Summary
Covid-19 pandemic related disruptions to EU and global dairy markets has led the European Milk Board (EMB) to call for the implementation of a production restricting Market Responsibility Programme, which it is argued should become a permanent feature of the EU diary sector policy tool kit. While the EC is likely to resist such call, favouring traditional intervention buying, ACP milk producers could usefully support the EMB proposal in order to avert future ‘dumping’ of low priced EU milk powder on ACP markets, to the detriment of local milk producers and national efforts to boost local milk production.
Analysis from Rabobank has indicated the ‘upward trajectory in global dairy product prices in Q4 2019, stalled in Q1 2020’, as the Covid-19 outbreak in China has spread across the global. This has left dairy traders scrambling for markets. According to Rabobank while China’s consumer buying patterns are expected to normalize by the second half of 2020, there remains a danger of ‘a delayed economic recovery in China’ exerting a downward pressure on dairy prices throughout 2020 (1).
The dairy trade disruptions arising from the Covid-19 pandemic need to be seen against the backdrop of rising global milk production in major milk exporting regions. According to Rabobank ‘the combination of reduced Chinese imports, significant supply chain disruptions, including extreme competition for shipping containers across the globe, and rising dairy surpluses in export regions will keep downward pressure on global markets through much of 2020’ (1).
Prior to the onset of the Covid-19 pandemic the dairy sector was already at risk from a ‘projected slowdown in the general global economy’ (2). The pandemic is likely to turn this projected slowdown into a massive economic recession, with consumer spending and international trade facing a significant depression.
However, according to Rabobank, ‘China’s 2020 imports forecast is not expected to be as severe as the 2014-2015 destocking, which resulted in a 35% decline in 12 months’ (2). This being noted the collapse of tourism sectors in many countries in the face of travel restrictions and flight cancellations and the contraction of out-of-house food consumption as all restaurants across a range of countries are closed, is likely to depress dairy product demand across wide range of markets.
Following the ‘spring flush’ in milk production, linked to a mild winter in the EU and US, there is likely to emerge a substantial surplus of milk supply over demand (2).
From mid-February 2020 except for cheese, prices across all EU dairy products entered a downward trend, with this accelerating as the Corvid-19 pandemic spread (3). This has seen the European Milk Board call on the EU to have ‘a crisis instrument ready NOW to reduce the resulting fallout’ from the economic effects of the Covid-19 pandemic. The EMB maintains the EU dairy sector has already entered ‘a strong downward spiral’, with Italian spot milk market prices having fallen ‘almost 7 percent as compared to February’, while the value of ‘milk-product futures on the European Energy Exchange (EEX) have dropped significantly’ (-5.7%) (3).
While some producer organisations have already initiated voluntary production restraint measures, the EMB believes an pan-EU response is required to managed markets given the depth of the dairy trade crisis in the EU and beyond (the Global Dairy Trade index dropped 3.9% in the week to 19th March).
The EMB points out how ‘in many areas, the amount of milk being produced on farms is too high for existing processing and market capacity’, while ‘the spread of the Coronavirus is leading to major difficulties in procurement and logistics in the processing industry’. These problems are being further compounded by pending ‘personnel shortages, as well as the collapse in demand for certain products’. The EMB has called on the EC to support a ‘voluntary volume reduction scheme’, as foreseen in the EMBs’ proposed Market Responsibility Programme. The EMB takes the view that in the absence of proactive EU-wide action ‘there is a very high risk of the entire sector falling into its worst crisis yet’ (3).
The EMB calls for a Market Responsibility Programme to become a permanent feature of the EU dairy sector policy toolkit ‘to deal with hard-hitting events, like pandemics or economic and political embargoes (like the Russian embargo), as well as with the impending consequences of Brexit’ (3).
In terms of EU-ACP dairy sector trade relations the pending imbalance in global supply and demand needs to be seen in the context of recent trends in EU dairy exports, with in milk equivalent terms EU dairy exports being up 9% in 2019 compared to 2018 levels (4). From an ACP perspective trends in milk powders exports are particularly significant, since EU exports of milk powder, including fat filled milk powder (FFMP) directly compete with ACP milk producers in meeting the input needs of locally established dairy processing companies.
In 2019 EU28 exports of skimmed milk powders (SMP) grew 18% in volume terms, with exports to China seeing a 38% increase compared to 2018 (5), to levels double what they were in 2014. This saw China emerge as the leading destination for EU SMP exports (ahead of Algeria), taking fully 13% of total EU SMP exports. China was also a leading destination for EU whey powder exports taking almost a third of total EU whey exports, at levels double those prevailing in 2010 (6).
