector, as early as January 2008 the EC had committed to intervention buying being ‘restricted to a genuine safety-net role’, with it no longer being used ‘to set market prices’ (2). However by the end of 2008 market price developments had led the EC once again to make greater use of intervention buying instruments (3). Indeed as part of a wider programme of safety-net measures introduced by the EC in response to the 2008-09 dairy market crisis, the nominal ceiling of 109,000 tonnes of SMP purchases into intervention stocks was raised to 282,587 tonnes (4). While periodically the EC has been able to eliminate intervention stocks through the more extensive use of private storage arrangements, by 2016 stock levels were in excess of 350,000 tonnes (5), where they have remained throughout 2017 (6).

The US based Milk Producers Council argues that given the size of EU SMP stocks the current uncertainty over EU policy on the disposal of existing SMP intervention stocks and the question of future EU policy on intervention buying, is weighing down heavily on the market. Dairy Australia meanwhile maintains ‘the large EU intervention stocks will likely be a source of instability in dairy commodity markets going forward’. Indeed, it is argued ‘so long as uncertainty around the EU’s intervention stocks continues, SMP prices will remain low’ (1). In October 2017 Agrimoney.com went further citing analysis from the Wellington Bureaux of the USDA which suggested that while ‘international prices are languishing at the bottom of the price cycle’, there is ‘no end in sight for the near term’ for these low prices (8).

SMP prices were not the only dairy commodities which faced price falls at the GlobalDairyTrade auction in October 2017: WMP prices were down 0.5%; butter prices were down 2.5%; and rennet casein prices down 8.6%. Only anhydrous milk fat increased 5.2% to the second highest price level on record.

Comment and Analysis

SMP prices are particularly important for ACP countries, given the impact SMP prices can have on local dairy sector development programmes. In regions such as West Africa, reconstituted milk powders dominate the dairy sector, while elsewhere imported milk powders can be used to substitute for fresh milk supplies in the production of a wide range of dairy products.  In this context the price of skimmed milk powder imports can set a benchmark for local milk prices. Sustained low international SMP prices can then undermine the commercial viability of ACP efforts to develop local milk-to-dairy supply chains.

The hard reality is EU dairy sector policies have both direct and indirect effects on the functioning of ACP dairy supply chains. The direct effect is through EU trade in milk powders to ACP countries, the indirect effect is through the influence of EU SMP stocks on global SMP prices, with low prices for SMP sourced from other global dairy exporters also adversely impacting on efforts across ACP countries to develop local milk-to-dairy supply chains, whether in the Pacific, the Caribbean or Africa.

Both these direct and indirect effects can serve to make it cheaper to produce final consumer ready dairy products on the basis of imported milk powders than on the basis of locally sourced fresh milk.  This can profoundly undermine efforts to promote local milk-to-dairy supply chains across the ACP.

EU intervention buying however cannot be seen in isolation from wider EU policies which sustain milk production. The deployment of support payments tied exclusively to milk production in the 19 EU member states considered to be less efficient EU milk production zones, at a cost of € 846 million per annum, sustains EU milk production at far higher levels than would otherwise be the case (7). Without these payments overall EU milk production levels would be lower, the need for intervention buying would be greatly reduced and the price depressing effects of accumulated EU SMP stocks would not arise to the same degree.

It is against this background that EC policies for the disposal of accumulated stocks of SMP and the future use of intervention buying as a policy tool to support the domestic EU dairy sector, is a matter of considerable concern to ACP dairy sectors. The reality is an ill-managed programme of disposal of accumulated EU intervention stocks could set back ACP efforts to develop local milk-to-dairy supply chains for years, both as a direct result of the trade effects of EU SMP disposal programmes and indirectly as a result of the international price effects of the uncertainty created by the overhang of EU SMP stocks.

As Agriculture Commissioner Hogan rightly points out ‘there are not any easy options’. However one easy option open to the EU in ensuring EU programmes for the disposal of intervention stocks of SMP only minimally disrupt ACP efforts to develop local milk-to-dairy supply chains, is to allow ACP  governments to closely regulate the import of milk powders, in ACP countries where milk supply development programmes are underway.

This would require the European Commission to commit to not invoking the provisions of Economic Partnership Agreement on the prohibition of quantitative restrictions and similar such provisions which seek to limit the use of non-tariff trade policy tools by ACP governments in trade with the EU. This would then leave ACP governments free to manage milk powder imports  from all sources in ways consistent with  local efforts to develop milk-to-dairy supply chains.

(1) Agrimoney.com, ‘Skim milk price discount hits biggest in years, amid jitters over EU’, 17 October 2017
(2) Agritrade, ‘The EC sets out its ideas on the future of the dairy sector’, 6 February 2008
(3) Agritrade, ‘Support to private storage for EU butter is reintroduced’, 1 January 2009
(4) Agritrade, ‘Dairy Sector: Executive Brief Update 2012’, 15 October 2012
(5) EC MMO, ‘Intervention Stocks of SMP’
(6) EC MMO, ‘Public SMP Intervention scheme (2016-2017) Buying-in quantity at fixed price’, page 2
(7) EC, ‘Voluntary coupled support – Sectors mostly supported Notification of decisions taken by Member States, 1 August 2014’, Informative Note 30 July 205
(8) Agrimoney.com, ‘World faces butter supply squeeze in 2018 too’, 19 October 2017