Reform of dairy

Turbulence in world markets in most agricultural commodities looks set to continue in the future – so says the combined forecasting brains trust of the OECD and FAO, which released a 10-year outlook last week.

The effects of the global financial crisis (GFC) which took hold in late 2008 have almost worn off for most of the global food industry. But in 2008, the global dairy market took the sharpest and deepest hits from the GFC of all major food commodities. The volatile impacts on product and farmgate prices rattled the players in the dairy supply chain, but the greatest noise has been sustained by dairy farmers in both Europe and the US. Due to the strength of their political lobby in both regions – exercised in different ways, politicians have been brought into the game to address the problem. The problem in reality is that regulation of dairy production and prices in the US and Europe hasn’t served farmers like it was supposed in the grand design – by preventing exposure to volatility.

But now that the dust has almost settled, lawmakers on both sides of the Atlantic are trying to work out what to do about this problem dairy child. Six months ago the European Commission set up a leadership group to come up with some solutions to at least shelter their industry from uncertainty. The aptly-named High-Level Group (HLG) ran a fairly open process and delivered a wordy set of recommendations to the industry last week after gaining consensus of the 27 member states of the European Union. No small feat given the divergent historical attitudes to regulation of markets.

With an underlying EU commitment to get out of as much regulation as possible, the HLG’s remedies have largely focused on the process by which milk prices to farmers are set. It suggests a uniform contract structure, and that farmer organisations are allowed to bargain on behalf of farmers, which will need changes to competition law. It however (disappointingly) clings to the past and says that the EU should retain “safety net” measures, leaving the door open it seems for the EU to buy surplus product out of the market and to even leave export subsidies in place – which the EU had already pledged in the WTO to drop. The HLG outcomes will yet cause a stir within EU members, and have a long path before they are adopted anywhere as law. Meanwhile the EU will (in 2015) remove production quotas which limit individual farmer output – a move that will create at least 5 years of turbulence.

Not so easy on the other side of the Atlantic. The US government has for the past couple of years been taking ideas of how to make changes to a broken set of rules that tie regulated farmgate milk prices to the results from trading on a commodity exchange. Nothing could be more exposed to nervy sentiment. Farmers and processors agree that there is a need for price-protection in future, but they are miles apart of whether supply should be managed with the support of regulation.

It’s ironic – in the past the world market felt volatility due to the fallout from the application of various forms of farmer protection by these superpowers. Our industry will watch developments carefully to ensure that devils in different forms aren’t created from these bumbling processes.