Milk market transparency and competition

The EU Commission today published a report on the EU dairy market. It is mainly concerned with setting out the portfolio of measures available to alleviate the very difficult milk market situation. Demand for milk products, particularly the higher value products such as cheese and fresh products which account for 70 per cent of EU production, has been adversely affected by the economic downturn. At the same time, there has been a collapse in world market prices, due to a combination of production increases by other suppliers (New Zealand, Australia, Argentina, Brazil) responding to the dramatic increase in dairy product prices in 2007-08 and a drop in global demand due to the economic crisis.

The report also deals with the widening gap between the price paid to farmers for milk and the prices charged to consumers for milk products. The figures for Ireland are particularly startling, even if the pattern for other EU countries is broadly similar. Between Q4 2007 and Q1 2009, the price paid to farmers for raw milk in Ireland fell by 43%, with corresponding reductions in the wholesale prices paid for butter and skim milk powder of 44% and 41%, respectively. However, the CPI for the product category ‘milk, cheese, eggs’ (which includes other milk products but excludes butter) actually increased by 9% over the same period, compared to a 4% increase for food products generally. From the CSO databank, I calculated that the corresponding increase for butter was 2%, which while smaller, is still extraordinary in the light of the 44% decrease in the wholesale price of butter over the same period.

The Commission report underlines that this is not just an Irish problem. However, the Competition Authority’s recent investigation into grocery prices which recommended a relaxation of planning restrictions to encourage greater competition in the retail trade does not seem an adequate response to this total absence of price transmission in the dairy supply chain. At a minimum, we need much greater transparency in how margins are distributed between producers, processors and retailers.

5 thoughts on “Milk market transparency and competition”

  1. We are subsidising farming for social, political, environmental, consumer protection, health and safety, planning and (food) security reasons.

    At the same time, retailers are creaming huge profits from the top of this subsidised industry.

    Is there amoral hazard here in that retailers can always rely on the state to subsidise farm incomes? There is.
    Is there a distorted market with a few major retailers and food puchasers controlling the sectors? I think there is.
    Is there an important public policy goal at stake? There is – that is why we are subsidising so much.

    Conclusion – we need to regulate the big retailers and/or wholesale dealers in agricultural products to reduce margins to a sustainable level.

  2. Alan, those figures back up my milk cheque. In April 2008 I was paid 35c a litre; April 2009 19.7c a litre. Admittedly late 2007/early 2008 was a peak. But these prices now are below what the farm was paid in 1980.

    Any business that suffers a 45% fall in price is in crisis, period.

    I for one am living off my savings (unlike most farmers I left them in the bank not property/shares), the two people who work for me have taken a 12% pay cut and I pare where I can. I am a big farmer (over 1.2 million litres a year) but I will be out of business within 12 months unless things change.

    As in your other post the only solution is to become more efficient. Yet in farming getting bigger is the most obvious way. 15 years ago I milked 90 cows producing 500,000 litres pa with 1.5 staff. Now I have doubled production and added only 1/2 a labour unit. To expand further I need more land but even now the cost is prohibitive- and land is finite and immovable. Real agricultural land prices for farming has to be measured by Return-on-investment- by rent, with a small amount of speculation thrown in: 15 years X 130 = €1950 acre plus €1000 is €3000. Even now you can’t get it for less than €10+k in Wicklow. The bubble in land prices is still not over.

    What is the solution? Yes, greater transparency in the supply chain. But that isn’t going to solve the problem. I’m afraid regulation has always been the case in agriculture but I don’t know if it will work now. Farmers like me need to go bust and create a milk shortage before a proper relationship between suppliers, processors and retailers is re-established. The difference between dairying other areas of farming is that you can change your field of wheat to rapeseed in one year but it takes nearly three years for a new born calf to become a milk cow. If dairy farmers go broke and there is a shortage of milk then you won’t be able to increase supply overnight.