In the whole milk powder (WMP) sector, China is not a major market, but ACP countries already take significant volumes. Four African and 1 Caribbean country are amongst the top 15 destinations for EU WMP exports, taking some 17% of EU WMP exports in 2019, up from 14% in 2018. While overall EU WMP exports fell 11% by volume in 2019, exports to the top 5 ACP markets increased 8.3% and to the top 4 African market some 13.1%. Africa is also the main the EU’s growing exports market for fat filled milk powders (see companion epamonitoring.net article, ‘Strong Expansion of EU Fat Filled Milk Powder Exports to West African Markets Resumes’, 19 April 2018)
Disruptions in EU milk powder exports to China and domestic EU dairy market difficulties, linked to the Corvid-19 pandemic, are likely to leave EU companies looking for alternative markets for existing dairy products or alternative outlets for liquid milk (skimmed milk powder sold into intervention stocks).
| Comment and Analysis
The EMBs call for a permanent pan-EU Market Responsibility Programme to manage the milk market at times of crisis, is unlikely to find favour with the European Commission since it hints at a return to the type of production management policies the EC sought to move away from when it abolished EU milk production quotas. The more favoured EU response is the use of intervention buying, designed to take liquid milk off the market at times of market crisis, thereby supporting the EU milk price. The problem with this approach in response to milk market crisis situations is that historically this has led to extensive use of SMP intervention storage (after an initial period of support to private storage) and then a sustained increase in EU exports of SMP. Trends in EU Skimmed Milk Powder Stocks 2006-19 (Situation Beginning of the Calendar Year -1,000 tonnes)
Source: EC, Milk Market Observatory, ‘Intervention Stocks of SMP’ This was the experience in the 2008/09 EU milk market crisis and the 2014/15 milk market crisis arising from the closure of the Russian market to EU dairy exports. In both cases this saw a surge in EU exports of SMP in the following years, with this fuelling a model of dairy sector development in Africa based on imported milk powders, and not the development of local milk supplies. Trends in EU Skimmed Milk Powder Exports 2006 -2019 (1,000 tonnes)
Source: EC, Milk Market Observatory, ‘Top 15 Trade Partners of EU+UK – SMP’ While currently the EC has not announced any plans to reintroduce intervention buying, if pressure increases from EU milk producers to implement a quasi-permanent Market Responsibility Programme to manage the milk market at times of crisis, the EC may feel it has no alternative but to fall back on the tried and trusted policy tool of intervention buying of SMP into publicly held stocks in order to avoid a reversal of its policy shift away from production restrictions in the milk sector. The major constraint on this traditional EC approach however is the ‘major difficulties in procurement and logistics’, faced by the milk processing industry arising from the Corvid-19 pandemic. These constraints could make the EMB proposal for a pan European coordinated restriction of milk production a more attractive option than traditional intervention buying, since it cuts off the problem at source (excessive milk production relative to demand), rather than storing up problems which are displaced to global markets and specific overseas markets at a later period. The implementation of a Market Responsibility Programme, as proposed by the EMB would ease future pressures on African and other ACP markets where domestic milk production takes place. However, such a production restriction-based approach would not necessarily find favour with those EU dairy companies which have invested in African dairy sector development based on the value-added processing of imported milk powders. These dairy companies are likely to favour a traditional EU intervention buying policy responses, since while supporting domestic EU milk prices this makes available a longer-term supply of cheap raw materials to feed the expansion of their value-added dairy processing activities in Africa. African milk producers could therefore usefully support calls from the EMB to implement a quasi-permanent Market Responsibility Programme to manage the EU milk market at times of crisis. |
Sources:
(1) Rabobank, ‘Dairy Quarterly Q1 2020: The Corona Hangover’, March 2020
https://research.rabobank.com/far/en/sectors/dairy/dairy-quarterly-q1-2020.html
(2) dairyreporter.com, ‘The ripple effects of COVID-19: A look into global dairy’, 17 March 2020
https://www.dairyreporter.com/Article/2020/03/17/The-ripple-effects-of-COVID-19-A-look-into-global-dairy
(3) EMB, ‘Coronavirus crisis spreads to producers in the dairy sector’, 19th March 2020
http://www.europeanmilkboard.org/special-content/news/news-details/article/coronavirus-crisis-spreads-to-producers-in-the-dairy-sector.html?cHash=cfb7b27731e86a621dbe1bb4e77a06d0
(4) EC, ‘EU27 averages of main dairy commodities’ 18 March 2020
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/eu-dairy-commodity-prices_en.pdf
(5) EC, Milk Market Observatory, ‘Milk Market Situation: February 2020’, 24 February 2020
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/milk-market-situation-presentation_en.pdf
(6) EC, Milk Market Observatory, ‘Historical Series: Top 15 Trade Partners of EU+UK – SMP; Top 15 Trade Partners of EU+UK – WMP; Top 15 Trade Partners of EU+UK – WHEYPOWDER
https://ec.europa.eu/info/sites/info/files/food-farming-fisheries/farming/documents/eu-dairy-historical-trade-series_en.pdf