    One last thing- I have always appreciated your contrary views on agriculture; contrary to the IFA/Dept duopoly. Your critiques have been correctly harsh on farmers.

  3. @Alan, Zhao and Danny,
    The points made by Alan are valid not just for dairying, but for the whole range of agricultural outputs. There are serious market failures within the industry allowing this situation to proliferate. The superficial answer is that as long as our farmers collectively are willing to operate at an economic loss, accepting mediocre, often negative, returns for land, capital and labour, they deserve what they get. This is too simplistic as there is a structural inertia in farming, which makes short run loss-making production preferable to no production.
    For a simple example, it is likely that Danny (writing above) has invested up to €1m in specialised dairying facilities, which needs to be recovered (or indeed repaid). As this money is committed, he is better off working at a short-run loss to recover at least some of these costs. However when the time comes to replace this facility will he repeat the investment?

    So why are producer returns being squeezed so much when the market can clearly afford to pay more? Part of the reason is that the producer is the weakest link, with each individual accounting for a tiny proportion of total output. The retailing chains grow increasing powerful and can squeeze producers tighter all the time. Another reason is the current availability of cheap imported product. Yet another, the lack of differentiation in the mind of the consumer between nationally produced traceable product, and generic imports. The short term consequences of these reasons include producer losses.

    HOWEVER, the longer term consequences of this decimation of producer returns are alarming. A younger generation of farmers will not be willing to accept mediocre returns. As these either exit the industry or scale down loss-making enterprises, effectively farming for subsidies if at all, it is likely that domestic production of food will decline. Then, the same structural inertia that keeps farmers producing into appalling markets will have the opposite effect. It will then be impossible to ramp up production quickly enough in the event of foreign food shortages or health issues cutting off our now-plentiful sources of supply. This is a matter of national security in my opinion.

    I echo Alan’s call for transparency in pricing and margin distribution. However there is much disinformation in circulation, and many vested interests co-operate to ensure market information is not transparent.

    I call for an economic analysis to be carried out analysing the market for each of Ireland’s main food outputs, from producer to consumer. Regulation may need to be considered if this market failure continues. I would like to see a debate on how this problem should be resolved. Farmers,consumers and government are in this together, as we all want safe, abundant food with fair returns to all market participants.

  4. @ Danny Haskins

    Howya, from Brisbane!

    The solution is obvious: more competition.Why are farmers not allowed to sell direct? The milk must be processed for safety. Milk purchaesd in shops does not sour any more it decays…..weird but it certainly is not milk. Processing any food makes it an industrial product. It is no longer wholesome. In Australia, there is a small movement to allow customers to take shares in a cow so as to obtain the milk raw for the purposes of cosmetic use in bathing not for drinking. NOT FOR DRINKING. GOT THAT? Cuts out the middleman. Just make sure there is no brucellosis and the bacteria count is low.

    Farmers are not to blame for a culture that allows them to buy off politicians, with votes or whatever. But they should pay for it. This problem is world wide.

    @ Cow And lie
    The EU is susidizing the farmer………

  5. @Danny

    Thanks for that view from the dairy, it is appreciated. Though I hope I am never harsh on farmers, whom I greatly respect! My criticisms are meant for the policy framework which provides the incentive structure within which farmers operate.

    There is no doubt that the relatively small mismatch between milk supply and demand has sent milk prices crashing. Imposing a quota cut – as demanded by the farm organisations associated with the European Milk Board, including the ICMSA in Ireland – would penalise those producers who can just about make ends meet even with low market returns. There will be a reaction – New Zealand production which increased almost 11% in the marketing year to June 2009 (including a recovery from drought) will increase hardly at all in the coming year, the US has started to cull cows (although it has also begun to subsidise exports) and the EU has introduced support measures. Even if world market prices stabilise in the second half of this year, this may not mean much uplift to EU and Irish prices because of the way prices here are protected by export refunds.

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